Apyx Medical Corp (APYX) 2015 Q3 法說會逐字稿

Good morning and welcome to the Bovie Medical Corporation third-quarter 2015 earnings conference call. (Operator Instructions). Hosting today's call will be Robert Gershon, Chief Executive Officer of Bovie Medical Corporation. (Operator Instructions). Please also note this event is being recorded. (Operator Instructions).

Before we begin, I would like to make the following Safe Harbor statement. Today's call will relate to Bovie's third-quarter 2015 earnings results 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. The Company assumes no obligation to update or supplement any forward-looking statements whether as a result of new information, future events or otherwise.

With that I would like to turn the call over to Mr. Robert Gershon. Please go ahead, sir.

Thank you, Andrew, and thank you all for joining us this morning to review our third-quarter results and discuss key developments across our organization. With me today are our CFO, Jay Ewers, and our Chief Commercialization Officer, Jack McCarthy. At the end of our prepared remarks, all three of us will be available to answer questions.

This was an excellent quarter for Bovie Medical from several perspectives. We reported a double-digit increase in total revenues compared to last year's third-quarter. J-Plasma sales were higher than the last two quarters combined and each of the metrics tied to future J-Plasma sales showed substantial sequential growth. Additionally, the recent progress we have made on three key initiatives has further strengthened both our core business and the potential for J-Plasma.

Specifically, we reported a 15% year-on-year increase in total revenues and a gross margin that was stable with the adjusted gross margin we reported in last year's third quarter. The profitable growth of our core business has always been an important objective for us and we are continuously exploring opportunities to build our product portfolio and increase efficiencies.

The big news of the third quarter however was J-Plasma and as I said in the earnings release, we believe we have reached an inflection point in terms of positive sales momentum. First, our J-Plasma sales surpassed $500,000 and we have closed in on the $1 million mark for the first nine months of this year. Of course, the numbers are relatively small but the trends are undeniable.

After sales, the metric that we watch most closely is generators in use as it has the closest correlation to actual sales and is a good indicator of future recurring revenue from handpiece sales. In the third quarter, we had 62 generators in use at 53 hospitals in 18 states representing an 82% sequential increase over the 34 that were in use at the end of this year's second quarter.

The installed base is comprised of generators that we have sold or leased to hospitals where J-Plasma has been VAC approved as well as generators that we have placed in hospitals where J-Plasma has been VAC approved or is still under VAC review. In the case of the latter, we charge a premium for the disposable handpieces as part of a program that allows hospitals to pay for the use of a generator without having to purchase any capital equipment.

Placing the equipment on-site has proven to be one way to shorten the sales cycle and increase the number of surgeons who are exposed to J-Plasma.

At the same time, this has resulted in disposables representing a greater proportion of our J-Plasma sales than they generally would at this early stage of commercialization which is fully aligned with our strategy of growing recurring revenue.

62 generators in use gives us the scale to effectively mine our installed base. Being on-site puts us in an excellent position to increase adoption amongst surgeons with access to our generators and broaden awareness within the institutions where J-Plasma is already VAC-approved or in review while continuing to expand the universe of surgeons who are using the product.

At the end of the third quarter, there were 132 surgeons using J-Plasma, a 74% sequential increase achieved in just a three-month time horizon. Also, we are very proud of the fact that all surgeons who have been trained by us on J-Plasma have emerged as users of the product.

As we have noted previously, there is a lag time between the time the surgeons began using J-Plasma and when that translates into bulk purchase orders from their hospitals. This is due to the longer approval process and Value Analysis Committees or VAC, a situation that is not Bovie Medical specific but rather confronting our entire industry.

One mechanism we have to capture these sales is via Scrub POs which are issued when the surgeon is using the product in the OR while it is under VAC review. With the timing of VAC approvals increasingly unpredictable and the significant amount of paperwork required following approval, Scrub POs have become another accurate early indicator of future sales. In the third quarter, we received 79 Scrub POs, almost double the 42 we've received in the first six months of this year bringing the total for nine months to 121 compared to just six for all of last year.

