Robert L. Gershon - CEO Jay Ewers - CFO Jack McCarthy - Chief Commercialization Officer.

Dave Turkaly - JMP Securities Charles Haff - Craig-Hallum Russell Cleveland - Renn Capital Jeff Bernstein - Cohen Prime Advisors Paul Nouri - Noble Equity Fund.

Good morning, and welcome to the Bovie Medical Corporation First Quarter 2016 Earnings Conference Call. All participants will be in a 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 statements. Today's call will relate to Bovie's first quarter 2016 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, further events or otherwise. With that, I would like to turn the call over to Mr. Rob Gershon. Please go ahead..

Thank you, Erica. Good morning, everyone, and thank you for joining us to review our first quarter 2016 results, discuss the latest news on J-Plasma and go over our business outlook. With me today are Jay Ewers, our CFO; and Jack McCarthy, our Chief Commercialization Officer.

At the conclusion of our prepared remarks, all three of us will be available to answer questions. Bovie’s performance in the first quarter highlights the important progress we have made at the company over the last two years and puts us on track to achieve 20% revenue growth for the full year.

This progress reflects solid execution on core business strategies that we have discussed over the past two years to leverage the Bovie brand and its world-class manufacturing operations to drive sales growth. At the same time, we created an R&D platform and brought the technical capability of Bovie Bulgaria into the company.

We have also strengthened our OEM business, which manufactures equipment for some of the biggest names in the medical device field and it introduced the Powered by Bovie logo to further increase our brand recognition. Today, our OEM business is on solid footing with staggered contract terms that provide us with greater revenue predictability.

The success of this strategy is evidenced in our first quarter financial results with revenue growth of nearly 27% and gross margin of close to 43%. The single largest factor in this impressive growth was our OEM business where we have several additional contracts scheduled for delivery throughout 2016.

We also saw positive results across our business portfolio including cauteries, lighting and of course J-Plasma. We see opportunities to continue our growth throughout the rest of 2016 and beyond based on demand from established customers and the potential we’ve identified in new markets.

Now to J-Plasma, where we are executing on the strategies that I outlined during last quarter’s conference call and added new strategies to further accelerate sales growth. First, we discussed expanding our target market. Last year, we announced the formation of our Medical Advisory Board, or MAB, and recruited three world-renowned surgeons; Dr.

Vip Patel of Florida Hospital in Orlando, Dr. Robert Cerfolio of the University of Alabama, and Dr. Sam Balkhy of the University of Chicago. We are working with this board and other key opinion leaders to identify areas of surgery where J-Plasma has the potential to become the standard of care.

The precision of J-Plasma makes it a natural fit to robotic surgery across multiple specialties. Each of three MAB members is renowned for their use of robotic surgery in the respective specialties of urology, cardiothoracic and cardiovascular surgery.

In April, we launched the Precise 360, a J-Plasma product extension that can be used through the auxiliary port of the DaVinci robot while enabling surgeons to operate from the console. Dr.

Patel, a world leader in robotic prostate surgery has begun using the product and has stated publicly that the level of precision, control and safety gives J-Plasma the potential to become a standard of care in robotic prostatectomies as well as a range of other oncology procedures. Just a few days ago, Dr.

Patel received approval from the Internal Review Board, or IRB, at Florida Hospital to proceed with a clinical study of 100 patients to examine the benefits of using J-Plasma for pelvic lymph node dissection.

This is a procedure that is frequently carried out to access lymph node metastases following robotic prostatectomies and other cancer surgeries. The most common side effect of pelvic lymph node dissection is lymphocele formation, which can cause postoperative complications requiring needle aspirations or other forms of drainage.

More precise tools could significantly reduce the formation of lymphoceles, which could improve patient outcomes. Patient enrollment begins this month and the study will likely take six to nine months to complete. The positive implications for J-Plasma could be quite significant. Separately, Dr.

Robert Cerfolio, an expert in robotic thoracic surgery and a member of our Medical Advisory Board, will begin testing J-Plasma in his procedures with the DaVinci robot in the coming weeks. The next step in our robotics strategy is a J-Plasma product extension that can be integrated with robotic surgical systems.

