Good afternoon and welcome to Bovie Medical Corporation first quarter 2014 conference call. All participants will be in a listen only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Betsy Brod of MBS Value Partners to read the safe Harbor statement.
Good afternoon and welcome to Bovie Medical Corporation's first quarter 2014 earnings call. Hosting today's call will be Robert Gershon, Chief Executive Officer of Bovie Medical Corporation.
Before we begin, I would like to make the following Safe Harbor statement. Today's call will relate to Bovie's first quarter 2014 earnings release and will contain forward-looking statements regarding predictions about future events. Forward-looking information is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected.
Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Important factors that may cause actual results to differ materially and could impact the company and the statements contained in this news release can be found in the company's filings with the Securities and Exchange Commission including the company's report on Form 10-K A for the year ended December 31, 2013. The company assumes no obligation to update or supplement any forward-looking 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.
Thank you, Betsy, and good afternoon everyone and thank you for joining us to review Bovie Medical’s first quarter 2014 results and our business outlook, which can be characterized as positive results and positive momentum. Joining me today is our new CFO, Peter Donato, who some of you may know from his financial positions with several healthcare companies including Cyberonics, Catasys and IRIS International. Peter came on-board just nine days ago and as you will see is a quick study and will be available to answer financial questions during our Q&A session.
From virtually every perspective, our first quarter was a period of positive performance for Bovie. Our core business produced solid financial results, we made significant progress in the commercialization of J-Plasma across key metrics and we succeeded in attracting top-notch talent that has the experience and insight to take us to the next level and beyond.
Starting with the financials; first quarter results were a good indication of the underlying strength of the Bovie brand and product lines. Total revenues increased 13.8% over similar period last year benefiting from higher sales in both our core and OEM businesses. Core business sales increased 6.5% led by increased electrode and medical lighting sales. Our OEM business was up 67% reflecting the new contracts we were awarded at the end of last year which of course is tempered by the fact that we were comparing against a low number in last year’s first quarter. Higher sales and more favorable product mix drove a 470 basis point increase in our gross profit margin.
We also saw a decline in professional fees which offset higher salaries and related costs in the first quarter. As a result we reported a modest operating income of $58,000 compared to our operating loss of $665,000 in last year’s first quarter. The accounting for our outstanding warrants requires us to revalue common stock purchase warrant each quarter to reflect changes in stock price. As a consequence of the increase in our share price this past quarter we booked a non-cash charge of $9.6 million resulting in a loss for the period, of $9.6 million or $0.55 per diluted share on a GAAP basis. Excluding this non-cash charge we would have reported a net loss of $0.01 per diluted share compared to a loss of $0.02 per diluted share in the last year’s first quarter.
I am pleased to report that the commercialization process for J-Plasma product is moving forward on schedule and in some cases is advancing at a faster pace than we have projected. Let’s start with the metrics that we will be reporting on each quarter.
First, J-Plasma sales were $31,000 in the first quarter. This is not a huge number, but it is about 70% of what the sales were all of 2013. Next, are the six categories we established to measure our progress.
First, number of surgeons using J-Plasma. At the end of the first quarter, J-Plasma was being used by more than 40 surgeons at 25 sites. This is up from 18 surgeons at 12 sites at the end of 2013. The feedback has been excellent and J-Plasma is currently being evaluated by 23 hospital value analysis committees across the country compared to 12 at yearend.
Second, surgeon pipeline, importantly, our surgeon pipeline is growing at an accelerated pace. It more than doubled to over 50 compared to 24 at the end of last year. As I mentioned during our March 31st conference call, since the beginning of this year we have been focusing our effort on those surgeons in the fields of gynaecology, plastic surgery, and dermatology who are considered early adapters or thought leaders so not only is this pipeline growing significantly but its relevancy is even more pronounced today. As you know our initial focus is on these three specialties but J-Plasma can and is being used across several other specialties and as appropriate, we might add an additional target market next quarter.
Third, executive talent, one of the most encouraging aspects for me personally is the quality and experience level of professionals who are joining the Company. As you know, my long-time colleague Jack McCarthy came on Board at the end of March as Chief Commercialization Officer with the primary responsibility for driving the growth of J-Plasma. Also on the corporate level, we announced last week that Peter Donato has joined as Executive Vice President and Chief Financial Officer bringing with him 22 years of experience much of which have been with publically traded healthcare companies.
Fourth, the sales organization, in the critical sales positions I am pleased to report that as of today we have four direct sales reps, three of whom are or will be in place this quarter and one who will join officially in the summer. They’re all very experienced averaging 15 years in the operating room sales at a distinguished group of companies including Covidien, Ethicon and Intuitive. These direct sales reps will work closely with our 28 independent manufactures reps bringing the total of J-Plasma focus sales professionals to 32. Clearly, the fact that we’ve been able to attract such an accomplished team both on the corporate side and on the sales side supports out conviction that J-Plasma is a transformational technology.
Fifth, white papers, this is another important element in our program to develop substantial and sustainable long-term growth for J-Plasma. There are five white papers currently underway that are being authored by surgeons that have clinical experience with the product and several should be completed within the next three to four months. This will make an important difference for us in our selling efforts with hospital customers.