While we are frustrated by the time it takes to complete the VAC reviews, we cannot complain with the treatment that J-Plasma is getting from them. We were approved by 17 VACs during the third quarter bringing the total VAC approvals up to 59 year to date and J-Plasma was under review by an additional 64 VACs.

The VACs at two large systems have deferred approval requiring that we publish ongoing clinical studies prior to their approval but except for those two, we are batting nearly 1000.

Taking all of these metrics together, it is clear that we are positioned for substantial growth in J-Plasma sales in the periods ahead with the vast majority of demand coming from OB/GYN and plastic surgery which have been our initial target markets.

Last quarter I discuss the formation of a Medical Advisory Board to assist us in determining those specific procedures in other surgical specialties for which J-Plasma is well suited for broad-based adoption. Our first member, Dr. Vip Patel, a world-renowned urologist and leader in robotic surgery believes that J-Plasma has the potential to significantly benefit patients undergoing surgery for prostate cancer.

One of the strategic initiatives I mentioned earlier is the progress we have made in building out the Medical Advisory Board. The two new surgeon members we announced in our third-quarter earnings release are at the top of their fields. Dr. Sam Balkhy is Director of Robotic and Minimally Invasive and Cardiac Surgery at the University of Medicine, University of Chicago Medicine, and Dr. Robert Cerfolio, is professor of Surgery and Section Chief of Thoracic Surgery at the University of Alabama Hospital. Drs. Balkhy and Cerfolio see multiple ways in which J-plasma can become the standard of care for certain procedures within their respective specialties of cardiovascular and cardiothoracic surgery.

In addition to expanding J-Plasma's addressable market, we believe that expanding from OB/GYN and plastic surgery into specialties like these will accelerate the hospital VAC process. All three Medical Advisory Board members have been working with us on J-plasma and have collectively completed many labs and surgical cases using the product. In short order, we expect to expand the Board to six to nine members.

Another strategic action we took since our last earnings call was to purchase Bovie Bulgaria, our R&D and manufacturing contractor based in Sofia. This transaction gives us control over an important part of our product development activities and supply chain and we project that it will result in net cost savings of approximately $850,000 for 2016 and 2017 combined.

Lastly, we continue to execute our strategy to unlock the value of the Bovie R&D pipeline. In the third quarter, we announced the receipt of FDA clearance for six new handpiece configurations that extend the J-Plasma pistol grip product by offering additional instrument length and adding a new needle option.

The longer lengths allow greater surgical reach and the needle enables even more precise delivery of energy giving the surgeon added control around vital organs.

Just a few days ago we received FDA clearance for our next J-Plasma product extension which is branded, Precise 360. This J-Plasma handpiece has a roticulating tip that will enable surgeons to navigate structures that are out of the reach using a straight laparoscopic device. And the next J-Plasma portfolio addition on the drawing board is a handpiece designed specifically for use in robotic surgery which we expect to launch in the second half of next year and we look forward to collaborating with our Medical Advisory Board members to develop other new J-Plasma product configurations.

Jay will be reviewing our third-quarter financial performance in just a moment. I do want to comment however on the fact that we kept our administrative and other non-revenue generating costs in check in the third quarter and have allocated our resources to those areas where we see meaningful growth potential. We succeeded in maintaining our cash position at $13.2 million, just modestly below the $14.1 million in cash that we had at the end of the second quarter, providing ample funds to support the commercialization of J-Plasma.

At this point, I will turn over the call to Jay Ewers, for a financial review of our third-quarter results. Jay?

Thank you, Rob. Revenues for the third quarter rose 15.3% to $7.8 million compared with $6.8 million in the year ago quarter. We saw continued growth in the core business, the expected pickup in OEM sales from existing customers and more than $500,000 of J-Plasma revenue, up from $90,514 a year ago.

Gross margin for the quarter was 41.3%, stable with the adjusted gross margin figure we reported in the third quarter of 2014 which excluded certain inventory charges.

Our margins have remained in line with expectations but this quarter we recorded a large sale of lighting, a product that is relatively low margin and where orders tend to be large but irregular. Going forward, we still expect gross margin to be in the mid-40s range.

