Zynex, Inc.
Q2 2015 Earnings Call Transcript

Published: 13 Aug 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Zynex Second Quarter 2015 Earnings Conference Call and Webcast. As a reminder, for the Q&A session, questions can only be submitted from participants using the webcast interface. Statements made in this presentation include financial estimates and forward-looking statements that are not historical facts. Each of these estimates and forward-looking statements involve risks and uncertainties. These estimates are based upon present circumstances, information currently available, and assumptions about future revenues, industry growth and general economic conditions. Estimates are inherently uncertain as they are based upon assumptions concerning future events. No representations can be made as to the accuracy of such information or the reliability of such assumptions. Accordingly, actual revenues and expenditures may vary significantly from the company’s estimates and actual results or developments may differ materially from those expressed or implied by the forward-looking statements. Factors that could cause actual results to differ from the financial estimates and forward-looking statements in this presentation include those described in the company’s filings with the Securities and Exchange Commission, including the Risk Factors section of the company’s annual report on Form 10-K for the year ended December 31, 2014. Therefore, neither the company’s estimates nor the assumptions upon which they are based are to be interpreted as a guarantee or promise of the company or management. The company has no obligations to modify, amend, update, alter, or change the estimates contained herein. It is now my pleasure to turn the call over to Mr. Thomas Sandgaard, CEO. Please go ahead, sir.

[Thomas Sandgaard:]

Good morning. My name is Thomas Sandgaard, President and CEO of Zynex. Welcome to our second quarter 2015 conference call. Revenue in our second quarter was at $3.1 million in line with our run rate in the past few quarters. And we've continued the reduction in expenses, expenses we practically been able to and we keep executing every month and are now at a point where the second quarter EBITDA was a breakeven level and the improvements continued into the third quarter. We're pleased with the development which now creates a platform to get back in the growth mode. We've revitalized the compensation structure for our sales reps from what we had 5 to 10 years ago very successfully in order to attract a significant amount of new reps and are executing at a very fast pace. Several new reps are already sending in orders from the books of existing accounts which is very exciting. With all the improvements taking place we expect to be back to reporting positive earnings very soon, if not already in the current third quarter. We continue to see improvements in how much we collect per order on our NexWave device which prove that the home electrotherapy industry is still a very profitable segment of the medical device industry. We've experienced challenges in billing and reimbursement in our compound pharmacy and besides reducing our expectations for revenue growth in that space we've contracted with an outside billing company to do our pharmacy billing. Our growth is currently coming mostly from our NexWave combination of TENS in differential and muscle stimulation device by many consider the best product in the industry. Our products for pain management and rehabilitation still stand out as some of the best products in the industry. The NexWave for pain management, our NeuroMove device for stroke rehabilitation, and the InWave for incontinence treatment puts us in a very strong product position in the rehabilitation markets. In addition to growing our electrotherapy sales force, we're expanding sales in our compound pharmacy by working with well-established rep groups as well as continuing our cross-selling efforts into that same call point. We've also added new products such as pain patches, pain sprays and metabolic supplements to our offering. And just recently we have obtained accreditation on our DME business through a company called ACHC. Actually it was reaccreditation. And we're also making progress on our new non-invasive blood volume monitor, the first product that can indicate loss of blood during surgery, internal bleedings during recovery and it also may have additional applications as well. We received the response from the FDA and expect to submit a full 510-K application before the end of this quarter. We're also preparing for getting the product CE Mark for Europe. This product would feel a huge unmet need for better fluid management in hospitals today. We've built the first 10 units in pilot production and expects to build more as we get those units placed physically at hospitals in the U.S. and internationally. We have signed an agreement with the consulting firm to accelerate getting key opinion leaders behind the product and further availability to gain market acceptance, enter into strategic partnerships with large and well-established companies in this space and possibly improve our ability to attract funding separately for introducing the blood volume monitor and creating sales efforts. You should check out our website zynex.com to see a one-minute video of how it works. I'm very excited about launching this product. We obviously see great potential in both our product divisions, our existing revenue generating area for pain management as well a huge unmet potential for blood volume monitor. I will now turn the call over to our CFO, Brian Alleman to review our second quarter 2015 financial results.

