Apyx Medical Corp (APYX) 2015 Q4 法說會逐字稿

Good afternoon, and welcome to the Bovie Medical Corporation fourth-quarter and full-year 2015 earnings conference call. All participants will be in listen-only mode. Hosting today's call will be Mr. Robert Gershon, Chief Executive Officer of Bovie Medical Corporation.

After today's presentation, there will be an opportunity to ask questions. Please also note that 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 fourth-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 Rob Gershon. Please go ahead.

Thank you, Amy, and thank you all for joining us this afternoon to discuss Bovie Medical's fourth-quarter and full-year 2015 performance and our outlook for 2016. With me today are our CFO, Jay Ewers, and our Chief Commercialization Officer, Jack McCarthy. At the conclusion of our prepared remarks, all three of us will be available to answer questions.

We executed well in 2015 and ended the year with positive momentum across a broad range of operating metrics. Fourth-quarter revenues increased nearly 11% from the comparable period in 2014, reflecting positive year-on-year growth in core product sales, OEM contract work, and J-Plasma sales. Specifically, sales of our cauteries and lighting drove increased core product revenues. Our OEM contract work benefited from additional orders that we received toward the end of the year that will also be additive in 2016.

These developments are building upon the Bovie brand and leveraging the product development and manufacturing expertise that the Company is known for, as well as enabling us to allocate significant resources to the commercialization of J-Plasma. For full-year 2015, total revenues increased 6.6% to $29.5 million. Also, we have been consistently operating at a healthy growth -- gross margin, which was 42.4% in the fourth quarter and 42.5% for the full year, emblematic of the market's recognition of the high quality of our products.

The operating metrics and leading indicators for J-Plasma product adoption were strong in the fourth quarter, but sales were below our expectations. We continue to face an exceedingly slow pace of J-Plasma generator sales. While we know that the long sales cycle for capital equipment is an industrywide issue, we also know that our VAC approval track record has been outstanding at over 92%, which makes this situation even more frustrating.

On the other hand, while overall J-Plasma revenue was sequentially down from Q3, we had a 28% sequential increase in J-Plasma handpiece volume compared to third-quarter levels. In fact, when you adjust for a large order that shipped from Q2 to Q3, handpiece volumes sequentially increased at double-digit rates in each quarter of 2015. This is the momentum that we had anticipated and expect to accelerate.

And, as handpiece volumes are closely tied to volumes of procedures done using J-Plasma, we have estimated that J-Plasma has been used in over 1,300 cases in 2015. Growth in handpiece volumes and the number of procedures are aligned with the leading indicators of J-Plasma adoption that we have been reporting on over the last several quarters, and which have shown significant growth in this fourth quarter as well.

Specifically, at the end of 2015, the number of surgeons using J-Plasma increased 14% to 151 from 132 at the end of the third quarter, and was almost 5 times higher than the 32 we had at the end of 2014. The number of generators in use at the end of the year rose to 81, up from 62 at the end of the third quarter, and 18 at the end of 2014. Scrub PO's, which are usually an excellent indication of orders to come, increased by 61 in the fourth quarter to reach 182 for full-year 2015 compared to only six in 2014. As you can see, all of these metrics are pointing in the right direction.

Within this environment, we have implemented four strategies that we believe will accelerate J-Plasma adoption and significantly expand the addressable market in 2016. Broadly speaking, these strategies involve first expanding our target markets; second, converting users of a competitive plasma product; third, enhancing the value proposition for generator purchases by hospitals; and fourth, accelerating our development of distributor networks, particularly for international sales.

For competitive reasons, I do not want to go into tremendous detail in each of these four initiatives, but here is what I will say. We are moving ahead to capture more business in our plastic surgery target market. J-Plasma is FDA-cleared for many soft tissue plastics procedures, including breast reconstruction and wound management, and while not specifically cleared, it is not contra-indicated for a host of others, notably skin resurfacing or wrinkle removal.

Without actively targeting this market, we have been receiving a number of orders, and certain plastic surgeons had been widely marketing the benefits of the product on reducing the patient's discomfort and downtime. By mid-February, we completed the next phase of training of our entire sales organization. And we have already launched a more aggressive campaign to address the plastic surgery market, which is largely office-based and where decision-making is much faster and less cumbersome than the hospital environment.

At the same time, we have expanded our focus in gynecology to include gynecology/oncology, where we see additional opportunities to use J-Plasma for various procedures, including dysplasia, debulking, carcinomatosis and colpotomies. And as we've mentioned in the past, we are working closely with members of our Medical Advisory Board, all three of whom are leaders in their respective fields of urology, cardiothoracic, cardiovascular and robotic surgery. They are guiding us to identify those procedures within their specialties for which J-Plasma can become the standard of care.

While it takes time for a product to gain this recognition, the surgeons on our Advisory Board, as well as other top surgeons, are convinced that J-Plasma has the precision and safety attributes that could lead it to replace other modalities, and indeed become a standard of care. In addition to increasing the opportunity for J-Plasma sales, our multispecialty approach is likely to help us accelerate the VAC process, as we have hospital-based champions in several of the highest profile revenue-generating specialties.

This brings me to the second initiative, which is enhancing the value proposition for the hospitals. First, we are stationing reps in operating rooms where our generators are available, but not being used by surgeons on all of their procedures. In this way, we expect to significantly increase the number of handpiece sales and overall adoption in demand for J-Plasma.

We have also added to our leasing program another pay-per-use feature that includes a minimum handpiece quantity commitment. This would shift the decision from a capital equipment investment, with its elongated sales cycle, to an operating expense decision, which has a much shorter sales cycle.

The third strategy is to convert users of a competitive plasma-based product. This process is underway and involves working with surgeons at large hospitals, several of whom are already using J-Plasma on a trial basis. Stay tuned for some exciting progress in this area.

And the fourth thrust is to evaluate how best to use distributor networks to broaden our reach, particularly in the international markets. This facet of J-Plasma's commercialization has been on our radar for more than a year, but recently, we have experienced an uptick in requests to distribute the product to overseas markets where we already have regulatory approval.