Third-quarter operating expenses rose 17.6% to $5 million. Approximately 80% of the year-on-year increase in operating expenses represented additional spending on R&D and the commercialization of J-Plasma.

I will now go into more detail on the OpEx number. R&D costs grew 58.4% to $583,000. As we have discussed before, we greatly expanded the R&D capabilities in terms of headcount and expertise. In the last 12 months, we rolled out multiple new products including the Bovie Ultimate Generator and six new J-Plasma handpiece configurations.

Professional service costs were $427,000 compared with $142,000 in the third quarter of 2014. This increase largely consists of expenses associated with legal and accounting fees for due diligence and advisory services related to our recent acquisition of Bovie Bulgaria and outsourced tax and compliance work.

Salaries and related costs totaled $1.9 million, an increase of $275,000 from the year-ago quarter. Similar to previous quarters, the higher salaries, benefits and payroll taxes reflected the increased headcount in the J-Plasma sales force and other key hires.

SG&A costs were flat from a year earlier at $2.1 million. Increases in sales commissions and sales related T&E were offset by decreased spending and regulatory, non-sales related T&E and other administrative expenses.

We expect operating expenses to remain relatively flat at this level in the coming quarters. The exception will be marketing and advertising expenses and variable compensation from J-Plasma sales which is forecast to increase.

The operating loss for the quarter was $1.8 million compared with $2.4 million in the third quarter of 2014.

Turning to below the line items, we recorded a non-cash gain on the valuation of derivative liabilities of $266,000 in the third quarter compared with a non-cash loss of $1.7 million a year earlier. As you know, we executed a transaction in the first quarter to convert Great Point Partners preferred shares to a similar security without warrants and certain [preferences]. This transaction reduces the volatility of below the line expenses.

The net loss attributable to common shareholders on a GAAP reported basis for the third quarter was $1.6 million compared with a $3 million loss a year earlier.

Looking briefly at year-to-date results, revenue was up 5% for the first nine months of 2015 with solid growth in the core business and J-Plasma. Gross margin was 42.6%, up from 32.4% in the first nine months of 2014 when we booked significant inventory adjustments.

Total operating expenses are up 38% year to date to $14.7 million with higher expenses in most categories as we build a foundation to support growth in J-Plasma and core business.

Our operating loss was $5.6 million year to date compared with $4.1 million in the first nine months of 2014. The net income attributable to common shareholders on a GAAP reporting basis was $9.8 million compared with a loss of $12.8 million in the first nine months of 2014 both related to the revaluation or extinguishment of derivative liabilities.

Turning to the balance sheet, it remains largely uneventful. We ended the third quarter of 2015 with $13.2 million of unrestricted cash and we are actively working to conserve our cash position providing us with the resources to fund the ongoing J-Plasma commercialization.

I will now turn the call back to Rob for closing comments.

Thank you, Jay. We are well on our way to the strong second-half that we anticipated at the time of our second-quarter conference call. The pickup in core business materialized in the third quarter and we expect to see continued progress in the fourth quarter and J-plasma's performance metrics set the stage for continued positive momentum all indicating a strong finish to 2015.

In 2016, we expect to continue to achieve steady progress in our core business. We are allocating resources to develop new products and assess products developed by third parties which we can bring to market through our efficient distributor network.

The Bovie brand is an important competitive advantage and one we believe we could leverage further. At the same time, we expect our revenues to reflect a greater contribution from J-Plasma sales as we penetrate our installed base and continue to build surgeon adoption in both our current target markets in the high profile urology, cardiovascular and cardiothoracic surgical specialties.

In summary, we believe we have built much of the foundation for sustainable and scalable growth. We have a transformational product, a clear roadmap, the right surgeon advocates and a motivated and committed sales and management team.

At this time, Andrew, we would like to open the call to questions.

(Operator Instructions). Dave Turkaly, JMP Securities.

Thanks and congrats on the J-Plasma momentum. I guess quickly, you mentioned the VAC process and I was just thinking with the new Medical Advisory Board members that you have, once you get through a VAC process in any given hospital, do you have evidence that you will be able to get surgeons from different specialties to use the product say you got it in first originally through a gynecological surgeon. Could these cardio and thoracic people then also use it once you are through the VAC?