[Brian Alleman:]

Thank you, Thomas. Many of you have seen our financial results in the press release that was issued this morning. We will be filing our form 10-Q with the SEC tomorrow. If you would like to copy of the release or Form 10-Q once filed, you can access one on the web at the SEC’s EDGAR website once they're filed. Here's an overview of our second quarter unaudited financial results. Our Q2 total revenue was $3,079,000 compared to $1,349,000 million in the second quarter of 2014. For the six months, revenue was $6,256,000 for the 2015 period compared to $4,516,000 in 2014 period. Revenue for both the three-month and six-month periods in 2014 were negatively impacted by the differed revenue related to the backlog in shipments of consumable supplies, which had the effect of shifting revenue from the second quarter 2014 to the third quarter of 2014. As of June 30, 2015, there was no such backlog. Orders for our NexWave electrotherapy devices have finally stabilized and are showing signs of growth. We continue to hire additional sales reps and are beginning to see orders from those reps. Sales of the transdermal pain creams were negatively impacted in the second quarter of 2015 by the decision by TRICARE, the military health insurer, to discontinue reimbursement for compound pain creams. To give you some perspective, revenue from TRICARE was $277,000 in the first quarter compared to $157,000 in the second quarter; most of which came in the month of April. Total pharmacy revenue in the second quarter was $458,000 compared to $474,000 in the first quarter of 2015. We expect that pharmacy revenue where the client further in the third quarter as a result of the TRICARE decision. Cost of revenue related to both rental and sales business were $1,166,000 compared to $1,171,000 in the 2014 quarter. For the six months of 2015, cost of revenue was $2,411,000 compared to $2,168,000 in the 2014 period. We reported selling, general and administrative or SG&A expenses of $2,270,000 in the second quarter compared to $2,947,000 for the 2014 quarter. SG&A expenses were reduced $677,000 from the first quarter of 2015 level of $2,710,000. For the first six months of 2015, SG&A expenses were $4,980,000 compared to $6,403,000 in the same 2014 period. The reductions reflect the effects of the headcount reductions, general cost controls and lower rent under the new facility lease. Second quarter of 2015, we incurred a net loss of $493,000 or $0.02 per share compared to the net loss of $5,553,000 or $0.18 per share in 2014 period. For the first six months of 2015, the company incurred a net loss of $1,389,000, compared to $6,983,000 for the 2014 period. The 2014 period included the charges related to the write-downs of noncore inventory of $2,655,000 in 2014. As Thomas mentioned earlier, the EBITDA for the second quarter was nearly breakeven with a loss of just $6,000. EBITDA for this purpose is defined as net loss, excluding depreciation, amortization, interest, stock compensation, and the increase in inventory reserves, finished goods. Our line of credit at June 30, 2015, was $4,620,000, as compared to $4,442,000 as of December 31, 2014. The company continues to face liquidity challenges due to the lack of available borrowings under our credit facility. As we have discussed over the last several quarters, the company is in the fault of the terms of the credit agreement and the lender has accelerated the payment of the outstanding loan balance. However, the loner -- I'll repeat, the lender has continued to make advances to the company based on our cash collections and has agreed forbear exercising its rights through September 30, 2015. The company continues to explore new ways to improve its liquidity, including finding a new lender or investor to replace the existing lender and provide additional liquidity. However, the company can make no assurance that it will be able to improve its liquidity or obtain new capital to replace exiting lender. For more in-depth discussion, please refer to our upcoming Form 10-Q for the quarter-ended June 30, 2015, and the Form 10-K for the year-ended December 31, 2014. In summary, the second quarter of 2015 was a significant turning point as TENS revenue stabilized and operating expenses continued to decline. I'll now turn the call back over to Thomas.