In fact, many of those requests come from existing partners of ours who distribute Bovie-branded core products overseas. To date, we have trained 14 distributor reps in various countries on the use of J-Plasma, and we expect to accelerate that program in the coming months.

This should give you a good sense of the major strategies we are implementing to drive further adoption of J-Plasma. There are lots of other initiatives underway, too numerous to mention. It is important to note, however, that we are taking these actions while keeping close control of our expenses. Jay will speak to that in a moment, but I'm very pleased to report that the strength of our core business is enabling us to reduce the operating losses associated with J-Plasma's commercialization and our R&D activity.

And while on the subject of R&D, I will mention that we launched several new products in 2015, including extensions of our J-Plasma product line, and will continue to make certain customized changes to the J-Plasma handpiece configurations for its use in specific high-volume procedures.

At this point, I will turn the call over to our CFO, Jay Ewers, who will do a financial review of the fourth-quarter and full-year. Jay?

Thank you, Rob. In the fourth quarter, Bovie's results showed positive momentum as we execute on our strategy with double-digit growth in revenue, expanded gross margin and a narrower operating loss. Importantly, the strength of our core business continues to support J-Plasma's commercialization.

Revenue for the quarter was $8.3 million, nearly 11% higher from $7.5 million in the year-ago period. Sales were driven by the core business, with a higher contribution from J-Plasma revenue at nearly $348,000, up from $73,000 a year ago. Gross margin for the period expanded to 42.4%, a substantial increase over the adjusted gross margin of 38.7%, and reported gross margin of 32.7% in last year's fourth quarter.

The result reflects an improved product mix, including higher sales of cauteries, lighting, and other products, and inventory write-downs in 2014 that negatively impacted margin. After achieving the substantial increase in margin, we believe the current level will be stable to slightly higher in 2016.

Fourth-quarter operating expenses were higher as planned, rising 15% to $4.9 million as we continue to invest for growth in J-Plasma commercialization and R&D across the business. R&D expenses rose 57.3% to $626,000, driven by higher payroll costs and project spending on new J-Plasma handpiece configurations and other new product initiatives.

Professional service fees of $414,000 were 25.5% higher than last year's fourth quarter, reflecting legal costs related to patent work and due diligence for our Bulgaria acquisition. Salaries and related costs were broadly flat at $1.7 million. Operating loss for the quarter narrowed to $1.4 million from $1.8 million in the year-ago period, as the higher gross profit more than offset increased OpEx.

Net loss attributable to common shareholders was $1.4 million or $0.05 per diluted share compared with a loss of $5.5 million or $0.39 per diluted share in the fourth quarter of 2014. Results for the year-ago quarter included a non-cash gain of $2.5 million related to the mark-to-market accounting for the fair value of issued common stock purchase warrants and a non-cash charge of $6 million on the write-down of a deferred tax asset.

We eliminated the volatility of the mark-to-market effects of the derivative liabilities following our capital raise in Q1 of last year. Once we pass the first anniversary of that raise, investors will have a more apples-to-apples comparison of our performance.

Now looking briefly at results for 2015, for the full-year, total sales were up 6.6% to $29.5 million, supported by our core business and higher contribution from J-Plasma. Gross margin reached 42.5%, a jump over last year's adjusted gross margin of 40.7% and the reported gross margin of (technical difficulty) [$32.5 million].

Our operating loss in 2015 was $7 million compared to $5.8 million in 2014, due to higher operating expenses related to Bovie's investment to commercialize J-Plasma and expand its product suite. The Company reported net income of $8.4 million or $0.24 per diluted share compared to a net loss of $18.2 million or $1.03 per diluted share last year.

Our 2015 net income benefited from a gain on conversion of warrants and preferred shares of $14 million. Last year, the Company incurred a loss of $7.3 million from the conversion of warrants and preferred shares.

I'll now comment briefly on the balance sheet. At the end of 2015, our balance sheet remains strong. We had unrestricted cash and cash equivalents of $11.8 million compared to $5.7 million at the end of 2014. Working capital was nearly $18 million. And aside from the mortgage on our manufacturing facility, we had no debt. While we do see significant cash outflows in the first half of 2016, cash burn should slow in the second half, and we expect the Company to be cash flow-neutral by the fourth quarter.

In conclusion, 2015 was a year of solid financial performance. In 2016, we are positioned to deliver further revenue growth while expense growth should be limited.

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

Thank you, Jay. To sum up, this was an exciting year for Bovie Medical, one filled with accomplishments and our share of challenges. While we are not in a position to give guidance on our performance in 2016, there are certain projections we can share.

First, based on our current visibility, we see continued low to mid-single-digit growth in our core products business and we are set for a solid bump in OEM revenues in 2016.

Second, when looking at our sales pipeline and operating metrics, we expect that J-Plasma handpiece volumes will increase by more than three times in 2016 from 2015 levels.

And third, this anticipated revenue growth, plus the operating expense savings from the Bovie Bulgaria acquisition and our own focus on cost controls, should enable us to break even cash flow by the fourth quarter of this year. Most important is that, while J-Plasma adoption from a generator sales perspective has been slower than anticipated, there are no product derailers.

J-Plasma works as expected. When used as indicated, there have been no clinical objections or any adverse events. Clinical acceptance by surgeons and VACs has been excellent. And, in fact, with over 92% of VAC's approving, unprecedented. J-Plasma meets an unmet need and we are confident that it will become the standard of care across several specific procedures.

Amy, at this point, I would like to open the call to questions.

(Operator Instructions). Dave Turkaly, JMP Securities.

So, I know in the past we talked about the sales cycle I think being somewhere around 120 days. And obviously, yes, we've heard some similar comments on capital placements or sales in today's environment. But I'm just curious, could you comment on exactly any update there? How long you think it's taking?

And then I guess one just for Rob. I mean, you mentioned some of the expansion into gynecologic/oncology and plastic surgery. And you look at this technology -- I'd love to just get your thoughts on the overall size of the opportunity for J-Plasma, given that you're looking at some incremental areas to go into.

Yes. Okay. Absolutely. So I'll start and I'll certainly invite Jack to chime in.