Yes, Dave, thanks for the question. It is Rob and I certainly invite Jack to add any additional color. The answer is a resounding yes, absolutely. In fact what we have experienced at several accounts is once the hospital approves the product and it starts getting used by our initial target such as OB/GYN, there are conversations that ensue in the surgeon's lounges and there tends to be a viral effect where we have other specialties approaching us to help them adopt the technology.

We have several examples of that and we have been very diligent at remaining focused on only our target specialties. We have had other specialties that are not targets that would like to start using the product but to keep the organization focused is absolutely paramount so we use that level of discipline but many examples of that happening.

Dave, I will add to that as well. This is Jack. One of the things that we are leveraging the VAC members for is to make sure that we have the right procedures for those specialties -- the MAB members, excuse me. With that as soon as these procedures are identified, the sales team will be able to go to the existing installed base and go after those specialties that you just referenced there, the CV and thoracic so that will be a strategy moving forward to go in and leverage the existing base.

And in summary once the product is approved at the hospital for purchasing, all surgeons have access to requesting that product once it is approved.

Great. Thanks for that. Then I guess give an update on your headcount in your J-Plasma sales force, where it is and where it is going?

Yes, thanks for the question. The answer is we have held steady with our headcount which includes 16 sales professionals and that includes the territories as well as the sales leadership team and as we have commented in the past, every one is a coach and a sales professional so everyone is selling the product.

At this point in time we have not expanded our sales organization beyond those numbers but we certainly have plans to do so. Our discipline is to make certain that we can serve our cash position so that we responsibly grow the organization and this is a balancing act and it is not only a quantitative exercise, there is an art to it as well. So we are beginning to understand how long it takes for a sales rep to become very profitable and then of course we can start increasing accordingly.

But there is also an art to it as the sales team is really coming together and gelling and we want to expand it and really start scaling accordingly.

So we will comment more on our plans in our next earnings call with respect to 2016 and beyond but growth is our plan.

Thanks a lot.

Charles Haff, Craig-Hallum.

Thanks for taking my questions, guys. Question for you on kind of the metrics and the trajectory of the J-Plasma metrics. So it seems generally speaking like we saw similar levels of sequential growth of VACs going from 42 approvals to 59 under review going from 46 to 64. J-Plasma physicians going from 76 to 132 and generators in use 34 to 62. So they all kind of have the similar level of sequential growth thereabouts and I am just wondering if you could kind of characterize the quarter? And are these different metrics and this similar level of sequential growth, is that an anomaly, is it just a coincidence or is that a function of your resources, your sales resources? Would you kind of expect these levels of growth to be seen in the fourth quarter? Just help us understand or characterize this quarter as respect to those metrics?

Okay, thanks, Charles. It is a very thoughtful question and the growth that we are seeing, the sequential growth across all metrics is very consistent with our 2015 goals and certainly the trajectory has us on track by the end of the quarter, of quarter four that is, to meet our 2015 goals that we established. It is a function of the level of sales activities that are taking place. That is what it is. So this sequential increase is not a surprise to us, it is what we expected based upon the activities that have been building really since January. And given this elongated sales cycle of upwards of six to nine months, it is reflective of the work that has taken place six to nine months ago and the level of activities have only increased quite significantly throughout the year.

So we do expect this trajectory to absolutely continue in Q4 and beyond.

Okay. And Jack, maybe you can chime in here. All of these metrics kind of had a similar level of growth. Just on the second part of that question, I mean I know your win ratio is pretty high so do think it was coincidence that all of these metrics kind of had a similar level of sequential growth or is it a function of kind of the sales resources that you are deploying and so forth?

It is no coincidence. It is expected. This is going according to our plans and strategies that we have been employing throughout the entire year. So no coincidences at all, this is all very expected and planned.

So if I think about kind of the term backlog and kind of what you have in terms of Scrub POs, VACs that are under review going from 46 to 64, I mean if I think about it in a backlog standpoint, it is going to take a long time for this backlog to burn off and you are going to have new businesses and new accounts that you are getting into.

