Bovie's (BVX) CEO Robert Gershon on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: Bovie Medical (BVX)

Bovie Medical Corporation (NYSEMKT:BVX)

Q2 2014 Results Earnings Conference Call

August 5, 2014 4:30 PM ET

Executives

Robert Gershon - Chief Executive Officer

Peter Donato - Chief Financial Officer

Jack McCarthy - Chief Commercialization Officer

Analysts

Russell Cleveland - RENN Capital

Keith Hinton - Sidoti & Company

Alison Peck - Peck Wealth Management

Operator

Good afternoon. And welcome to the Bovie Medical Corporation Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Hosting today's call will be Robert Gershon, Chief Executive Officer of Bovie Medical Corporation. After today’s presentation there will be an opportunity to ask questions. (Operator Instructions)

Please note this event is being recorded. Before we begin, I would like to make the following Safe Harbor statement. Today's call will relate to Bovie's second quarter 2014 earnings release and will contain forward-looking statements regarding predictions about future events. Forward-looking information is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected.

Although, the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved.

Important factors that may cause actual results to differ materially and could impact the company and the statements contained in this conference call can be found in the company's filings with the Securities and Exchange Commission, including the company's report on Form 10-K/A for the year ended December 31, 2013. The company assumes no obligation to update or supplement any forward-looking statements whether as a result of new information, future events or otherwise.

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

Robert Gershon

Thank you, Denise, and good afternoon, everyone. And thank you for joining us on today’s call to discuss our second quarter earnings and our business outlook. With me today is our CFO, Peter Donato, who will be -- who will provide a detailed financial update and also on the line is Jack McCarthy, our Chief Commercialization Officer. At the conclusion of our prepared remarks, all three of us will be available to answer questions.

Second quarter was another period of solid financial and operating performance for the company. We achieved double-digit growth compared to last year’s second quarter. Thanks to increases in our core and OEM businesses, which continued to progress in their own way, as well as support the commercialization of J-Plasma.

Our core business revenues increased 2.8% over the prior year led by higher sales of electrodes and generators, and we are moving forward with several initiatives to expand our product portfolio to further drive core business revenue growth.

For example, in the second quarter, we announced the launch of two new products, Derm 101 and Derm 102, which began shipping at the end of July. These high frequency desiccators allow family practitioners, pediatricians, general dermatologists, physician assistance and nurse practitioners to perform minor skin procedures in their offices instead of having to refer patients to a dermatology specialist.

The key takeaway here is that this is the first new major core product launch for Bovie in more than 10 years and there is much more to come. When I joined the company eight months ago, I was very impressed by the capabilities of the in-house design team and by the state-of-the-art manufacturing facilities we have in Clearwater and our contracted facilities in Bulgaria and China.

These resources provide a platform for new product development and the assessment of products developed by third parties, which we can bring to market by leveraging the Bovie brand and distributor network.

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

Taking a quick look at our OEM business, revenues increased by a factor of 4 in the quarter. This was mostly due to higher demand from our existing customer base keeping in mind, of course, that we are comparing against a very weak year ago quarter.

As you know, we design, develop and manufacture electrosurgical equipment and products for some of the largest medical device manufactures in the world. While this is a very scalable business as we are often sort out for our expertise it requires significant resources and we are selectively expanding it to ensure that we could meet the demand of our own core product and of course, for J-Plasma.

Also to smooth out some of the lumpiness associated with the OEM business in the past, we have calibrated the terms of any new contracts to make sure that the explorations are staggered and that we are receiving fair value for what we deliver.

Now I will turn to J-Plasma, where commercialization is moving forward on schedule and we expect an accelerated ramp up in the second half of the year. In fact, we already are experiencing a very strong start to Q3 with July orders exceeded $50,000.

We are not going to set a precedent of releasing monthly sales for J-Plasma but it is worth in this quarter given the circumstances of a new sales force and the sale cycle for hospital-based products which is typically 60 to 120 days.

Sales were $15,000 in the second quarter, down sequentially as our direct sales force continues to get up to speed. Importantly, in July, we were awarded our first large scale contract for J-Plasma. It is a contract with a major Midwestern integrated delivery network or IDN that would give us the opportunity to sell to each of its 13 member hospitals, while this is a significant achievement.

