Apyx Medical Corp (APYX) 2014 Q2 法說會逐字稿

Good afternoon and welcome to the Bovie Medical Corporation second-quarter 2014 earnings conference call. (Operator Instructions). Hosting today's call will be Robert Gershon, Chief Executive Officer of Bovie Medical Corporation. After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded.

Before we begin, I would like to make the following Safe Harbor statement. Today's call will relate to Bovie's second-quarter 2014 earnings release and will contain forward-looking statements regarding predictions about future events. Forward-looking information is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Important factors that may cause actual results to differ materially and could impact the Company and the statements contained in this conference call can be found in the Company's filings with the Securities and Exchange Commission, including the company's report on Form 10 K/A for the year ended December 31, 2013. The Company assumes no obligation to update or supplement any forward-looking statement whether as a result of new information, future events or otherwise.

With that, I would like turn the call over to Mr. Rob Gershon.

Thank you, Denise, and good afternoon, everyone, and thank you for joining us on today's call to discuss our second-quarter earnings and our business outlook.

With me today is our CFO, Peter Donato, who will provide a detailed financial update. And also on the line is Jack McCarthy, our Chief Commercialization Officer. At the conclusion of our prepared remarks, all three of us will be available to answer questions.

Second quarter was another period of solid financial and operating performance for the Company. We achieved double-digit growth compared to last year's second quarter thanks to increases in our core and OEM businesses, which continued to progress in their own right, as well as support the commercialization of J-Plasma. Our core business revenues increased 2.8% over the prior year led by higher sales of electrodes and generators, and we are moving forward with several initiatives to expand our product portfolio to further drive core business revenue growth.

For example, in the second quarter, we announced the launch of two new products, Derm 101 and Derm 102, which began shipping at the end of July. These high-frequency desiccators allow family practitioners, pediatricians, general dermatologists, physician assistants and nurse practitioners to perform minor skin procedures in their offices as that of having to refer patients to a dermatology specialist. The key takeaway here is that this is the first new major core product launch for Bovie in more than 10 years, and there is much more to come.

When I joined the Company eight months ago, I was very impressed by the capabilities of the in-house design team and by the state-of-the-art manufacturing facilities we had in Clearwater and our contracted facilities in Bulgaria and China. These resources provide a platform for new product development and the assessment of products developed by third parties which we can bring to market by leveraging the Bovie brands and distributor network.

In fact, we are currently experiencing growth in the international market and veterinary space and are exploring strategies to further expand sales in both areas. We see additional growth potential through our robust R&D pipeline, as well as through the addition of products that are complementary to J-Plasma core points, namely hospital, surgery centers and potentially procedural suites in physician offices.

Taking a quick look at our OEM business, revenues increased by a factor of four in the second quarter. This was mostly due to higher demand from our existing customer base, keeping in mind, of course, that we are comparing against a very weak year ago quarter. As you know, we design, develop and manufacture electrical surgical equipment and products for some of the largest medical device manufacturers in the world. While this is a very scalable business, as we are often sought out for our expertise, it requires significant resources, and we are selectively expanding it to ensure that we can meet the demand of our own core products and, of course, for J-Plasma. Also, to smooth out some of the lumpiness associated with the OEM business in the past, we have calibrated the terms of any new contracts to make sure that the explorations are staggered and that we are receiving fair value for what we deliver.

Now I will turn to J-Plasma where commercialization is moving forward on schedule, and we expect an accelerated ramp-up in the second half of the year. In fact, we already are experiencing a very strong start to Q3 with July orders exceeding $50,000. We are not going to set a precedent of releasing monthly sales for J-Plasma, but it is warranted this quarter given the circumstances of a new sales force and the sales cycle for hospital-based products, which is typically 60 to 120 days.