So do you feel like you have pretty good visibility or is your visibility improving on the VAC side or is it still kind of still random? I know a lot of these VACs operate differently than one another. Is there any predictability now that the numbers are getting kind of bigger now or should we still be a little bit cautious in trying to predict how some of these approvals take place on the VAC side?

I invite Jack to chime in as well so I will just start. The level of POs that are coming through with which there is an instant gratification to those Scrub POs because we get paid that day for the product and the level of hospitals that are now going through the VAC process is a function of the high level of activities that are occurring.

We are seeking and really successfully starting to shorten that sales cycle by approaching the VACs through this multi-specialty process because that process has begun. And that part is helpful and the groundswell of support that comes with Scrub POs that at times are for multiple specialties really helps the VAC committees efficiently make their decisions. These VAC committees are not all about saying no to everything. They are all about going through a thoughtful process to control costs at their hospitals.

As we can assist them in that process, we shorten the cycle and our batting average really speaks for itself so we know and that is really helpful. So the momentum continues to build.

So I don't know if that completely answers your question but I invite Jack to chime in as well.

So I think your question is as far as the predictability, it is still somewhat variable hospital by hospital. There is still no clear cadence of each hospital and when they are going to order the product.

But we do, as Rob said, have an idea of how to shorten the sales cycle. The MAB and multi-specialty approach is definitely one of them as well as providing additional tools for the sales team out there to help shorten the sales cycle. And we continue to learn throughout the year and as we learn from the customers and what the VACs are requiring, we are building more tools and more tactics against that.

So we hope to shorten the sales cycle moving forward but again, there is no real consistent sales cycle per VAC. It is still variable by hospital, by IHN.

Robert Gershon

I will make one more comment, Charles, regarding the Scrub POs because I think they are such an important indicator.

When a VAC committee sees an increase in Scrub POs at their respective facility, what it does communicate to them is that surgeons have decided to pick this battle to fight to get this product into the hospital and that is a very important data point for the VAC committees because back in the old days whatever the surgeon one of the surgeon got. Today the surgeon will only pick certain battles for those must-have products. So I think these Scrub POs are a real strong indicator that what we have with J-Plasma is a must-have product.

Yes, that is a great point, Rob. I hadn't really appreciated that but that makes a lot of intuitive sense. Thanks for bringing that point out.

Just a couple of more quick ones for me here. Sorry, I joined a couple of minutes late but did you mention anything about the economic white paper, anything, has that been published yet or is that coming?

So I will make one statement and then I will turn it over to Jack to further elaborate. We said at the beginning of the year that we want to exit 2015 with collectively 10 plus white papers including the one that you are referencing. We are on pace to absolutely meet that goal. But Jack, I ask you to comment on it.

Sure, we had not commented on that specific paper but that paper is out there and it is helping generate more interest in approvals through the VAC. We will also publish additional economic papers next year as we continue to move forward. And we are also going to be moving into some clinical studies as well which is important to again reduce the sales cycles. In addition to white papers, we are working on a clinical strategy as well.

Okay. One last one for me and if you don't have the answer to this maybe I could get this off-line. But 132 doctors using J-Plasma at the end of the third quarter, do you have a breakdown of GYN, cardio, thoracic, any of the subspecialties that make up the 132 doctors?

Charles, so we don't publish that level of surgeon customer information very specifically. But we can share with you in general the vast majority are split between OB/GYN and plastic surgery. There are a few other specialties that are sprinkled in there and we certainly expect going forward as we expand into these other surgical specialties such as urology, heart surgery and thoracic surgery that the mix will start shifting as the number continues to grow.

Okay. Thanks for taking my questions, guys.

Russell Cleveland, RENN Capital.

Good morning and congratulations on a very good quarter. I've got two questions. One is a technical question on number of shares moving from 17 million to 27 million. I am assuming that is 5 million from conversion of preferred and 5 million from the offering. Is that correct?

Correct.

So it is a conversion of the preferred is the other $5 million?

That is correct.

Okay. The next thing earlier in the year, we had guidance on for example a number of surgeons and things like that that we were expecting. We haven't updated that, we certainly are making a lot of progress. Can you update your guidance in the areas that you have been guidance because I didn't see it in the press release.

