Zynex, Inc.
Q1 2018 Earnings Call Transcript

Published: 11 May 2018

[Operator:]

Good morning, and welcome to the Zynex’ First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Certain statements in this release are forward-looking and as such are subject to numerous risks and uncertainties. Actual results may vary significantly from the results expressed or implied in such statements. Factors that could cause actual results to materially differ from forward-looking statements include, but are not limited to

[Thomas Sandgaard:]

Good morning. My name is Thomas Sandgaard, President and CEO of Zynex. Welcome to our first quarter 2018 earnings call. We had a great first quarter with revenue of $6.9 million and our seventh consecutive quarter with positive earnings. Our revenue doubled compared to the same quarter last year, and we've reported positive net income of $1.9 million or $0.06 per fully diluted share. If we compare our revenue on the first quarter with the first quarter last year sequentially, it was down slightly due to the seasonality of our annual health insurance deductibles not being met in the first few months of the year. The rage in opioid epidemic continues to be a serious issues in this country, and we are increasingly working to get patients of opioids and physicians to use our prescription-strength technology as the first-line-of-defense in treating pain. We continue to develop more tools to make physicians aware of our technology that literally has no side effects. Our orders grew 36% year-over-year in the first quarter, while reimbursement per order also grew substantially compared to a year ago and throughout last year. I'm very pleased to see our gross profit margin increased from 73% in the first quarter last year to 82%, up from 80% at the end of 2017, an indication that the industry for prescription-strength electrotherapy is still a very healthy and viable industry. I should also mentioned that $1.8 million of our $2 million stock buyback program took place in the first quarter, an effort may repeat in the future to further strengthen the value of the stock and increased shareholders value. Our products for pain management and rehabilitation still standout as some of the best products in the industry. The NexWave for pain management, our NeuroMove device for stroke rehabilitation and InWave for incontinence treatment puts us in a very strong product position in rehabilitation markets. We’re also making progress on our new noninvasive blood volume monitor, the first product that can indicate loss of blood during surgery or internal bleeding during recovery and may have additional applications as well. We’re hoping we can announce being granted one of several patents, CE marking for the European market as well as seeing some progress through FDA here some time very soon. We continue to see great potential in both of our product divisions, our existing revenue-generating area for pain management as well as the huge unmet potential for our blood volume monitor. I will now turn the call over to Dan Moorhead, our CFO.

[Dan Moorhead:]

Thanks, Thomas. Here is an overview of our 2018 first quarter. Net revenue increased 100% to $6.9 million from $3.4 million in 2017. Device revenue increased 15% to $1.6 million compared to $1.4 million last year. Supplies revenue increased to 158% year-over-year to $5.3 million from $2.1 million. The growth in revenue drove gross margins to 82% in Q1, up from 73% last year. Fourth quarter net income increased 444% to $1.9 million or $0.06 per diluted share, compared to net income of $400,000, or $0.01 per diluted share in the first quarter last year. Adjusted EBITDA, which is a standard EBITDA calculation plus an exclusion of non-cash stock based compensation is reconciled in our press release, was $2 million in Q1, up 257% from $600,000 last year. We generated $1 million in cash from operations during the first quarter of 2018, a 4,288% increase from 2017. On the balance sheet. As of March 31, 2018, our cash balance was $4.4 million compared to $5.6 million at December 31, 2017, as during the first quarter, we spent $1.8 million on repurchasing our common stock. Our working capital grew to $4.6 million compared to $4.4 million as of December 31, 2017. As of March 31, we owed less than $50,000 on our subordinated notes payable, and they were paid in full on April 1st, which was the scheduled payment date, leaving us currently with no debt on the balance sheet outside ordinary operating obligations. With that, I'll now turn the call back over to Thomas.

[Thomas Sandgaard:]