We continue to remind investors that commercialization is a process and there are no shortcuts. So we reaffirm that although we expect some financial benefits from higher J-Plasma sales in the second half of this year the full impact will not be evident until 2015.

Our J-Plasma operating metrics were very strong in the second quarter and set the stage for a sale pick up in the second half of 2014. At the end of the second quarter, over 60 surgeons were using J-Plasma at 40 sites. This is up from 40 surgeons in 25 sites respectively at the end of this year’s first quarter and up from 18 surgeons at 12 sites at the end of 2013.

As important, our surgeon pipeline continues to expand, moving up to 98 surgeons from about 50 in the last three months and from 24 at the end of last year. So our pipeline has more than tripled since the end of 2013 and this pipeline is populated by an increasing number of thought leaders in the fields of gynecology, dermatology and plastic surgery, the markets that we are initially targeting.

Additionally, we made progress on each element of the J-Plasma commercialization plan. First, on July 1st, two independent white papers were published on J-Plasma by surgeons at Women's Health Center in Nevada. One is currently available on our website. The second will be presented at a scientific meeting in September.

These were the first two out of five white papers that we expect to be published by year-end. The third which we expect to be published in the third quarter will study the pre-and post-procedural effects on facial wrinkles.

As we've mentioned in previous calls, these white papers are important to our sell-in efforts with hospital Value Analysis Committees or VAC and significantly enhances the credibility of J-Plasma within the broader medical community.

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

We have also added another field based position, a clinical specialist whose understanding of the clinical applications of J-Plasma will provide support for surgeons and our sales force and drive the utilization of the product.

In August, we will bring our field-base team to Tampa for a rigorous three day clinical and product training session which will involve coursework, lab sessions onsite and certification. This is the type of intensive training that Jack and I have conducted over the course of our careers that stimulates and supports the rollout of transformational products. And we are confident that it will enable our sales force to drive much broader adoption of J-Plasma.

Third, to support our sales effort and to broaden the awareness of Bovie and J-Plasma, we launched a brand new branding and marketing campaign in the second quarter that included the development of a printed ad that would be placed in key publications beginning in June 3.

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

Fourth, we have ramped up our surgeon training and expect to hold six courses during the second half of the year. These sessions are targeted to the key opinion leaders across the country to facilitate adoption. And we expect to have between 8 and 12 surgeon attend each course.

Our objective is to have 80% of the surgeons that attend these courses adopt J-Plasma and use it routinely. To date, we are pleased to say that while our any small, we are in fact starting at 1,000 as all surgeons that have attended our courses so far this year have adopted the technology.

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

We are also pleased to announce that John Andres was elected to our Board of Directors at the July annual meeting. John has more than 30 years of experience in the medical device field, having held strategic business development and legal executive divisions at Tyco Healthcare, now Covidien and its predecessor, U.S. Surgical.

Most recently, John served as a partner of Hawk Healthcare and was the founder of K2M. Attracting some one of John's caliber is another vote of confidence for the future potential of Bovie Medical.

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

Peter Donato

Thank you Rob. I’m going to take you through the quarter in some more detail. We posted a healthy 15% percent increase in net revenue, compared with a year ago. As Rob stated, we benefited from $740,000 increase in our OEM business with the core business also having a solid quarter, up 2.8% from the second quarter of 2013.

Our GAAP gross margin for the quarter was 27%. It was negatively impacted by a charge of $843,000. This charge was related to the write-down of some inventory related to J-Plasma and other items as we adjusted our inventory to match changes in commercialization plans.

This is part of our ongoing process to monitor and rightsize our inventory to optimize our cash flow and to align our inventory to our current commercial plan. Excluding the charge, gross margin was 39.2% compared with 36.9% a year earlier, an expansion of 230 basis points. As we continue to benefit from structural reductions in our labor force initiated late last year and more favorable mix, thanks to the significant uptick in our OEM business.

The adjusted margins this quarter are largely indicative of our go-forward margins, exclusive of any special charges. However, we expect to see margins improving as the volume picks up in our core and OEM businesses and especially as J-Plasma gains traction in the marketplace.