Sales were $15,000 in the second quarter, down sequentially as our direct sales force continued to get up to speed. Importantly, in July, we were awarded our first large-scale contract for J-Plasma. It is a contract with a major Midwestern integrated delivery network or IDN that will give us the opportunity to sell to each of its 13 member hospitals. While this is a significant achievement, we continued to remind investors that commercialization is a process, and there are no shortcuts. So we reaffirm that although we expect some financial benefits from higher J-Plasma sales in the second half of this year, the full impact will not be evident until 2015.

Our J-Plasma operating metrics were very strong in the second quarter and set the stage for a sales pickup in the second half of 2014. At the end of the second quarter, over 60 surgeons were using J-Plasma at 40 sites. This is up from 40 surgeons and 25 sites respectively at the end of this year's first quarter and up from 18 surgeons at 12 sites at the end of 2013. As important, our surgeon pipeline continues to expand, moving up to 98 surgeons from about 50 in the last three months and from 24 at the end of last year. So our pipeline has more than tripled since the end of 2013. And this pipeline is populated by an increasing number of thought leaders in the fields of gynecology, dermatology, and plastic surgery, the markets that we are initially targeting.

Additionally, we made progress on each element of the J-Plasma commercialization plan. First, on July 1, two independent white papers were published on J-Plasma by surgeons at Women's Health Center in Nevada. One is currently available on our website. The second will be presented at a scientific meeting in September. These were the first two out of five white papers that we expect to be published by year end. The third, which we expect to be published in the third, quarter will study the pre- and post-procedural effects on facial wrinkles. As we mentioned in previous calls, these white papers are important to our selling efforts with hospital value analysis committees or VACs and significantly enhances the credibility of J-Plasma within the broader medical community.

Second, our direct sales organization stands at five reps, each of whom has deep operating room experience, on average 15 years, with very well-known companies. They work together with a group of 28 independent manufacturers reps who have demonstrated sales ability and have made J-Plasma a priority.

We have also added another field-based position, a clinical specialist whose understanding of the clinical applications at J-Plasma will provide support for surgeons and our salesforce and drive the utilization of the product. In August we will bring our field-based team to Tampa for a rigorous three-day clinical and product training session, which will involve coursework, lab sessions on site and certification. This is the type of intensive training that Jack and I have conducted over the course of our careers that stimulates and supports the rollout of transformational products, and we are confident that it will enable our salesforce to drive much broader adoption of J-Plasma.

Third, to support our sales efforts and to broaden the awareness of Bovie and J-Plasma, we launched a brand-new branding and marketing campaign in the second quarter that included the development of a printed ad that will be placed in key publications beginning in Q3.

In addition, we have new sales materials for the sales force and have posted a new J-Plasma video to our website that brings the J-Plasma story to life, including surgeon testimonials, clinical video clips and comments from a VAC committee chair. When you have an opportunity, we encourage you to go to boviemed.com and view the new video firsthand.

Fourth, we have ramped up our surgeon training and expect to hold six courses during the second half of the year. These sessions are targeted to the key opinion leaders across the country to facilitate adoption. And we expect to have between eight and 12 surgeons attend each course. Our objective is to have 80% of the surgeons that attend these courses adopt J-Plasma and use it routinely.

To date, we are pleased to say that while our inn is small, we are, in fact, batting 1000, as all surgeons that have attended our courses so far this year have adopted the technology.

Six, we continue to add executive talent. As you know, we announced Peter Donato as our new CFO in May, and in late June we added a Controller, Jay Ewers, who joins Bovie with 30 years of senior-level finance experience. And like Peter, in a very short time, Jay has made significant contributions.

We are also pleased to announce that John Andres was elected to our Board of Directors at the July in your meeting. John has more than 30 years of experience in the medical device field, having held strategic business development and legal executive positions at Tyco Healthcare, now Covidien, and its predecessor US surgical. Most recently, John served as a partner of Hawk Healthcare and was a founder of K2M. Attracting someone of John's caliber is another vote of confidence for the future potential of Bovie Medical.

At this time, I would like to turn the call over to our CFO, Peter Donato, for a more detailed financial review. Peter?