Thank you, Dan. We’re in a strong growth phase and working to capitalize on the current momentum and demand for our products. We’re expanding our product offerings as well as adding sales reps to our existing sales force. We added more than 25 sales reps in the first quarter alone, and obviously they’re not all productive yet, but we will continue to expand our sales force and our geographic coverage. We estimate our second quarter revenue to be between $7.5 million and $8 million, EBITDA between $2.5 million and $3 million, and earnings per share around $0.08 a share. Other than the work we're doing, we’re getting our blood volume monitor ready for market launch, including government approvals, such as the FDA. We announced earlier in the first quarter that we are reintroducing our NeuroMove device into our sales force. We are deploying a model where clinics get to use a device on the stroke patients purchasing the supplies or electrode in that process and allowing for patients that qualify to obtain revenue-generating prescriptions for the home use so the patient can use it at home. We are also increasing our activity in adding electrodes for sale to clinics with significant volume discounts, had revenue streams at our previous competitor empty / DHL mashup very well. My long-term goal for our electrotherapy and reactivation as to continue to grow our share -- our share of huge market for prescription, pain management and to take advantage of defused voice in the market after the disappearance of our main competitors. Looking back, over the past three years we have not only added a significant amount of new sales reps and growing orders, we have seen reimbursement on our products steadily increase and we have become more efficient in our operations and have expanded our product line from conservative pain treatment. This has resulted in consistent great financial results that I'm very excited about. We are currently working on getting the company up-listed to a national stock exchange to ultimately improve liquidity in the stock and getting more people exposed to our stock. It will potentially also improve our ability to use the stock as the currency, should we actively engage in acquisitions again in the future. We will now answer questions from our listeners.

[Operator:]

[Operator Instructions] The first question will come from Howard Halpern of Taglich Brothers. Please go ahead.

[Howard Halpern:]

Congratulations. Great start to the year, guys.

[Thomas Sandgaard:]

Thank you. Appreciated.

[Howard Halpern:]

In terms that you've talked about 36% look at that. growth how should we look at that how long does it take to filter into device revenue, and then how long does it the usage I guess is what really is driving the supply so how that 36% potent for going forward into the year?

[Thomas Sandgaard:]

Well, obviously, it's a very slow-moving train. Revenue generated from an order takes place over the next several years and the cash that is and collected as a result of that comes in even lighter than that. There is a fairly long payment cycle in our industry where most of it is paid by, perhaps, insurance companies. So most of the revenue comes from the monthly supplies that are being shipped to the patients as long as and the device revenue is split between when we bill on insurance company, for the purchase of the device versus in many cases we bill for the monthly use or in insurance terms, it's called the rental. But again, in those cases, the revenue split or divided many months often roll over year. Sometimes, it’s simply lifetime use that insurance approves for patients. So the revenue and especially the cash is spread out overs from when we get an order get an order. So if we have the spike in orders, as an example, you won't see that in as a revenue spike immediately because now we have consistently increased revenue going forward. That answers your question.

[Howard Halpern:]

Yes. And I guess in terms of how the supply revenue growth is occurring, I mean you’re really seen your installed customer base, the usage I guess is going up. Is that the consequence of the supplies revenue growth?

[Thomas Sandgaard:]

Yes, maybe Dan can pitch in, but in just -- if you look at the cell phone industry, it is somewhat similar that the more an install base you have out there than your revenues simply keeps accumulating as a result of that. So you could say as strong as our orders stay either stable or grow, the supplies fortune of our revenue will -- everything else being equal, slightly [indiscernible]

[Howard Halpern:]

And I guess it’s more of a general landscape question for the industry with the largest competitor gone a number of years ago, have the overall landscape changed and I don’t know if you have any internal numbers you would like to share about what percentage of the overall market have you I guess penetrated since they’ve got the market?

[Dan Moorhead:]

Well, in round numbers, a few years back, the total market was about $0.5 billion in annual revenue generated. And obviously, with the disappearance of the biggest competitor and the very limited amount of sales from who used to be number two in the market, that leaves it up for us to grow our business back into the $0.5 billion in annual revenue. And obviously with revenue in ’16 of $13 million, we were up to $23 million in ’17, and we obviously, as you can see, on a very good trajectory to growing revenues this year. There’s still a long way up to $0.5 billion a year and that is -- if you say it’s a very positive problem to have, it’s a lot of fun to continue to be covering more geographic area and develop a new and better sales tools for our sales force, but we have a lot of heavy lifting to grow back into that currently unserved part of the market. But it's not like if you look at products that never had a demand before but it’s being developed, this is well-known territory. Physicians that used to prescribe these devices would just need to get someone in front of them and we have a fantastic product that is recognized as by far the best in the industry. So it's an easy sell, but getting those new cells reps in front of the physicians, it’s obviously a process that takes a lot of time.

[Howard Halpern:]

And just you added 25 sales reps. How many sales reps do you have as we enter in the second quarter or as we start the second quarter?

[Thomas Sandgaard:]

Well, round numbers today here in early May, I think we are approximately 130.

[Operator:]

Our next question is from Ajay Tandon with SeeThruEquity. Please go ahead.

[Ajay Tandon:]

Thanks for taking the question. Congrats on a great quarter.