Turning to OpEx. R&D for the quarter was flat versus last year second quarter at $318,000 compared with $314,000 a year ago as we continue to develop our J-Plasma product line and cross the finish line with new core products including Derm 101, 102 and IDS-310. Professional service fees were down almost $100,000 versus last year. As the company had higher legal costs a year ago associated with disputes that are now behind us.

SG&A fell 27% for $585,000 from $2.2 million last year to $1.6 million this year. There were two factors behind this. First, in the year ago quarter, we booked over $1 million of expenses related to legal disputes which as I stated earlier has since been settled. Partially offsetting these were nearly $300,000 of higher expenses related to J-Plasma, insurance, relocation and other smaller administrative expensives.

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

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

Turning to the below-the-line item. Under mark-to-market accounting, we generated a non-cash gain related to the fair value of our warrant liabilities of approximately $1.5 million. This combined with the book tax benefit of $583,000. And our GAAP net income for the quarter was $251,000 with $29,000 attributable to common shareholders.

This translated into $0.00 cents per basic share and a loss of $0.07 per diluted share, compared with a net loss of $0.06 per basic and diluted share in the second quarter of 2013. Excluding the gain related to the warrant, charges associated with our inventory and other special charges, we would have reported a net loss per diluted share of $0.03 in the second quarter of 2014 in line with last year’s loss of $0.03 per diluted share. Also as I mentioned on the March earnings call, we continue to work on ways to optimize our capital structure in order to avoid these quarterly swings in our warrant valuation and other special charges.

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

With that, back to you Rob.

Robert Gershon

Thank you, Peter. To sum up, we have positive momentum going into the second half of 2014. We are focused on strengthening our core business with new product introductions and calibrating our OEM business to maximize operating efficiency.

The Bovie brand is known for high quality and reliability and we are developing strategies to leverage these strengths to drive revenue growth. At the same time, we’re building a world-class organization to support the commercialization of J-Plasma.

We have attracted top-tier talent to bring this product to market and we are giving our sales teams the tools and training they need to get the job done.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Russell Cleveland of RENN Capital. Please go ahead with your questions.

Russell Cleveland - RENN Capital

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

Robert Gershon

Okay. All right. Thank you, Russell and for all these questions, I’d certainly invite Peter and Jack to chime in as well. So the size of the market, and again we are focused on three, its plastics, dermatology and of course GYN. GYN being the biggest of the three markets. Those markets collectively represent about $1 billion total addressable market and that is for the disposable hand pieces only, primarily rounding up slightly.

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

Russell Cleveland - RENN Capital

Okay. That’s my question. Thanks so much.

Robert Gershon

All right. Thank you Russell.

Operator

Our next question will come from Keith Hinton of Sidoti & Company. Please go ahead.

Keith Hinton - Sidoti & Company

Hi, Rob. How are you?

Robert Gershon

Okay, Keith.

Keith Hinton - Sidoti & Company

I have two questions here, the first one, Peter, might be able to address it a little bit. But I was hoping you can just give a little bit more color regarding the inventory write-down, sort of what the cause of that was? And specifically, whether you're looking -- whether you expect there to be any write-downs like that in the future?

Peter Donato

Yeah. So good question Keith, $843,000. So, first off, Keith, its part of our initial process like any good [hygiene] (ph) of company, you look at your inventory balances. We have a new executive team and a new chief commercialization officer and of course, I’m relatively new to the organization starting in May.

We evaluated inventory, which it tipped up over $8 million, relative to the new commercialization plan. So that was the first step. A little bit more detailed process and for me the first time through, $843,000 represented in broad-brush strokes, Keith, kind of three buckets, if you will. The first bucket was kind of J-Plasma related. There was -- like any startup there, there are some scrap, there are some products that we’ve kind of evolved away from since the earlier days and some processes that have changed, so about a quarter of the $843,000 was related to J-Plasma.

The second batch was just legacy products. We either had no commercialization plan or sale commercialization plans for those items or we just had too much of some products that weren’t moving, which is the textbook definition of a write-off. And then lastly there were some new regulation. RoHS was the name of the regulations in Europe. And with that said, we either had some products that fell out of compliance that we were no longer going to market or we found it not cost effective to put those products back on the market.

So those were the three big buckets of the $843,000. At this time, Keith, we don’t have any visibility to inventory write-down but we still have $6.9 million on the balance sheet and we’ll continue to kind of tweak our J-Plasma commercialization plans in that but no write-downs at this time.