Thank you, Rob. I'm going to take you through the quarter in some more detail. We posted a healthy 15% increase in net revenue compared with a year ago. As Rob stated, we benefited from a $740,000 increase in our OEM business with the core business also having a solid quarter, up 2.8% from the second quarter of 2013. Our GAAP gross margin for the quarter was 27%. It was negatively impacted by a charge of $843,000. This charge was related to the write-down of some inventory related to J-Plasma and to other items as we adjusted our inventory to match changes in commercialization plans. This is part of our ongoing process to monitor and right-size our inventory, to optimize our cash flow and to align our inventory to our current commercial plans.

Excluding the charge, gross margin was 39.2% compared with 36.9% a year earlier, an expansion of 230 basis points, as we continue to benefit from structure reductions in our labor force initiated late last year and more favorable mix thanks to the significant uptick in our OEM business. The adjusted margins this quarter are largely indicative of our go forward margins, exclusive of any special charges. However, we expect to see margins improving as the volume picks up in our core and OEM businesses and especially as J-Plasma gains traction in the marketplace.

Turning to OpEx, R&D for the quarter was flat versus last year's second quarter at $318,000 compared with $314,000 a year ago as we continue to develop our J-Plasma product line and crossed the finish line with new core products, including Derm 101, 102 and IDS-310. Professional service fees were down almost $100,000 versus last year as the company had high legal costs a year ago associated with disputes that are now behind us. SG&A fell 27% or $585,000 from $2.2 million last year to $1.6 million this year.

There were two factors behind this. First, in the year ago quarter, we booked over $1 million of expenses related to legal disputes, which, as I stated earlier, has since been settled. Partially offsetting these were nearly $300,000 of higher expenses related to J-Plasma, insurance, relocation and other smaller administrative expenses.

Lastly, salaries and related costs trended higher from a year ago by $613,000. This increase includes salaries and incentive compensation of the new executive team, costs related to the growing J-Plasma direct salesforce and one-time CFO transition costs, as well as some other smaller items. All told, our OpEx was consistent with prior year, and we hope to start to see leverage on this line as we grow sales later this year and into next.

Now to operating income. We are reporting on a GAAP basis a loss of $1.7 million, roughly stable with the year ago quarter. To try to get a more apples to apples comparison, we can exclude from this year's second quarter the costs associated with the inventory adjustment, $843,000, CFO transition costs $340,000 and other special charges totaling $43,000, while deducting just over $1 million from last year's second quarter for the legal costs mentioned previously. On that basis, the adjusted operating loss for the second quarter of 2014 was $520,000 compared with $609,000 in the second quarter of 2013.

Turning to the below the line items. Under mark-to-market accounting, we generated a non-cash gain related to the fair value of our warrant liabilities of approximately $1.5 million. This, combined with a booked tax benefit of $583,000, meant our GAAP net income for the quarter was $251,000 with $29,000 attributable to common shareholders. This translated into $0.00 per basic share and a loss of $0.07 per diluted share compared with a net loss of $0.06 per basic and diluted share in the second quarter of 2013. Excluding the gain related to the warrants, charges associated with our inventory and other special charges, we would have reported a net loss per diluted share of $0.03 in the second quarter of 2014, in line with last year's loss of $0.03 per diluted share.

Also, as I mentioned on the March earnings call, we continue to work on ways to optimize our capital structure in order to avoid these quarterly swings in our warrant valuations and other special charges.

Turning to the balance sheet, our balance sheet remained largely uneventful and very much in line with our expectations. This included our cash on hand, which was largely stable from a quarter earlier at $5.6 million compared with $5.8 million as of March 31 and $7 million at year-end. As stated previously, our core and OEM businesses are cash flow neutral to slightly positive, and we expect cash balances to remain in the $5 million range through the end of the year.

With that, back to you, Rob.

Thank you, Peter. To sum up, we have positive momentum going into the second half of 2014. We are focused on strengthening our core business with new product introductions and calibrating our OEM business to maximize operating efficiencies. The Bovie brand is known for high quality and reliability, and we are developing strategies to leverage these strengths to drive revenue growth.