The sixth and final category is training. Training is another key part of our commercialization process and we have engaged a world class firm to rollout our sales force training program starting next month in June. In addition to the one surgeon training course completed in Q1, three more courses are scheduled to take place this quarter and we expect that number to increase as our sales force supported by a new marketing and branding campaign creates more awareness of J-Plasma.
In summary, we are seeing positive momentum across the entire spectrum of activities that comprise our go-to-market strategy for J-Plasma. It is important to recognize that this is a process one that I have led many times before in my roles at other healthcare companies therefore it is important to set expectations realistically. While we anticipate some benefits in 2014, we believe the major positive impact will not begin until 2015 and between now and then our costs will increase as we bring more experienced sales executives and continue with the J-Plasma rollout. Partially offsetting these higher costs will be the continued progress of our core business where we expected take advantage of additional opportunities to profitability grow sales as noted before primarily through driving favorable product mix and new product introductions.
Our R&D product pipeline remains robust for both the core and J-Plasma businesses and we will continue to execute our growth strategy to organic and inquisitive acidities. Finally, we will leverage Bovie’s brand equity and the visibility and stability of our core business while we continue to meet or exceed our schedule for the full commercialization of J-Plasma.
At this time, operator, I would like to open the call to questions.
Thank you. (Operator Instructions) Our first question comes from Keith Hinton with Sidoti & Company.
Keith Hinton - Sidoti and Company
My first question is you pruned the independent sales force for J-Plasma down to about 28 as well as the four direct sales people. Do you plan to add any additional headcount on the independent side before the big rollout in 2015?
Yes, that’s a very good question and it’s going to be market dependent. We are likely going to increase some of the independents for certain geographies that we’re targeting. Now our stated strategy is to really shift the sales force to more of a direct sales force over time. But there are going to be certain geographies and certain independent manufacturers’ reps that have excellent relationships with targeted surgeons that we would want to access. And a lot of these candidates as we bring them on board have expressed an interest to become direct sales reps. So I think that we will add additional ones as long as they remain focused on J-Plasma as their A-product that they pull out of the bag, their primary focus.
Keith Hinton - Sidoti and Company
Got you, okay. The other question I had was regarding the surgeon training programs. First of all, how many surgeons can come to one of those sessions?
Yes, they vary in size, we like to keep the group to about 15 at most, 10 to 15 and as we populate these classes we vet these surgeons very-very carefully. In other words we have a stated target that we want to bat 800 so eight out of 10 we want to ensure that they will adopt the technology following the course, so our vetting process is quite rigorous and these are surgeons that are not passively interested but have gone on record saying they want to adopt this technology.
Keith Hinton - Sidoti and Company
Okay, the last question I had about the training programs was those training programs, is that simply you know sort of a marketing thing to increase awareness or is that training actually necessary for every surgeon in order to use J-Plasma safely?
Yes, so, it is not required training per se. So we do not require that surgeons go through specific training, get certified before they can use our technology, however there are a lot of hospitals that do require kind of their own process of certifying surgeons to use products in general. So it’s not mandated training. The way we structure this training course is it’s a one day class that has no marketing to it. It’s entirely clinical and it is facilitated by a surgeon who is a user of the technology, who’s very well versed on it. There’s a component of lectures and then it’s mostly a hands on animate lab. And by the end of the one day training course they do receive a certification that they’ve attended this course that satisfies the requirements of the local hospitals. But there’s no marketing to this, this is pure clinical training.
(Operator Instructions) And our next question comes from Russell Cleveland at RENN Capital.
Russell Cleveland - RENN Capital
Hello Rob and welcome Peter. Seems like we’re making a lot of good progress here in J-Plasma as well as this OEM business, the only thing that was surprising was the write-off of these write-down, noncash charge on these warrants of $9 million seemed to be very high, even though I realize this is just an accounting adjustment, but you know if we continue to do well and our stock goes up we won’t have any net worth. I am wondering can we look at whole issue because I think it’s surprising the size of it; do you have any comments on that? I know you’ve only been there nine days Peter but this seems like a very large charge.
It is a large charge and you hit the nail right on the head, it’s kind of a by-product of a mark-to-market accounting which just came into being not too long ago. One of my top priorities is to kind of look at our capital structure, knowing that it’s not optimized right now and see what our options are and I hope to bring back some better news on what our plans are as we move forward.
Russell Cleveland - RENN Capital
Okay, so, I’m sure the holders of these are listening and so I know they’re probably surprised at the size of this, so maybe everybody can get together and cure this, meanwhile congratulations again on your results and we’ll look forward to seeing how we go.
(Operator Instructions) I see no further questions I would like to turn the conference back over to Mr. Gershon for any closing remarks.
Okay. Well thank you, thank you for your interest in Bovie. We certainly look forward to keeping you up to date on our progress on a go-forward basis. We will be having these quarterly and we look forward to the next one.
The conference is now concluded. Thank you for attending today's presentation, you may now disconnect.
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