So here's what we know. With the benefit of -- we are about 14 months into full commercialization, being that commercialization truly started in January of 2015. And with the benefit of that, we've been able to really get our arms around how long is the sales cycle? From an empirical data perspective, how long is it?

And what we've found, our initial target markets have been GYN and plastics. And on the GYN side, what we are finding is the sales cycle is about seven months. And for the plastics, it's about 60 days. So a big, big difference; hence our emphasis in 2016 on plastics. It's simply a shorter sales cycle.

With respect to the size of the market in terms of GYN oncology and plastics, the way we calculate the size of the market is looking at the specific procedures, the volume of those procedures, and simply multiplying it by the ASP of our disposable handpieces.

And what we are doing right now -- and you have to really vet these numbers -- so we are working with the various societies to get the actual numbers. So I don't have a specific number for you in those specialties. But what I can tell you, at least from looking at some of the early numbers, it's a multiple of what we have established as our TAM to begin with -- especially in the plastics area; those numbers tend to be very, very high from a procedural volume perspective.

Thanks for that. And could you --

I'm sorry, Dave, to interrupt, I'm sorry. I meant to mention that as we are vetting these numbers, we will update our investment presentation online and the respective TAMs accordingly. So, stay tuned for that. It will be -- it will absolutely be in our next iteration.

Great, thank you for that. That's helpful. And not to put you too much on the spot here, but the tone -- your comments sound like you're even more of a believer in sort of J-Plasma and the opportunities ahead. And I just want to make sure that I'm hearing that correctly. The delay that you saw or the issue you might have seen this year was a timing one, which you think you can recapture ahead -- would that be fair?

Yes. Absolutely. There's no question about it. At the beginning of this process, we knew that we had a special product on our hands. And we knew that it had significant opportunities for growth.

Fast-forward now, we've absolutely validated it. And that's why I commented on no derailers. The more we learn, the better the story gets. And our confidence has never been higher. There's no question -- yes, we're frustrated. We are really frustrated by this elongated sales cycle for the capital piece of equipment, but wow, are we encouraged by the growth that we see in true adoption, which is really measured by the handpiece volume and the quarter-over-quarter growth that we see there.

So, our confidence level has never been higher. And we're navigating and have strategies in place to shorten that sales cycle for the capital piece.

Thank you very much.

Charles Haff, Craig-Hallum.

Thanks for taking my questions. Can you hear me okay?

Yes. Can hear you perfectly, Charles.

Okay. Thanks. And wondering, in terms of the new hires, I think you made some announcements there. I wonder if you could just kind of review why you made those hires at this time and what you hope to accomplish there?

Yes, absolutely. So I'll start and then I'll ask Jack to chime in. So, this was all about -- you know, we slightly expanded the sales organization by adding a new regional manager. And this is purely a span of control play, and the opportunity to bring two highly, highly talented regional managers into our organization.

In my personal experience, the regional manager role is -- within sales, really is the most critical of them all. They are the ones that are -- that really drive the accountability on the front lines. And to have the opportunity to hire two exceptionally talented individuals and shrink the span of control, and manage more closely, was just too good to pass up.

And then, of course, the other hire was our Marketing -- our Director of Marketing. And this we considered a coup. Because he is a known entity to us, having worked with some of our management team members in the past, specifically Todd Hornsby. And we know his talents. So the ability to bring him into the fold was really a coup.

And in a very short amount of time he has really gained the credibility within the sales organization, which I can tell you is difficult for a marketing professional to do. But wow, has he made an impact in short order.

But Jack?

Yes. I'd say from a both marketing and sales, oh, yes, they've got great experience in the places where we need them. The regional managers have a lot of experience in capital sales, which is really going to help us out in shrinking that sales cycle. So we are excited about that and the insights they bring to our team there.

Additionally, our Marketing Director has a background in TV, which is a target procedure for us and to grow that space in plasma energy as well. So, we -- it really helped expand our knowledge and insights into capital and in our target procedures.

Okay. And Jack, could you remind us how many salespeople did you start the year with in 2015, and how many did you end the year with?

Yes. We started with 13 and three managers, which are player coaches, and we ended with the same amount end of the year.

Okay. And then where do you expect to end 2016 on those metrics?

In terms of the sales organization?

Yes. The number of salespeople.

Yes. So our -- so here's our philosophy on it. We want to -- we haven't wavered on our strategy of migrating as quickly as practical to a direct sales organization. We will continue to do that. But from a practical perspective, we need to do so responsibly.

And that is why we've been able to grow the way we've been able to grow, and manage our cash position as favorably as we have. So, specifically, we will grow that direct sales organization when we can do so responsibly, meaning that the sales reps become self-funding in a fairly short time horizon. We don't have a specific target in place, but we do continue to augment the direct sales force with the independent sales reps.

Yes. And that's one of the reasons we expanded the RM role to include another RM, so that we could add more independents, cover markets and still properly manage their activities. In addition, we also are, as Rob mentioned, are adding some resources, OUS for distribution but no direct heads.

Okay. And regarding the plastics opportunity, some of the plastic surgeons that I've spoken with like the fact that the J-Plasma box can be used for a few hours. And sometimes they use them for multiple procedures in the office. Is this something that is a functionality that is still holding and physicians could do multiple procedures in the plastics office with J-Plasma? Or have you tweaked the software so they can only use it once per procedure?

Yes. So, per the IFU, the Instructions For Use, this is a one-time use, one-patient use product. Now we can't control if surgeons opt to do things differently than that, you know, from a compliance perspective. We can't compel surgeons to do anything. But we do label it accordingly.

It is certainly a consideration to build some smart technology into it so that it is not being used beyond the instructions for use. One-patient, one-time use. So that is a consideration for us.

(multiple speakers) Okay. So that's something that you're working on now?

Yes, you know, it is. Because anything we can do to promote the proper and safe use of our products, we will take those necessary steps to do it. And this is one step that we are investigating accordingly.

Okay. And then I had a question regarding the Ultimate machine. Where does that stand right now? Are you still selling that machine? And how does that kind of fit in with the core J-Plasma strategy today?