Yes, absolutely. I alluded it kind of lightly just a moment ago but some of the goals we talked about was having 100 generators in use. We are on that trajectory by the end of 2015 that is, 100 generators in use and 200 surgeons using the product as we exit the year.

We continue to pace on that trajectory to meet those goals. We do think that we will exit with those goals being met. We also commented and I just said it a moment ago on the number of white papers. We expect to have 10 or more that are independently published by the end of the year. We are absolutely going to meet or exceed that number.

We also mentioned an increase in key opinion leaders and this is before we announced the Medical Advisory Board and we said that we would increase the key opinion leaders to 10 to 12. We have far, far, far exceeded those numbers I think in the first half of the year and certainly we are going to exit the year with many, many, many more than those numbers.

So I think of course we will report in early 2016 our finish for 2015 and I expect when we do we will have met our goals.

Great. Okay. That is all I had. Thank you so much.

(Operator Instructions). [Glenn Ruettiger], Trust Management.

My question is basically a little bit of what Russell asked, the number of shares going from 17 million to 27 million and when we did that conversion of the issue that Craig-Hallum did back in March, as we ran the numbers it looked like we were going to eventually grow up to about 33 million shares. Will there be more shares added in over the year period since that conversion happened? Or are we done at 27 million at this point?

Yes, so, we have the option overhang of course which is about 2.7 million shares in the option overhang. Right now there is the weighted average shares outstanding is 27 million. Great Point Partners still has -- they still have about -- they can convert approximately another 4 million of their preferred -- they have 1.975 million preferred shares at a 2 to 1 conversion rate. So that is a 2 to 1 so that could be on another $4 million of overhang which puts us at about $34 million because we are basically done with the placement agent warrants. We have a few of those outstanding, about 300,000.

So those numbers will start going into our reports after the conversions happen but right now they are just carried on the books as being not fully diluted at this point?

Yes, sir, that is correct.

Has anyone else written a report on Bovie? I know JPM came out with a very good report back in April. I haven't seen Craig-Hallum come out with anything and we are basically trading right now at 40% less than what the stock was when they did our secondary and we are supposed to be putting it in strong hands. Do you have any feelings on what is going on as far as any other reports on the company or concerns?

Glenn, it is Rob. Thanks for that question. And you know, right now we have two analysts that are covering us, they are on the phone and asked questions already, JMP as well as Craig-Hallum and they do publish updated notes on a quarterly basis to keep their clients informed and as you would expect from an investor relations perspective, from an investor relations strategic perspective, we continuously and very often at least quarterly have meetings, the executive management team does with many other institutions that are very interested in our stories.

And what we expect over time is that other analysts begin to pick up the story because it is such a great compelling story and start doing research and publishing their research on us.

There is another organization you may have seen their stories, we have no affiliation with them. In fact to my knowledge I don't know that they have ever spoken to people, maybe historically they have but it is Seeking Alpha and they have put together some very interesting articles and again, they have never contacted us, at least not in my coming up on two years of tenure, they have never contacted me personally directly or anyone from our leadership team. But they tend to publish very thoughtful and well researched and insightful reports.

So you could look those reports up, they do so quite frequently. I think there have been at least three or four in the last couple of years including one very, very recently.

Okay. Is there an actual report out from Craig-Hallum or just the notes that the analyst puts out?

So Craig-Hallum, when they first initiated coverage, put out quite a comprehensive report and following some -- I don't remember exact pages -- but about 15 to 20 pages of a report that they put out, maybe even more, and every quarter they do when update which tends to be a six to seven page report that they publish.

What is the best way to get access to those? Is it just on the Web?

Yes, it is best to connect directly with Craig-Hallum and with JMP. They are completely mutually exclusive so we don't have any ability to help facilitate those discussions but just connect with them directly. Their contact information tends to be on the last page or the first page of their reports.

Bill Chapman, Morgan Stanley.

Good morning and congratulations on the fine quarter. I wanted to ask -- I know we are early in the ramp on the J-Plasma but do you still stand by your metric that each generator has two surgeons doing approximately two surgeries a week, therefore it is around 75,000 or somewhere in that range annual sales?