At the same time, we are building a world-class organization to support the commercialization of J-Plasma. We have attracted top-tier talent to bring this product to market, and we are giving our sales teams the tools and training they need to get the job done.

Denise, at this time, let's open the call to questions.

(Operator Instructions). Russell Cleveland, RENN Capital.

Thanks for taking my call, and thanks for the report. It makes good reading. My question is kind of on the three areas that we have selected, and I have two questions. One is, what currently is the size of this in the surgical market? Secondly, what would be our goal, not a forecast, but our goal to capture that? In other words, in percentage terms. And those are the two questions I have.

Okay. All right. Thank you, Russell. And for all these questions, I certainly invite Peter and Jack to chime in as well.

So the size of the market, and again we are focused on three, it's plastics, dermatology and, of course, GYN. GYN being the biggest of the three markets. Those markets collectively represent about $1 billion total addressable market, and that is for the disposable handpieces only, primarily, rounding up slightly.

So in terms of our goal, we certainly expect given the product at hand that we ought to be able to capture 10% of that market in due time. We think that due time is likely five years or so, plus or minus.

Okay. That is my question. Thanks so much.

All right. Thank you, Russell.

Keith Hinton, Sidoti & Company.

Hi, Rob. How are you?

Okay. Keith. Hope you are.

I have two questions here. The first one, Peter might be able to address it a little bit, but I was hoping you could just give a little bit more color regarding the inventory write-down. Sort of what the cause of that was and specifically whether you are looking and whether you expect there to be any write-downs like that in the future.

Yes, good question, Keith. $843,000. So first off, Keith, it as part of our initial process. You know like any good hygiene of companies, you look at your inventory balances. We have a new executive team and a new Chief Commercialization Officer, and of course, you know, I am relatively new to the organization starting in May. We evaluated inventory, which, you know, I ticked up over $8 million relative to the new commercialization plan.

So that was the first step. A little bit more detailed process and for me the first time through. The $843,000 represented in broad brush strokes, Keith, kind of three buckets, if you will. But the first bucket was kind of J-Plasma related. There was -- like any startup, there is some scrap; there are some products that we kind of evolved away from since the earlier days and some processes that have changed. So about a quarter of the $843,000 was related to J-Plasma.

The second batch was just legacy products. We either had no commercialization plans or stale commercialization plans for those items, or we just had too much of some products that weren't moving, which is the textbook definition of a write-off.

And then lastly, there were some new regulations, RoHS, was the name of the regulations in Europe, and with that said, we either had some products that fell out of compliance that we were no longer going to market or we found it not cost-effective to put those products back on the market. So those were the three big buckets of the $843,000.

You know, at this time, Keith, we do not have any visibility to inventory write-downs, but we still have $6.9 million on the balance sheet, and we will continue to kind of tweak our J-Plasma commercialization plans in that, but no write-downs at this time.

Okay. Terrific. And the other question -- Jack, you might be able to address this a little bit -- is regarding the growth opportunities in the core business, in terms of looking internationally, the Derm 101 in the veterinary space, do you have any goals in terms of timing or what kind of growth levels you are sort of shooting for with these various initiatives?

Hey, you know what, before Jack chimes in, I will just kind of set it up by indicating -- and it is a little bit of a repeat from previous calls -- in the core business where we know there is a significant growth opportunity both in the international markets, specifically Latin America, and the veterinary space, we are committing more resources, and our vision is a mandate really to grow beyond the market pace.

So with that, I will turn it over to Jack to add some more color.

Yes, Rob, I agree with Rob 100% there. We were just looking initially, as Peter said, new to the team coming in and looking at the core business and where it is currently exceeding year-over-year sales. And in those markets, we see opportunities to continue to grow in those segments. So that is a great segment, high growth area, and we are going to apply some additional internal resources to it. In international we have also seen some upticks in specifically Latin America, and we will continue to focus on that. So those are the key strategies moving forward as we just took a look at the initial commercialization plan.