Yes. So, just as a reminder, the Ultimate is the newer version of our generator which combines the highest wattage traditional OE surgical generator with monopolar and bipolar, with J-Plasma all in one box. That is certainly -- our strategy over time is to really migrate to the Ultimate box for all of our J-Plasma users. Now we still do sell the J-Plasma-only version of the generator, but the demand is higher for the Ultimate.

Okay. Thank you. And one last question from me. So the 71 VACs that you currently have approvals for, how many of those would you say are ordering each quarter? Are all 71 ordering each quarter or a portion of those?

I'd say a large portion are ordering every quarter. It's tough to break it out. I don't have that right in front of me, but I would say that most of them are ordering every quarter. Whether it's a generator in use, where scrub PO's are being used, or they're in evaluations or VACs, the process is different at each hospital. We've described this a number of times, so it's tough to say there's one formula in terms of time to VAC (technical difficulty).

Right. And one thing we can certainly say definitively is, those customers, where we have gone through the VAC process and it is approved, are ordering customers. So we don't have -- we haven't gone through an elongated process and had any customers drop out as a result. So they are all ordering customers. I just -- we don't know the timing, whether it's quarterly or not. I would certainly expect it is.

Okay. Yes. Because that's the part that I'm kind of struggling a little bit with. And having 71 VACs but roughly $340,000 of J-Plasma sales this quarter isn't a really high utilization rate. And I'm just wondering what it's going to take to kind of get that utilization going?

Yes. And that's a very, very fair point, Charles. In our prepared remarks, I referenced one of the strategies of stationing reps where we have generators in use. And the reason why we are doing that is to drive usage. And what we are finding is that, when a rep is in the room having the conversation with the surgeons, the adoption because much more routine and we are top-of-mind.

Now there are clear clinical benefits. So for certain procedures, we are top-of-mind no matter what. But our vision is to get these surgeons to utilize J-Plasma in all of their procedures. And when the rep is in the room having conversations, and sharing insights and experiences from other surgeons, we are beginning to see that traction. And that's a focus for us now, is to deploy the reps accordingly, so that we can drive more routine usage.

Okay, thanks. And congratulations on the new hires.

Okay. Thank you, Charles.

Russell Cleveland, RENN Capital.

Thanks for the call and the numbers here. And a comment -- one, congratulations on all of the conversions of the preferred. And I know that was a difficult thing, but it cleans up the balance sheet and makes everything a lot easier, and not having to worry about that. So, congratulations on the balance sheet cleanup. I think it was very, very good for last year.

My question is really on the whole dermatology plastics area. It seems like a very large area. Someone commented to me, there's a lot of wrinkles in this country, and this -- I noticed that surgeons -- plastic surgeons are putting out their own press release. There was one in Denver, and talking about Helio laser known as J-Plasma, revolutionary ascetic laser design by Bovie Medical.

Now in your prepared remarks, you mentioned going ahead and entering this market. And it is so large, would you comment more how you are going to do that, what our strategy is in the whole plastics area?

Yes. Absolutely. Thanks, Russell, for the question. And this is definitely an area between a shortened sales cycle and the positive results that our surgeons are experiencing. And you can see, based on their own marketing activities -- which we do not condone; we can't control what surgeons do, but we certainly have not branded our product as any other name at this point in time, although that certainly is a consideration in the future. But our product is J-Plasma. We have not branded it as anything but that at this point in time.

To enter into this market, there are different approaches that we are taking, so we have immediately -- or I shouldn't say immediately -- back in early February, as I mentioned in the prepared comments, we took our entire sales organization, that is both the directs and independents, through an extensive training program, specifically for plastic surgery, and specifically for those procedures that we have 510(k) clearance on.

So that was the first step. We are also considering other avenues for scaling this business. And for competitive reasons right now, I'm going to be a little bit silent on it, but it's simply exploring just some other ways of scaling it with other distribution type arrangements. So, stay tuned for the specifics, that's what I'm talking about is just a distribution channel type relationship.

Because the plastics market is different than the traditional OR acute-care setting. And what's critical to the organization, as we deploy our resources, is we do so efficiently. So as we expand into different areas, we don't want that expansion to detract from the acute-care setting. So investigating channel partners just makes sense, makes all the sense in the world.

So that's another way of scaling this opportunity. And you are right, Russell, the numbers are very, very large. And that's why we are continuing to vet it out and pursue this as a significant growth area for all the right reasons -- the product performs well; the sales cycle is shorter; and we are prepared to leverage those opportunities.

Last question is on J-Plasma, particularly the handpiece volume. We are getting numbers every quarter, which is a long time. Is there any thought about having these numbers come out sooner, so we can see the progress that is being made, and the whole handpiece volume, which seems to be the key to the use of this? Any thoughts on that?

Yes. You know, there's no question about it. The handpiece volume is a very accurate barometer for the adoption of the product. Now in the early innings of commercialization, which I would characterize as the first two years, those volumes can be lumpy. And looking at them on a monthly basis or biweekly basis -- of course, we look at it on a daily basis -- but to report on them that frequently may not paint the most accurate picture of the adoption.

We will be reporting them on a quarterly basis, because that is enough of a time horizon for looking at significant trends. So, we put that out as a new metric this quarter for the first time, and we will continue reporting on it.

Great. Okay, thank you so much.

Okay, Russell. Thank you.

Jeff Bernstein, Cowen Prime Advisors.

Thanks for taking my questions. Just a couple. Can you talk a little bit more about the new leasing model you're considering in that CapEx versus OpEx kind of decision, and how important you think that is?

Yes, absolutely. So I'll start by giving you the context. Why did we do this? We have a program -- and several manufacturers, that sell capital equipment and disposable handpieces, have a similar program -- that's a pay-per-use program. And what that means is, we will place a generator at a hospital, and the customer will pay us every time they use the generator.

Well, how do they do it? Every time they order a handpiece, there is an upcharge for the handpiece, so that's your pay-per-use. So it's a very common program. Many manufacturers have implemented this program.