This product will be ready for launch in 2017, and in anticipation we are putting preliminary agreements in place with developers and manufacturers of existing and emerging surgical robotic systems.

Second, we have discussed developing strategic relationships to significantly broaden the adoption of J-Plasma and I’m pleased to report that we have made significant progress on this initiative in the last two months.

We have spoken and met with a number of potential sales channel partners who have dedicated sales teams and portfolios of complementary products, engaging in one or more of these partnerships would offer the potential to rapidly scale J-Plasma in new and existing markets and significant enhance our existing sales efforts.

While preliminary discussions are underway with several possible partners, it is too early to be more specific. We want to be sure that we have the right fit and that J-Plasma will be a priority. More to come on that. Another initiative that we talked about with enhancing the value proposition for hospitals. We have approached this in two ways.

First, we have added a new pay-per-use feature to our leasing program that shift the decision from a capital equipment investment to an operating expense, hence potentially bypassing the elongated capital equipment side of the sales cycle.

Additionally, we have assigned sales people to operating rooms at hospitals where we have generators in place in order to accelerate J-Plasma adoption. We have already seen positive initial results with the greatest impact from these programs likely to take place in the second half of this year.

The same is true with respect to our strategy of converting users of a competitive plasma-based product. We are currently working closely with 35 surgeons at large hospital organizations who are using J-Plasma on a trial basis, and we have submitted the required documentation to these institutions to gain back approvals.

All of these initiatives are over and above what our direct sales force and independent manufacturer representatives are accomplishing, and the resulting metric continue to trend positively. J-Plasma sales in the first quarter of this year were $356,000, up 25% from the $284,000 we reported in last year’s first quarter.

I’ve spoken before about the importance of hand piece sales volumes as a metric for tracking recurring demand from surgeons for J-Plasma. First quarter volumes were flat from the fourth quarter but volume growth accelerated nicely in April setting the stage for positive second quarter performance.

The operating metrics that serve as forward-looking indicators for J-Plasma sales are also on a positive trajectory, so we are optimistic on the outlook for the rest of this year. At this point, I will turn the call over to Jay Ewers to provide additional financial details on our first quarter results.

Jay?.

Thank you, Rob. Bovie’s first quarter results show the strength of our operations and the demand that exist for our electrosurgical products. We have healthy momentum in revenue and disciplined expense management. This puts us in a strong position for the rest of 2016, as we expand upon the J-Plasma initiative that Rob mentioned.

Overall, revenue for the quarter was 7.8 million, nearly 27% higher than 6.1 million in the year-ago period with healthy sales growth across nearly all product lines. Gross margin for the quarter was 42.7% compared with gross margin of 43.6% in the first quarter of 2015.

Inventory write-downs for absolute products contributed to the lower gross margin. Going forward, we expect our gross margin to remain in the 42% to 44% range even as we continue to grow revenues. First quarter operating expenses were 5.3 million, up from 4.9 million a year earlier, a rise we anticipated as we invest in our growth.

This is approximately the run rate that we expect for operating expenses in 2016. Our largest increase was in our R&D expenses, which rose nearly 50% to 668,000 as we have expanded our R&D capabilities with new team members and worked to launch several new products in the last 12 months.

Professional service fees were around 8% higher to $357,000 due to increased consulting services related to J-Plasma. Salaries and related costs rose 7.6% to around 2.1 million, as we established comprehensive infrastructure to support J-Plasma’s adoption. SG&A remains relatively flat at nearly 2.2 million.

Operating loss was $2 million compared with a loss of 2.3 million in the first quarter of 2015. Similar to the fourth quarter, we saw gross profit rise in a faster rate than operating expenses.

The expense base is now largely established for the year, so higher sales in gross margin should translate into narrower operating losses as we proceed through 2016. Net loss attributable to common shareholders was $2 million or $0.07 per diluted share compared with net income of 12.9 million or $0.57 per diluted share in the first quarter of 2015.

Results for the year-ago quarter were affected by non-cash gains on the conversion of warrant and preferred shares and the mark-to-market accounting for the fair value of issued common stock purchase warrants. Exclusive of these gains, the company would have reported a net loss in the first quarter of 2015 of $2.5 million.