Keith Hinton - Sidoti & Company

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

Robert Gershon

Keith, before Jack chimes in, I’ll just kind of set it up by indicating and it’s a little bit of a repeat from previous call. In the core business where we know there is significant growth opportunity, both in the international market, specifically Latin America and the veterinary space. We are committing more resources and our vision is a mandate really to grow beyond the market pace. So with that, I’ll turn it over to Jack to add some more color.

Jack McCarthy

Yeah. Well, Rob, I agree with Rob 100% there. We were just looking initially as Peter said new to the team, coming in and looking at the core business and where it’s currently exceeding year-over-year sales. And in those markets, we see opportunities to continue to grow in those segments.

So that is a great segment, high-growth area and we’re going to apply some additional internal resources to it. And internationally, we've also seen some upticks in specifically Latin America and we’ll continue to focus on that. So those are the key strategies moving forward as we just take a look at the initial commercialization plan.

Keith Hinton - Sidoti & Company

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

Robert Gershon

Yeah. I’ll comment and then invite Jack to chime in as well. We are in the very early innings of Derm 101, 102 that we just started shipping. We do believe that there is pent-up demand for this product because we've been discussing it, as has our exclusive distributor partner and the interest level is high. But we’re in the very early innings right now.

Jack McCarthy

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

Keith Hinton - Sidoti & Company

Perfect. Okay. That’s it for me. Thanks guys.

Robert Gershon

Okay. Thanks, Keith.

Operator

(Operator Instructions) The next question will come from Alison Peck of Peck Wealth Management. Please go ahead.

Alison Peck - Peck Wealth Management

Good afternoon and thank you for your thorough report. I have the several questions, one is with the high success rate that you have with the surgeons adopting the technology? How does that trends like and maybe it’s too early to really understand into actual utilization. How offer they’re actually using it? What percentage of that procedure that do you expect to be utilizing in the J-Plasma?

Robert Gershon

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

In the meantime, it is being adopted routinely which means for those early adopters, the surgeon set we brought on last quarter and a quarter before. Those surgeons have adopted a routinely meaning. They don’t need a Bovie representative in the room to use it.

But to get a surgeon from a first-time user to using it routinely takes that 60 to 120 days. So with that kind of the set up track, I don’t know if you want to add a little bit more color.

Jack McCarthy

Yeah. Again, with the pipeline it continues to grow each month and we think that we’re confident it will continue to pace on that upward trajectory. In the meantime, as Rob alluded, within that 620 days, there are different gating factors for individuals and it could be the systems themselves require certain certifications or training so things that initial, which we've got several six plan for the end of this year. So we know that these trends will definitely get these surgeons through the credentialing process and will certainly equal more revenue moving forward.

Alison Peck - Peck Wealth Management

Okay. I see.

Robert Gershon

Alison, I’m sorry to interrupt you, but I just wanted to add one more comment. One thing that is different about J-Plasma than other transformational technology is this. With other transformational technologies often the surgeons are waiting for that perfect case, that uneventful case to use the product in and that in it of itself can slow down the adoption.

The great news is for J-Plasma, they don’t wait for that perfect case. They could use it on most of the cases that they have. So we do expect the adoption, that cycle to be shorter than with other transformational technologies.

Alison Peck - Peck Wealth Management

Good. That will be interesting to watch as you move along in them. And one last question is the current utilization rate at the Clearwater facility and just some comments around capacity and et cetera?

Peter Donato

Sure. Yeah. Alison, this is Peter. So I think we spoke before the capacities there, we are currently on one shift. We’re kind of trying to right size the OEM business as to not over tax the existing resource. There’s a lot going on as you imagine.

But in light of Jack’s ability to ramp up J-Plasma, we’re ready for it. We as part of the inventory that I talked to on one of Keith’s question, we reviewed kind of all the lead times and items that need to going to J-Plasma.

So long and the short of it is there is capacity to ramp up pretty quickly. For J-Plasma, we’ve looked at the supply chain and done the resource planning necessary. And we also have the ability to add shift. We are one shift operation in Clearwater.

Alison Peck - Peck Wealth Management

Great. Thank you.

Operator

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

Robert Gershon

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

Operator

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

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