Where we at Bovie got a little bit more creative and started thinking outside the box is with some of our leasing company partners. And we have a new leasing program that we launched already that takes this concept of pay-per-use and transitions it to the leasing company. So in this situation, the leasing company would actually purchase the generator outright, so we of course get the revenue and recognize the revenue immediately, or (technical difficulty). And then the pay-per-use component of it actually goes through the leasing company and not through us.

So it's just one more way or one more option to provide our customers to shorten their cycle to bring the product into their ORs. You know a lot of our customers, especially the surgeons, are just as frustrated as we are in terms of how long it takes to get the product in. Because the demand is there; there's no question about it. But the process that they have to go through is just torturous for so many that are involved.

So, as we launch these types of programs, they are really welcomed by the hospital. Because all of a sudden, it does bypass their capital process and it just goes to their expenses.

So at this point, it's really not the VAC approvals as much as the capital process that's frustrating to you?

Yes, it's actually a combination of both. And again, it's different for every single hospital and every single system. And as Rob mentioned earlier, we're competing with other capital priorities. One in particular is one that everyone on the phone probably knows if you followed the devices -- EMR. All the hospitals are required now to make large investments in EMR. And that's a huge capital component for the last couple of years, for every single hospital out there.

Yes. And that's kind of an insight. I'm sure you've seen it as well. Electronic Medical Records, or EMR, is just a reality that every single hospital has to contend with. So all of a sudden, here we are at medical devices for a relatively small spend on a generator, we are competing with EMR's? That's a challenge. That is a challenge. But it's a challenge for everybody.

Got you. And then could you give us an update on what's going on with GPO's and how that's helping, if it is?

Jeff, you broke up for a second. Did you say scrub PO's?

No, no. GPO's, the Group Purchasing Organizations.

Oh, GPO's. Yes. Yes. So, Jack, why don't you provide the update? Because we have grown our GPO strategy.

Yes, we have three contracts in place right now. One with into Intalere, which is the former Amerinet organization, they've rebranded, and that's for J-Plasma. And we've had success there early on. We recently signed a smaller regional GPO agreement in the Georgia and Florida marketplace, and that's really more focused on the core business. But still very helpful for us.

And then the most recent win in GPO's is med assets. And that's a great win for the organization, because that is a win for both the core business and the J-Plasma business. So it impacts all generators and all accessories across a very large network of hospitals. So we are very excited about the new med assets agreement.

And so what does that do for you exactly? Does that short-circuit anything in terms of a process? Or is it just kind of give it a discount and give you some product placement with the GPO's? Or how should we think about that?

It does a couple things. So, first of all, it gives us access. A lot of times you are shut out of these hospitals unless you're part of that GPO agreement. So that's one. It also will shorten the sales cycle a little bit, in that it will have pretty negotiated terms and pricing going in there. But it's not an automatic; it's a right to hunt. But it does give you those benefits upfront of access. And again, the pricing and terms and agreements are already in place.

Terrific. And then I had one for Jay. I think you've talked about potential to improve the supply chain and asset terms. Could we get a little update on what's going on there?

Sure. So, we -- as you know, we bought Bovie Bulgaria in Q3 of last year, and we are leveraging that, the lower cost structures in Bulgaria, is one area. As we ramp, we are leveraging our economies of scale in our purchasing. And of course we are -- the other area we're focusing on is continuous improvement in our production methodologies, et cetera. Those areas we see significant improvement. And we also -- and I forgot to mention our -- the suppliers in China, et cetera.

So will it be in the second half of the year that we will see asset turns kind of pick up? I didn't do the calculation for this quarter. On inventory, it looked like inventory didn't change very much sequentially. But when do you expect to kind of get some traction?

Yes, towards the second half. Inventory did increase a bit in Q4. It did go up, but that's related to the new product launches that we have coming. We are ramping for those. And we do expect to see better inventory and asset turns in the second half of 2016.

Great. And then lastly, Rob, I think you guys have talked about another new product that has not been described at some point soon. Can you just give us an update on that?

Yes, there's no real update on it. And that is true. Our commitment and promise has always been as we build this direct sales force, we will increase the number of products in their bag. We did not build this infrastructure to be what I just call a one-trick pony and sell J-Plasma.

We will launch additional products, both organically, and there -- we have so much inbound interest to access this talented sales organization, we certainly consider those other products. But the one that we want to launch organically is really an issue of a self-inflicted issue of timing. We want to ensure that nothing distracts us from growing J-Plasma as quickly as we possibly can. So it really is a timing issue for when we add an additional product to the bank.

So, we will update. We don't have a specific update on it ,as we continue to execute our commercialization plan for J-Plasma. But as soon as we do, we will certainly amplify that strategy and product launch accordingly.

Great, makes sense. Thanks very much, guys.

[Bill Mauerman], Lone Star Asset Management.

Thanks for taking my call. I've actually got a couple. On the leasing program, do you ever carry the generator on your books? Or is it always farmed out to a leasing company? And if the per-fee -- or per-use fee is going to the leasing company, does that mean that you will always still get a piece of the handpiece? Or do you give that up by running that through the leasing company?

Yes. So the generator title transfers to the leasing company on the generator, and it's structured so that we recognize it as a sale, you know, when -- at the time of shipment. And as far as the handpieces, it depends on the leasing program. If it's an upcharge, we see a piece of that -- actually on both we see a piece of it. One is more than other, but we do see -- we do retain a piece of the upside on the handpiece increased sale, selling price.

Okay. And that's in perpetuity forever, then?

Correct.

Okay. And then the other thing on trying to convert users of a competitive plasma product. I've been in Bovie for a long time; I wasn't even aware there was a competitor product. But if you could just kind of expand on that a little bit, what you think your benefit is or benefit there is to J-Plasma versus this competing product, and how you're going about converting?

Yes. So, I'll start and I'll turn it over to Jack to kind of compare and contrast. But without getting into specific -- for competitive reasons, obviously -- specific names of which companies we are going after, the category is argon plasma versus helium plasma.

So, Jack, if you could kind of just talk about some of the differences and why that makes sense, and why it's really, really resonating.