Turning now to the balance sheet. We ended the quarter with 9.5 million in cash and equivalents compared with 11.8 million at the close of 2015.

We reclassified the balance of $2.9 million of our mortgage note payable to current liabilities this quarter as we would be unable to meet a covenant that would have allowed us to automatically extend the original due date from March 2017 to March 2022.

We are not in default in the note and we intend to refinance before the due date and have begun discussions with our lenders. We are constantly working to manage our cash balance and have several initiatives underway that will lead to a deceleration in cash burn starting in the second quarter.

We are confident we will achieve cash flow neutrality in the fourth quarter of 2016 and begin to generate free cash flow in 2017. With that, I’ll turn the call back to Rob for closing comments..

Thanks, Jay. To sum up, after building the foundation for substantial growth in 2014 and 2015 through the development of our sales organization, marketing programs and the establishment of our R&D platform, we are fully dedicated to scaling our business and to doing so in ways that create long-term value.

The first quarter revenues were very encouraging with positive year-on-year comparisons across the business. Based on our current visibility, we are confident that we can achieve 20% revenue growth for 2016, more than three times the level we achieved in 2015. We also expect to be cash flow neutral by the end of the year.

In short, we have a clear vision of how to scale the business and we are executing on multiple strategies to do so in a sustainable manner. Erica, I would like to now open the call to questions..

Thank you. [Operator Instructions]. We’ll go first to Dave Turkaly. Please go ahead..

Thanks. Good morning.

Maybe one for Jack, I’m just curious, can you give some updates sort of on your distribution efforts, feet on the street and how many folks are out there actually selling specifically on the J-Plasma side right now?.

Yes. We still have the direct sales force, 16 direct positions in the market and we’ll hold that until we are ready to establish new markets and additional headcount, but we’ll do that responsibly. And as far as independents, we have approximately 26 right now in the market and that number is being added to as we speak..

And the 15 direct, do you have sort of a guesstimate of how long the average tenure of those people is today?.

For the last part, it was around a year at this point in time..

And I guess the information on the robotic platform sounds pretty exciting.

I was wondering as you look at these different opportunities knowing that the J-Plasma hand piece is pretty economic I guess we’ll say it, is there a difference as you look at the use in OB/GYN or the use on the robotic side and sort of the economics to you or is it a very similar sort of, I guess I’ll say ASP and yourself – for you guys?.

Hi, David. It’s Rob. Thanks for your question. Right now, the ASP remains quite consistent on the different platforms and different specialties. The ASP is tied specifically to the hand piece configuration. Now we mentioned in April we launched the Precise 360 and the Precise 360 has added features as you might expect also comes at a higher ASP.

This product, now it’s early, just coming out of the gate has shown to be quite popular. In fact, we had an unexpected little blip with a backwater and that’s because the demand was higher than we initially expected. The backwater lasted just days. We’re certainly out of it.

But right now that’s the way it’s being priced and it’s too early to comment on how we will price an integrated version of J-Plasma on the robot. That will be priced accordingly to the market as most accessories are to the robot..

And just one last one if I could. If you look at sort of the opportunities in front of you, obviously you got the medical board, you got a lot of the different specialties, certainly OB/GYN there’s a strong kind of core there.

Do you kind of look at this robotic opportunity as potentially the one that may be is the biggest driver looking out maybe for the next two years, or is there an area that you’d tell us that you’re more excited about or more focused on or is that kind of in the lead now? Thank you..

Yes. Thanks, Dave, for your question. We are absolutely very excited about robotics. We do feel that J-Plasma has quite a significant contribution to make across different approaches, minimally invasive surgery included but robotics is certainly something that we’re very excited about.

It is no coincidence that our Medical Advisory Board currently consists of three of the biggest users in their respective specialties of robotics. We do see that as a critical aspect of our growth for J-Plasma. And the launch of the Precise 360 really allows the surgeon to use the product now, J-Plasma, while operating at the console.

And that’s quite significant. The next step is an integrated product onto the arm of the robot..

Thank you..

We’ll take our next question from the site of Charles Haff. Please go ahead..