[Thomas Sandgaard:]

Thank you, Brian. As we have turned the business around and look forward, we expect to see $3.2 million to $3.4 million in revenue in the third quarter and at least $13 million in revenue for the year. We also expect to see cost of income from operations. I am excited to see increasing collections in our electrotherapy business, orders increasing in our existing business, and having our SG&A in line with our current level of revenue. It has taken a long time and lot of effort for everyone here at Zynex to get to that point. And I am excited to see more prosperous times ahead for the company for the benefit of our shareholders, our employees, vendors, and other stakeholders. Of course, it's exciting to see our blood volume monitor becoming a real product and waiting for regulatory approvals and more clinical trials. The response to our ability to detect blood loss noninvasively has been tremendous. And we have high expectations for not only the clinical interest in the product, but also the interest coming from the liability and risk mitigation that was paid a huge market opportunity for the product. We will now continue with answering questions.

[Brian Alleman:]

Just as a reminder, the questions will be submitted through the online portal.

[Operator:]

[Operator Instructions].

[Brian Alleman:]

Okay. Thomas, so the first question revolves around the blood volume monitor and that is when do you think we'll start to see revenue from the blood volume monitor?

[Thomas Sandgaard:]

Well, we don't obviously don't expect to generate any significant revenue before we obtain FDA clearance and CE marking for the product. We also need -- the clinical research we published this product obtaining acceptance among medical professionals and we need to collect a lot of additional information from the field about the initial use of this technology and so with that we can shape our sales and marketing efforts. We're just starting to build -- or starting an effort of building a network of key opinion leaders and expect to work with hospitals, both here in the U.S. and Europe for collecting more data. There is great interest from a lot of hospitals and research institution at this early point. And once we have the FDA's blessing, which could easily take six months we can start selling here. So far there is no real competition on the horizon as far as we can tell but lot of people are talking about how technology that can assist with fluid management will be. So we should not be surprised to see other people trying to come up with solutions at some point in the future.

[Brian Alleman:]

Great. We have a question regarding the TRICARE decision. And the question is do we expect TRICARE to reverse their decision? And I -- of course, I think the simple answer of that is we don't know these transdermal pain creams provided a great solution and a great relief for many of our military personnel but we just don’t know where the industry is going to come out on that.

[Thomas Sandgaard:]

Yes and at this point any billings for or through TRICARE for compound pain creams has totally stopped and lot of people in the industry that are closely connected to the PBMs and TRICARE expect that there will be some loosening up but from a planning point of view and our expectations is that nothing will probably change in that. It was very significant.

[Brian Alleman:]

The next question involves the – that is actually a couple of questions revolving around our relationship with Triumph Healthcare Finance, our lender, as well as the fact that the balance increased slightly from the December 31 timeframe and is that a sign of weakness or strength et cetera. First, let me say that the relationship with Triumph continues to be excellent. They have been absolutely supportive of our efforts over the last certainly the 13 months that I’ve been involved with the company. The small increase in the balance from year-end to me is really a sign that of Triumph’s support. They’ve been outstanding in that regard and been very supportive of our efforts to turnaround the company. The increase really results from some advances to bring some inventory in and continue the revenue support for the NexWave unit; should also noticed that as of about a week ago, that balance was back down to about the December 31 levels. So I think it’s a very, very good sign. Next question comes from shareholder. It's what is the geographic coverage of your sales force and where do you plan to expand specifically?

[Thomas Sandgaard:]

Our sales force of about 120 sales reps cover most states, but we have decent coverage in states like Colorado, Texas, Florida, Pennsylvania and California. We are expanding across the entire country and we hope to have doubled our sales force in the next six to seven months. In addition to that, we began working with large rep groups in the compound pharmacy industry to see if we can attract more orders even though there are lot of reimbursement charges. It's an industry that, as mentioned, has undergone huge changes in reimbursements, as well as we see the customers' formulations being offered. We do not expect to use any existing sales infrastructure for the introduction of the blood monitor as it’s clearly very different type of market and its rather a small capital goods sort of sales in contrast to the prescription-based business with insurance reimbursement that source of revenue that we have our existing business.

[Brian Alleman:]

The next question is

[Thomas Sandgaard:]

Thank you very much for listening in on the call and thank you very much for you interest in Zynex.

[Operator:]

Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may disconnect your lines at this time and have a wonderful day.