Yes. A couple things. Some are features but then there are some inherent benefits of helium versus argon in a way that our technology is ionized, and the way that our technology actually cools the tissue around it and gives you a better tissue effect than you get with argon. Argon is a lot hotter, so there's a lot more damage -- thermal damage to surrounding tissue.

Our product also has a knife blade; allows surgeons to cut and excise tissue, which is an advantage over other products out there. So there's a lot of different clinical benefits you get from our product that the surgeons are recognizing in the hospital right now.

Okay, great. It sounds like argon is kind of like laser, where it's a lot hotter whereas the helium is cooler. That clears it up for me, thanks.

Yes.

[Glenn Rediger], Trust Management.

I'd like to get maybe a little more clarification on Bovie Bulgaria. Looks like it ups your employment rate by about 20% or 25%. And what do you expect to get up there? And what did we really pay for it? Did we pay in stock or cash? Because the balance sheet, as of the end of the year, looks almost the same.

Yes, so -- hi, Glenn. Thank you for the question. Yes, we did increase heads when we acquired Bovie Bulgaria. We -- that's a combination of both technical, engineering and manufacturing folks. Administratively, no impact whatsoever, particularly from a headcount basis. It was all in manufacturing and technical resources.

As far as how we paid for it, it was about $0.5 million. And there's a $140,000 note payable that's due in five years. Simply put, we got Bovie at a bargain -- Bovie Bulgaria at a bargain, to speak candidly.

Yes. Just as a reminder, Bovie Bulgaria has been a contracted facility to us, exclusively -- hence we allowed them to use the name in the past -- for 16 years. So from a balance sheet perspective, we covered those expenses as a contracting facility.

So you didn't have a lot of surprises coming?

No.

No.

No. That was one of the benefits of buying Bovie Bulgaria.

(multiple speakers) The other question I have, as Craig-Hallum was now is exactly a year since they did the deal, our stock has been cut in half and they said they were going to be putting the stock in firm hands. What is your feeling about the job they did?

You know, it's -- when you take a step back, we went into a capital raise process and came out of it with a fully subscribed raise and an exercise of the green shoe option. And with that, as a result, we were quite pleased. It's hard to speculate, beyond that, how much of the performance of the stock is related to those activities. There are so many market dynamics that the investment community, that's on the phone, could probably speculate better than we can.

But in terms of not only having a fully subscribed raise and an exercise of the green shoe option, we also had the goal of institutionalizing our shareholder base a little bit more. And with that, we certainly have terrific investors that came into the stock, some of whom are on this call now, that were new to Bovie. So with that, we've been very pleased.

Well, I think the biggest advantage we got was the cleanup of the balance sheet and all the warrants and the preferreds getting wiped out. That was a big advantage. But it is kind of frustrating to watch the stock go the opposite direction.

Yes. There's no question about it, and we are certainly frustrated. While we are absolutely frustrated by the stock performance, our commitment to our shareholders is to keep our heads down, executing our strategy, and grow this business to its potential, and continue to scale and allow the markets to react accordingly.

Right. Does it look like, with your guidelines, it looks like J-Plasma was about 4% of our business last year. According to what I am looking at, it looks like it should be about 12% next year. Is that a reasonable expectation?

Glenn, yes, it was 4% of our business in 2015. We expect it to be --

Yes, you know, it will go up. There's no question that, over time, J-Plasma will become a higher and higher percentage of the overall business. We do expect the overall business, as I mentioned in the prepared comments, to grow -- all three aspects of the business, the core, the OEM and J-Plasma. And it should be a much higher percentage than 4% next year.

All right. Thanks, guys.

Glenn Rediger

Okay. Thank you.

Okay. Bye.

Rob Romano, 1st Source Bank.

Thank you for taking my call. How many generators were sold in the fourth quarter?

Yes, so we don't break down sales by generators and handpieces. So the metrics that we do report is the number of generators in use, which grew to 81 in the fourth quarter, I think from 61 or so. Don't quote me on it. I think I just had it in my prepared remarks; I can look. But we don't break down specifically how many were sold. Oh, I'm sorry -- it went from 62 to 81 quarter-over-quarter.

Okay, good. I'm just trying to get my hands around the sequential decline in J-Plasma sales. Because I definitely didn't see this coming. And I believe you are fairly optimistic throughout the quarter in some of the conference calls and some of the investment conferences you were at.

Yes. So I -- you know, what it is -- without question, what it is, is the generators. The capital piece, the capital component of the sale with this elongated sales cycle, is why it was sequentially down. And that is the impetus for us to share with the investment community what we believe is the most important barometer for adoption and that is the handpieces.

Because when you think about it, the generator ASP is north of $20,000. The handpiece ASP is [$375,000]. So theoretically, you could see sequential increases in revenue that's tied to a big generator purchase, but if you saw simultaneously a sequential decrease in handpieces, that would be problematic. That would tell you that adoption is going in the wrong direction. So we think it's more important for assessing the adoption of J-Plasma to focus on those handpiece sales, and watch its growth. Because --

And I would agree. I would agree, but if you are not selling generators, you're definitely not selling handpieces then.

Yes, that's -- so that's not necessarily the case because of the pay-per-use program that we have, where we will place the generator, without charging a penny, as long as they pay every time they use it through the upcharge of our handpieces.

In addition to that, another metric that we report on is the scrub PO's. And we think that's another strong indicator of sales to come, because surgeons are willing to go to bat with scrub PO's. And they will only pick that battle as they wait for the capital P sales process to come to its completion.

Yes. And you've made a comment that the demand is there, but I just kind of wonder if there's something else going on other than the slow sales cycle that's causing just a slow uptake here?

Yes. I mean, for us, in our view, it is really two things. It is the sales cycle. There's -- in our minds, there's no question about it -- it is the sales cycle. And one thing that we have not made significant investments in, which we are now, is in marketing and creating more broad-based awareness and pent-up demand in the marketplace for this product.

Now bringing Jeff Hoffman onboard, as we announced, is a big step in that direction. Now we have spent on marketing -- make no mistake about it -- we have put together, from a marketing perspective, mostly sales collateral material, because that was lacking. So we needed to prioritize our spend accordingly. But now, having brought Jeff onboard, and he is building out his team, and having a marketing plan that we are beginning to execute right away, we expect that to further drive awareness and demand for the product.