Hi, guys. Congratulations on the J-Plasma hand piece growth. I had a question for you Rob and maybe the others want to chime in. You guys have so many positive things going on; you have some challenges too, but so many positives.

I always think that this is the time where strategic clarity is more important than ever, so you don’t get sidetracked on some pet project or something that’s not as material.

So if you can just help me understand how you kind of rank order the priorities for this company right now, because you have so many things in front of you? Just so I understand with clarity what you think is going to be the most impactful to your fundamental strength for 2016 and beyond and where your focus is? Thank you..

Okay. Thank you, Charles. That’s a very thoughtful question. So I’m going to comment first on J-Plasma and then I’ll comment second on the priorities of the company in general. For 2014 and 2015, it has been all about building the foundation for substantial and sustainable growth, and that is the most difficult part of our journey.

Now that that part of our journey is completed and we have a solid foundation, we are now moving very quickly into scaling this business. So everything that you hear on a go-forward basis with respect to J-Plasma will all be about scaling the business.

So when you hear the J-Plasma strategy, the channel partnerships, the robotic initiative, the clinical study that’s going on now and we’ll announce another clinical study later on in the year, that is all about scaling the business.

So we made a very important transition in this journey from ensuring that we have a rock-solid foundation to scaling the business. Now as we scale the J-Plasma business, there are other aspects of our business that contribute quite significantly.

So very specifically to get to your question about ranking the order of priorities, certainly for 2014 and '15 it was building this foundation.

What also drives the 20% growth of the company that we expect is the solid performance of both our core business, which as we’ve commented in the past, we expect to grow in the mid-to-single digits as well as our OEM business, which we are experiencing some significant growth.

And of course, the J-Plasma is a big contributor to our overall growth in 2015 and beyond. So it is critically important, as you mentioned, to have clarity around our strategies. So, collectively, the three businesses really, really contribute quite significantly to our growth this year and what we expect beyond 2016..

Okay. So then if you think about balancing the growth in core and OEM versus the opportunities that you have in J-Plasma, how do you kind of allocate engineering resources? Clearly, you have things that you want to do on the J-Plasma side.

I know your marketing team is working with physicians quite closely to improve the product and make it more useful for the physician. But when you have these big OEMs that are knocking on your door saying they want to increase your orders, you have to help them out too.

So, are you just hiring more engineers, are you doing something differently, how are you kind of dealing with the engineering, if there is an issue, engineering challenges from a resourcing perspective?.

Yes. So for us, with respect to OEM, this is a very interesting business for us as I have commented on in the past in that it is 100% inbound. We have no outbound activities at all. We don’t respond to RFPs and so forth. As such, it’s very important for us to establish clear boundaries.

And these boundaries that we’ve established is that we will not allow the OEM business to be greater than around 8% to 12% of our overall business. The reason why it’s so important to establish that boundary is because our engineers, our entire – we collectively call our [ph] engineers R&D.

But our engineers is a shared resource across our core business, our OEM business and our growth business, our J-Plasma business. So in order to maintain proper allocation of resources, we establish that 8% to 12% boundary.

And we expect of course as our overall business increase, our OEM business will increase but we’ll keep it between that 8% and 12%. Now, the marketing team is doing an exceptional job. The whole operations team is doing an exceptional job in proving as you were saying and iterating J-Plasma.

So we’re very confident that we have launched the right products to-date and just as importantly we’re very confident in the future iterations of J-Plasma that we have as active R&D projects. And I alluded to the robotic strategy. We also have other iterations that will be coming out that we will announce in future quarters..

Okay, sounds good. Thanks for taking my questions..

Thank you..

We’ll go next to the site of Russell Cleveland. Please go ahead. Your line is open..

Hello. First, congratulations this quarter. You indicated that you thought April was looking good, so looking forward to this whole year. I’ve got two questions. The first one is about Europe. Now I know a year or so we began to establish distributorships over there. I haven’t heard much about it, because it’s a very large market.

Can you comment on what we’re doing overseas?.

Yes. So I’ll start. Russell, thanks for your question, and then I’ll turn it over to Jack to add a little bit more color. For us, the o-U.S., outside of U.S. strategy is important to the growth of J-Plasma long term.