Okay. And in terms of the Derm 101, 102 rollout, do you expect that to be sort of a slow buildup, or do you think that there is some pentup demand there where you are expecting the sort of sales from that to ramp up pretty quickly?

Yes, you know, I will comment and then invite Jack to chime in as well. You know, we're in the very early innings of Derm 101, 102. We just started shipping. We do believe that there is pentup demand for this product because we have been discussing as has our exclusive distributor partner, and the interest level is high. But we are in the very early innings right now.

Okay.

Yes, and again, I think you know the key point is there, if you look at the Bovie core business, we haven't had any new product launches in years. So the market is ready for this, and again, this is a very good product that will allow physicians to grow their business. So it is great timing, and like Rob, our distributor partner is very excited to move this product.

Terrific. Okay. That is it for me. Thanks, guys.

Okay. Thanks, Keith.

(Operator Instructions). Alison Peck, Peck Wealth Management.

Good afternoon and thank you for your thorough report. I have just several questions. One is with the high success rate that you have with the surgeons adopting the technology, how does that translate -- and maybe it is too early to really understand -- into actual utilization? Or how often are they actually using it? What percentage of this procedure do you expect to be utilizing the J-Plasma?

Yes. Okay, thanks. I will start, and again I welcome both Peter and Jack to chime in as well. We are early, and the sales cycle, as I stated in the prepared remarks, tends to be 60 to 120 days until the product is fully in the hospital, and that is when you expect the utilization to really take off and be much more predictable.

In the meantime, it is being adopted routinely, which means for those early adopters, the surgeons that we brought on last quarter and the quarter before, those surgeons have adopted -- and routinely meeting -- they do not need a Bovie representative in the room to use it. But to get a surgeon from a first-time user to using it routinely takes that 60 to 120 days. So with that kind of as a setup, Jack, I don't know if you want to add a little bit more color?

Yes, with the pipeline, it continues to grow each month. And we think that -- well, we are confident it will continue to pace in the upper trajectory. In the meantime, as Rob alluded, within that 60 to 120 days, there are different gating factors for individuals. It could be the systems themselves require certain certifications or trainings and things of that nature, which we have got several, six planned for the end of this year. So we know that these trainings will definitely get these surgeons through the credentialing process and will certainly equal more revenue moving forward.

Okay.

Alison, Alison, I am sorry to interrupt you, but I just wanted to add one more comment. One thing that is different about J-Plasma than other transformational technologies is this. With other transformational technologies, often the surgeons are waiting for that perfect case, that uneventful case to use the product in, and that in of itself can slow down the adoption. The great news is for J-Plasma, they do not wait for that perfect case. They could use it on most of the cases that they have. So we do expect the adoption, you know that cycle to be shorter than with other transformational technologies.

Good. That will be interesting to watch as you move along. And one last question is the current utilization rate of the Clearwater facility and just some comments around capacity and etc.

Sure. Alison, this is Peter. So I think we spoke before. The capacity is there. We are currently on one shift. You know, we're kind of trying to right size the OEM business as to not overtax the existing resources. There is a lot going on, as you can imagine. But in light of Jack's ability to ramp up J-Plasma, we are ready for it.

We, as part of the inventory that I talked to on one of Keith questions, we reviewed kind of all the leadtimes and items that need to go into J-Plasma. So the long and the short of it is there is capacity to ramp up pretty quickly for J-Plasma. We have looked at the supply chain and done the resource planning necessary, and we also have the ability to add shift. We are a one shift operation in Clearwater.

Great. Thank you.

(Operator Instructions). And in showing no additional questions in the queue, this will conclude our question-and-answer session. I would like to turn the conference back over to Rob Gershon for any closing remarks.

Okay. Thank you, Denise, and we thank all of our Bovie employees for their commitment and our shareholders and all of you that dialed into this call for your interest and support. We hope you enjoy the rest of the summer, and we look forward to our next earnings call in the fall.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.