Okay. How are J-Plasma sales trending in the first quarter?

Yes. So the momentum continues to build. And we will be reporting those numbers, of course, after the quarter closes, but we have been very pleased with the level of sales activity, which is tied right to our sales pipeline, and the things that are coming across the finish line. So the momentum continues to build, and we certainly expect to report certainly sequential growth quarter-over-quarter.

Okay. I know you were buyers of the stock back at the end of December, I believe you and some of your other executives. We are back at these levels again. Just kind of wondering what your thoughts are on the stock price at this level?

Yes. You know, it is so hard for us to speculate. We certainly are very, very bullish on what it is we are doing. And our Board and me personally, we do not suggest, emphasize, encourage or actually even discuss buying shares. We just don't. It's not part of our culture. So this was 100% voluntary. We watched the stock price. We think it's -- personally, we believe that it was undervalued, and we personally made investments.

And again, our Board never talks about it, never encourages that. And as a management team, neither do I. And we just felt very strongly. So we are not happy with the performance; we are surprised. But we are very confident and we believe our future is very, very bright.

And I'll tell you one of the major reasons, as I indicated in the prepared remarks, is, we've had no product derailers. And I have launched -- I've been responsible for launching a lot of products in my career. And typically, you run into a few of them. You run into a few issues that slows down the progress, sometimes it stalls to the point where you have to remove the product from the marketplace. And none of that is happening at all. And that's why we remain very, very bullish on our prospects.

All right. Thank you. One last question. Do you have an estimate -- what would you estimate the size of the plastic market for surgeons?

Yes. So we are getting -- we are going to revise our total addressable markets. And as we do, we will break them down by specialty, and specifically by procedure. So -- and you will see it in the updated investor deck on our Boviemed.com website under the Investor Relations tab.

So the current TAM that we have in plastics, which is very focused -- so it's not the expanded TAM that I discussed in the prepared comments and in the Q&A. But that one, that part of the TAM was much smaller. It was -- that TAM was $165 million in the US alone, but it was just for a couple of procedures. So, stay tuned. We're going to update that and we will put it out on our website accordingly.

All right. Thank you very much for taking my questions.

Okay. Yes, our pleasure.

Tom Maguire, private investor.

My questions have mainly been asked, but just one question is -- you're doing great in terms of the acceptance rate on the VACs, but -- and I realize no one hits 1,000 -- but what are some of the reasons hospitals give you when they don't pass you or accept you?

Yes. Great question. By and large, so we've had a handful. So less than 10. (laughter) Significantly less than 10 actually. We've had a handful. And the most common reason is lack of clinical studies. And what they say is this is just a check-the-box. Do you have a clinical study? Do you have those prospective randomized multisite clinical studies that take years to establish? And the answer is no.

What we have are our white papers, which are experience papers. And in the early stages of commercialization, that's all you can have. Having said that, we are pursuing clinical papers now, and they will take some time, but we are pursuing them. So the rejections have been by and large can't check the box of clinical papers, we just have to reject it, has nothing to do with your product. But it's just a criteria -- you know, a criterion. And you don't have it.

Okay. Thanks. And then one other one. Regarding the scrub PO's, how does that actually work? Do you bring a generator into a hospital for a physician to use it, and then does it go back out or does it stay there while he uses it for many patients or what? How does that exactly work?

Yes. So it varies. It varies by the usage of the surgeon. So if it's a surgeon who is doing high-volume number of procedures, we'll leave the generator. We'll leave it for as long as the scrub PO's are coming in. For other surgeons, the sales rep is literally bringing it in for that specific case.

Okay. And that is a pretty significant precursor to hospital placement, would you say?

Yes, it is. It's as strong of a buying signal as you'll get. Because surgeons -- scrub PO's is almost a throwback to a different era. where you don't hear many companies that are able to secure scrub PO's. And hospitals know this. And when a surgeon goes to battle to the point where they are actually requesting these scrub PO's, that actually makes the decision-making process of the VACs easier if they know that this one is very important to the surgeon, and it's a product that the surgeon is really, really going to bat for.

Okay. Thanks very much, gentlemen.

Okay. You're welcome.

Bill Chapman, Morgan Stanley.

Jack, let me ask you on the 1099 external salesmen, what are our numbers at right now?

23.

Okay. You mentioned -- someone mentioned that the emphasis on recruiting more 1099 guys. Do you see that going maybe 50 to 100? Or again maybe what your thoughts are on that.

No, we don't have a specific number. we are going to cover geographies as demand dictates. So where we have openings, we are actively looking right now. We are in discussions with a few reps or a few groups right now. So that number will grow. I don't know where it will land at, but it's certainly we're going to grow it from where it is right now.

Okay. The reason I ask is when we go to 3,000 OB/GYN's and we are around 400 GYN surgery only surgeons, and it's just hard to see how you guys are going to really capture that market since you clearly have endometriosis, you're filling a substantial void. And I'm still just grasping trying to see how we are going to actually get this market with such a vast number of physicians. Please do comment on it.

Yes. Sure. One of the things we've done and commented on this before is our targeting is a lot better, we have procedural data that will identify the number of procedures by hospital, by surgeon. So we are looking for the high-volume/high-value targets. And that's one way to go after the market. But clearly, we are going to add additional resources, as we just talked about.

Yes. And Bill, you're exactly right. In order to get to the numbers that we certainly want to get to, we have to expand our footprint. And we have to do so responsibly. And we do want to have an all-direct sales force over time, but in the interim period, as we expand our footprint, we must do so going with this hybrid model of independence, with the directs.

And I don't know if we mentioned this earlier, but the three regional managers that we have now, the one that was here that's been here for a little bit and the two that we added, have very deep experience in managing a hybrid sales organization. And that again was why it was too attractive not to bring both of these individuals onboard. But we have to expand that footprint, no question about it.

No, I understand. You are crawling before you can run. And you're trying to keep the burn rate down. And that's a -- I commend you for that. Have we ever thought about selling some of the other assets you've got in the core business, for example, the cauteries? I mean, that's something that could be sold at a nice premium, I know we do have a cash flow, but it gives us more capital to get more sales momentum to absorb a burn rate to again more aggressively go after this market. Any comments on that, please?