And to establish that channel of growing specifically in Europe but also in other parts of the country, it’s important to get organized first, start those discussions, select the right channel partnerships, so the right distributorships and then execute on those contracts.

So I’m going to turn it over to Jack to discuss our progress in that effort, because it’s been going on now for two years and we’ve had several contracts that are signed and we are executing on several of that..

Hi, Russell. This is Jack.

How are you doing today?.

Good..

As Rob said, we’ve been in progress o-U.S. for a little over a year now and we’ve identified some good partners for distribution, we had some contracts signed. And those partners right now are building the pipeline and they are identifying KOLs just as we did in the U.S. for the first year or two of commercialization.

So it will be the same trajectory in terms of building that pipeline, identifying KOLs and then strategically going after key accounts and moving the needle forward in that way..

Do you think we’ll have any significant sales from Europe this year or not?.

So, I would characterize it as modest sales. If they become real material, we’ll certainly start breaking out the sales. But to-date, they’ve been fairly modest. And this part of the business can be a little bit tricky to predict, because it’s hard to know exactly the timing.

And with distributorships, as you know, you can get pleasantly surprised by a stocking order. So again, if these things become material, we’ll break them out. But right now, it’s been fairly modest..

Great. My last question, we talked about having marketing partners.

Can you give us an example or just describe exactly what we’re looking for, what would be our benefit in this area that you’re currently negotiating? What will be ideal type of companies to join us?.

Thank you for that question. So this goes right back to in 2014 and 2015, it was all about building a foundation for substantial and sustainable growth. Now it’s all about scaling the business. So when you say marketing partners, I assume you mean channel partners and we are actively engaged with several of them – and I want to add.

The ones that we’re engaged with have been inbound interests. So those that picked up on our strategy and appreciate the product that we’re bringing to market and the unmet need that it has have become very interested in helping us scale the business.

So I’m not going to get overly specific but we are targeting them by specialty, and we are working with organizations that have very significant field sales organizations that are direct reps primarily to us, and they have really complementary products in complementary call points. And this is all about scaling the business now.

They are specialty specific..

Okay. Thanks so much and we’ll be visiting this year and seeing the results..

Great. Thanks, Russell..

We’ll take our next question from the site of Jeff Bernstein. Please go ahead..

Hi, guys.

Nice quarter and just wondering if you could provide some of the forward-looking metrics that you’ve given in the past, like the hospital VAC approvals and the scrub POs, et cetera?.

Okay. Thanks, Jeff, for that question. This quarter, we didn’t provide these leading indicator metrics and there’s a reason for that. First of all, they are all trending very positively. So it would be certainly a good news story to share the specifics.

But as we think about this journey that we’re on, in 2014 and 2015 where revenue was just starting to ramp up, we thought it would be very helpful to the investment community to share the operating metrics that we look at internally as future indicators.

Now that we shifted to scaling the business, we think the most important operating metrics to share at this point in time or metrics in general are revenue, J-Plasma revenue, that’s where the rubber meets the road. And we also think it’s important to comment on hand piece sales. And hand piece sales are important.

The growth of hand pieces are important because that is indicative of the stickiness of the J-Plasma product and how it’s being adopted and how quickly. So on a go-forward basis we’re really going to focus on those two metrics; revenue and the growth of our hand piece sales.

But do know all the other metrics, which are now really internal, are trending very positively..

Great. Understand. It’s a lot of information to give every quarter. And then I wanted to ask specifically about the plastic surgery vertical. It just seems like one with less barriers and less issues of how you get paid, et cetera.

So can you just give us an update on what you’re seeing there?.

Yes, absolutely. You’re exactly right. We commented on the last quarter’s call that the sales cycle for all the reasons you just said is considerably shorter, and we have certainly seen that continue to play out. And it’s a significant focus for us. And what I’ll do is I’ll turn it over to Jack to comment on our strategy in plastics..

Now in terms of our targeted procedures that were indicated for now and some of the future procedures that were focused on achieving approval for. So we have got a few targeted procedures right now that we’re seeing significant uptake in.

One of them most significant is breast augmentation and that’s specifically capsule scoring where they’re using J-Plasma for capsule scoring. It’s proven to work better than the standard of care which had been monopolar in that particular procedure.