Yes, thanks, Bill, for your question and the answer is yes. There are so many different ways to model out how one would project sales of J-Plasma but we stuck to that one. That is the way we think about it internally. We think about each generator generating $78,000 of recurring revenue from the disposable handpieces and it is exactly what you said, Bill. It is two surgeons doing two cases a week or four cases a week at a given for each given generator, that is how the math works out to 78,000 and that is essentially on balance what we are seeing and what we expect on a go-forward basis.

Okay. Now we had heavy vacations of course in August which affected Q3 and did that affect the quarter as much as it would most firms?

Yes, you know, there is no question about it, August is a tough month for anyone in medical devices for every organization and we are no different. So I would say in my personal experience having been in this industry for a long time I would say we experienced it in proportion like everyone else in August.

Okay, okay. One last question on the Bovie Ultimate. You have got this 3 in 1 the bipolar, the monopolar and then the J-Plasma and are there any other functions you are looking to add to that?

Absolutely, yes. This is part of what I was alluding to in the prepared comments with respect to unlocking the value of Bovie in part through our R&D pipeline. Building generators is an absolute core competency that we have that we feel very strongly we do better than anyone and it is our heritage, it is the sweetest sweet spot we have and it is the reason why our OEM business is what it is where it is 100% inbound interest from the absolute largest players in the industry bar none. Because we do this very, very well. We have a big vision for evolving the Bovie Ultimate. It will be much more than a 3 in 1 as we continue to iterate and we are not going to elaborate on it beyond that but do know we have a big vision and we have the capabilities to very quickly bring new products to market especially when it comes to the electrosurgical generators.

Okay, thank you very much.

(Operator Instructions). John Sheehan, a private investor.

My question to you is this -- at one of the conference calls you alluded to the fact that you were hoping to have a run rate of $2.5 million at the end of the fourth quarter. Is that still in effect?

Yes. So we won't comment on specific run rates at this time but if you think about our model, so if you think about the model we just suggested with the 100 generators in use times the 78,000, you will get to math that does get to a run rate that exceeds the 2 million -- 2.5 million. So we continue to be on that trajectory. So I am hedging a little bit because it is premature for us to give very specific financial guidance but we are providing guidance on the metrics and it is reasonable to conclude accordingly.

Now one last question. Recently you signed a contract with a chain of hospitals which have a lot of clinics attached to it, right?

Yes, you are referring to the Amerinet GPO?

Right, right, right. My question to you is this. When they signed up with you to use your product, is that like an exclusive thing? In other words, will they just be using J-Plasma or will they be using J-Plasma in conjunction with other products?

Yes, John, I'm going to make a general comment and very quickly kick it over to Jack. Jack is leading this effort on behalf of the organization.

In general, GPOs have evolved historically from being an exclusive relationship with manufacturers to now being nonexclusive where they open themselves up to have what they call dual for multisource contracts offering their members choice. So that is kind of just at a very high level what we have done. However, J-Plasma is in a pretty unique situation and I will let Jack elaborate more on this contract and where it falls within how this GPO characterizes this technology.

So Amerinet contracted with Bovie for J-Plasma. They actually created a unique category for J-Plasma as they reviewed the energy, they believed that it was so unique that they wanted to create its own category for J-Plasma. So with that being said, Amerinet is the only GPO at this time that has a contract with J-Plasma or is J-Plasma approved. We are selling into many hospitals that belong to different GPOs but we have a contract set up with Amerinet. They do have not only hospitals but clinics and physician offices that can access the product as well.

They have the ability to pull through our core products with that. The core products are not on contract but given that Bovie Ultimate is a 3 in 1 tool as the previous person had suggested, they can pull in the core products, the pads, pencils and other accessories with the Bovie Ultimate so it can pull through additional business with it.

Okay. Thank you so much.

Dave Turkaly, JMP Securities.

Actually my questions have all been answered. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Robert Gershon for any closing remarks.

Okay. Thank you, Andrew. Thank you all for participating in today's call. We really appreciate your interest in Bovie Medical and look forward to keeping you informed on our progress.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.