Yes. So the -- so we view the core business as integral, as an integral advantage to the commercialization of J-Plasma, because the core business is steady, stable and it covers our fixed costs of the business and allows -- and slows our burn rate for the commercialization of J-Plasma. So, selling off components of that core business, we think have weakened the overall strategy.

Okay. Well, let me ask you too, Rob, I saw a FDA filing on Dr. Patel's clinical study on the reduction of the lymphocytosis, and has this trial started?

It is not yet started. So I believe what you are referring to is on clinicaltrials.gov. If you search under Bovie and Dr. Patel, you will see a study, and you'll see a specific study protocol. That study has not yet started. We are still awaiting IRB approval at his hospital -- something that's totally out of our control.

So, they go through process; it has to be approved. But certainly, we inch closer and closer every day, and certain -- and really chomping at the bit for that clinical study to start.

Yes, that's exciting. And how about initiating any clinical trials involving lymphedema? Is there any possibilities there?

So, lymphedema, depending on what part of the body that you are operating on, it's all about the drain of the lymph nodes system. So there's incidents in thoracic and incidents in breast. And just about any time you're dealing with any type of cancer procedure, you're going to be working with the lymphatic system.

So, we're going to focus on this one initially. And then we've certainly had some inbound interest from surgeons looking to do additional studies. And we may start with white papers and different procedures in different anatomy related to the lymphatic system. But it's certainly something that we are looking at as not only a clinical strategy but an economic strategy as well. Because we believe that, in addition to the clinical benefits, if we can reduce lymph drain and complications associated with lymph drain, that we can take costs out of the healthcare system and have another benefit for J-Plasma in addition to clinical benefits.

Okay. Is there anything you can comment on wound care using J-Plasma?

Sure. We are, through the plastic surgery initiative, chronic wound care is a place that we're focused on, particularly in the acute-care space. The diabetic market is a huge market; there's a lot of chronic wounds associated with diabetes. So we have seen some uptick in that right now in the hospital space. We are excited about that.

We don't have a lot to report yet as it is a fairly new initiative for us. But there is a white paper out on our website regarding -- related to debridement. And debridement is basically wound care. And if that's -- if you read that paper, there's some benefits associated with it. And again we can put some economics around that down the road as well.

Okay guys, thanks for the update and everything.

Okay. Thank you.

Constance Meck, LPL Financial.

My question has to do with some comments that you made in the second and third quarter calls about what your expectations were for how much each generator would be used by the surgeons. And the thing that I don't understand is how the total dollars from the third quarter to the fourth quarter could go down with the increase in generator sales, unless the number of surgeries that you were expecting hasn't come anywhere close to what you said in those calls. Can you comment on that?

Absolutely. So, thanks for the question. It's a very fair question. And what you are obviously referring to is we had a modeling assumption -- that I've commented on publicly in numerous forums -- that we expect for each generator in use, for it to be used four times a week; whether that's one surgeon using it four times or two surgeons using it to times each, that is the way we have been thinking about the business, the way we've been modeling our assumptions internally. And we thought that was a pretty fair estimate to share publicly.

So the reality is, the numbers don't add up quite yet. Now there is a ramp-up period. But what we are finding is even with the generators in use, they are not being utilized as often as they can be by surgeons. And that's why we commented this time during our prepared remarks that we are stationing reps with those generators to really push the usage so that it becomes routine.

And what is simply happening is surgeons make a cost-benefit decision every time they use this product. And while the clinical efficacy is without question there, and very significant, they always have to balance, do I open up this $375 hand piece? And most times, when there is a rep in the room, it's almost a no-brainer, because they are in conversation and they realize the benefits of opening it and it's easy.

When the ref isn't in the room, sometimes the surgeon will just decide not to use it. Now this does not reflect any clinical efficacy whatsoever, because the clinical benefits are absolutely clear. What it does reflect is just the routine usage. And we want this to become top-of-mind routine for every procedure, because really the patient benefit far outweighs any cost associated with it, or the cost associated with it.

So for us, we just wanted to become more of a reflex and more routine to use it. And we fully expect that that assumption, of four cases per week per generator in use, will absolutely come to fruition. But it does require more rep presence in the room. And that's why we have made that shift. And we are starting to see, in the early parts here of 2016, we are starting to see the fruits of that labor.

Okay. Thank you very much.

[Mohammed Ibrahim], private investor.

This is Mohammed speaking. Thank you for taking my question. And congratulations on making the balance sheet clean. I had one question -- I had most of the questions answered. I had one question on robotic surgery. How is J-Plasma playing out on robotic surgery? Any comments on that?

Yes. Yes, great question. There's no doubt the J-Plasma has a significant contribution to make within robotic surgery. And it's not a coincidence that our Medical Advisory Board consists of three of the most prominent robotic surgeons in the world.

Currently, the product is being used in robotic surgery through the ancillary port in its current configuration. Now the current configuration of the product is not optimized for robotic surgery. So the robotic -- the surgeons that are using it are using it with patients and are utilizing it.

Now we did mention last -- during the last call, that we have a new instrument that we will be launching called the J-Plasma Precise 360. Now this version will still be used in the ancillary port of the robot, but it will be able to be used much more easily. So, we expect the adoption to grow a little bit there, but we've also commented publicly -- not so much during the earnings calls but at various conferences -- that we are absolutely going to launch configurations that are specifically designed for the robot. So, we have not put a timeline out yet for that, but do know that that is a very, very high priority initiative that we are devoted to.

Thank you, Rob. Appreciate that.

Yes. My pleasure.

At this time, we show no further questions.

Okay. All right. So, closing comments, Amy? Is that it?

Yes. If you'd like --

So -- sure. So just -- I just want to thank everyone for participating in today's call. And we look forward -- we really appreciate the amount of questions that were asked, and we look forward to keeping you informed on our growth.

This concludes the question-and-answer -- sorry, this concludes the conference. Thank you for attending today's presentation. You may now disconnect.