In addition, a lot of plastics are also managing chronic wounds and we’re seeing that as a tool, J-Plasma is a great tool for debridement and allowing surgeons to debride a lot better than, again, a cold knife or in some cases monopolar. So those are some of the main procedures that we’re going after right now.

In addition, as Rob said, the future procedures of many plastic surgeons [indiscernible] is dermal resurfacing, in particular removal of wrinkles and we are working with our regulatory partners to gain approval on that. So that is our future procedure and it’s very promising for that procedure as well..

Yes, and just to elaborate on that and I think I commented on this during the Q1 call that using J-Plasma for skin resurfacing or dermabrasion is something that surgeons are doing right now that’s considered off label. So we don’t have a specific indication for that. So we don’t market that quite yet.

We are going down that approval path right now to get the very specific indication for skin resurfacing. So we won’t be marketing, of course, until we receive that indication but that is certainly a very large market as well..

And just a quick description of what that regulatory path is and how long it might take?.

Sure. It’s a little dynamic and fluid, so it’s hard to say exactly how long it takes but our approach is collaborating with the FDA, so we believe in having collaborative sessions with the FDA and laying out our path so that we get it right the first time and work through it as efficiently as possible.

That path right now includes some animal lab work that we’re doing and some retrospective analysis of hundreds of procedures that have been completed as well as the early stages of putting together a clinical trial.

We do believe ultimately a clinical trial will be required and we actually have a collaborative session that’s going to cover the specifics in terms of the protocols, the size and so forth of that study coming up with the FDA in the next few months. So it’s a little hard to say exactly how long that path is going to be.

But we’ll continue to report on our progress once we get into the clinical study part of the process. But once we submit the application, it is a 510(k), a typical 90-day time horizon..

Thank you. We’ll move on to Paul Nouri from Noble Equity. Please go ahead..

Hi.

Can you give some color to your goal of cash flow breakeven by the fourth quarter, because in my estimation even if you grow sales 20% and operating expenses are flat, it’s going to be difficult to achieve that? So do you see a meaningful increase in gross margins or moderation in SG&A?.

Yes, so a great question, thank you. This is Jay. Now that we’ve got the established expense base, that 20% growth will increase in sales and the margins in 22% to 24% range coupled with some initiatives on the cost savings, supply chain, specifically in the supply chain area.

Supply chain initiatives where we expect to see some improvements, we do see us trending to cash flow neutral at the end of the year..

Okay. Thank you..

[Operator Instructions]. We’ll go next to the site of John Chan who’s a private investor..

My question to you is we have revenue of 356,000 for this first quarter and it’s up 25% from the corresponding quarter of last year.

My question is how does this compare to our fourth quarter sales? Is this up or down from the fourth quarter?.

Sequentially up..

It is up, okay..

It is..

Okay, all right. And my next question is perhaps I misunderstood you, but I thought in the last conference call you were looking for a run rate of $5 million for J-Plasma this year.

Am I right or am I wrong in that assumption?.

Yes, we did not comment on a run rate for J-Plasma..

You did not, okay. I thought you did because I thought it was – you brought it down on the last conference call from 10 million to 5 million and now I was wondering how are you going to achieve 5 million with sales of 356,000, but you say you didn’t – I guess I must have misunderstood you..

Yes, we didn’t comment on the run rate..

Okay.

My next question is in order to get into the orthopedic field and cardiovascular and neurology field, do you need another okay from the FDA or can you just move in without any approval from them?.

Yes. So the answer is, it’s the latter. We do not need any additional approvals for going into those respective specialties you just mentioned. Our 510(k) clearance right now is for all of soft tissue. And you need specific clearance for certain targeted procedures but not the ones that you mentioned.

So skin resurfacing, for example, is one that you need a specific indication for. But we do have such a broad base indication that for most surgeries we are already 510(k) cleared and have been since 2012..

At this time, we have no further questions and I’d like to turn the call back over to Mr. Gershon for any closing remarks..

Okay. Thank you, Erica, and thank you everyone for participating in today’s call. And we look forward to keeping you informed on our growth..

I’d like to thank everybody for your participation. Please feel free to disconnect at any time..