[Thomas Sandgaard:]

Thanks, Ajay.

[Ajay Tandon:]

Just a couple of questions on your sales force. If you can give us any color on typically how long is the payback for a new sales person, that would be helpful.

[Thomas Sandgaard:]

It’s all over the map, because we have some sales reps we get onboard are sometime even when they may not have a direct experience in medical sales that opt to a very significant amount of orders in extra two to three months and already there. It's positive in terms of the contribution from the orders. It is more common, though, that it takes up to 5 to 6 months for brand new rep to be apt. We can call it a theoretical breakeven point. But you’ve got pretty good success for the reps we have hired here in the past five months or so and have had a significant amount of them that will definitely be long-term players better than what we have seen a decade ago when we also grew our sales force. So we didn’t pretty successful so far with adding sales reps.

[Ajay Tandon:]

Got it. In terms of going forward on you've given that companies have exited the industry, any color on is it still something about find good quality people out there as you had head down?

[Thomas Sandgaard:]

We continue to add and mix of reps that at some point in time have prior experience in the industry one used to work for a competitor as well as brand new sales reps. And they obviously get deployed and trained in two very different ways. But by far the majority of those we hire right now have somewhat limited experience, but they are in contrast to the reps we primarily had a year two or three or four ago. These new reps most of them are 100% dedicated to Zynex with the base salary and a commission on top of that. So that's really what's driving most of the growth right now is from that type of sales reps, and that's why what we will be continuing to do for a long time going forward, probably several years, that's kind of sales force development.

[Operator:]

[Operator Instructions] Our next question is from Mark Rosenberger with the B. Riley FBR. Please go ahead.

[Mark Rosenberger:]

What percentage of the 10 devices are rented versus purchased?

[Thomas Sandgaard:]

I wouldn’t classify it is a rent versus purchase. When you build the insurance companies, sometimes they want the patient to use it on a monthly basis, and there is no term on it. So it's not really a rental from an accounting perspective. But when they are using it on a monthly basis, it’s all over the place because we've run some averages but it can go out to 15 months so anywhere from 3 months to 15 months, but I think the majority we would see is probably at the higher end of that.

[Mark Rosenberger:]

For a few the products you have consumables that are definitely showing great growth. For those products, do they need to be exclusively purchased from you? Or is there a risk that potentially those can be got from some other source?

[Thomas Sandgaard:]

They are available. They are probably lower-quality supplies that can be applied on places like Amazon and another web interfaces, but it's not really something that you can just walk into a store and buy. So we haven’t really seen with the population within that the people are shopping around for electrodes. So, we believe that the trend will continue. It’s also -- we utilize the best quality that is made worldwide in terms of electrodes, and having the best quality devices bodes well together. If we were to maybe open up for -- or if people gone more creative in terms of finding a lesser-quality electrode elsewhere, it could potentially deteriorate on the quality of the treatment. So we don’t really see any trends in that direction.

[Mark Rosenberger:]

When customers are looking for additional supplies, is that something that’s build automatically? Or do they have to actively reach out and reorder?

[Thomas Sandgaard:]

It really depends on the insurance company. Some insurance companies requires us to check in with the patient every month, some every three months. In some cases, we need to get the okay from the insurance company to continue to supply, and in some cases there is just more than automatic element where then after the fact the insurance will say, “Hey, this patient has been treating for two years now, that should be enough.” There are all kinds of scenarios, and it is obviously something that takes a lot of manpower to manage that internally.

[Mark Rosenberger:]

I was just going to say that’s something that potentially could be optimized and kind of more streamlined to down the road?

[Thomas Sandgaard:]

Of course, there’s always opportunities for automating this processes better, but that’s -- the whole concept of making sure that we help the patient as best as possible in terms of what they need for their treatment as well as looking at what the doctor prescribed and what the insurance company that has obviously the most weight in terms of the decision-making, what they want for the treatment for the patient. Sometimes they adjust the quantity of supplies that is sent to the patient based on what they feel is medically necessary. And so that's a lot of work that goes into that.

[Mark Rosenberger:]

And just one more from me. You’ve noted a number of times the disappearance of your two main competitors. Have you seen anyone attempting to come into the market now that there is such a void left by their exit?

[Thomas Sandgaard:]

Other than the few small players that’s been there for a long time already, no, we have not seen anyone attempt to get back into the industry. So, yes, so far it's really us to carry the load and help educating the public, physicians, et cetera, about the benefits of using electrotherapy without any side effects versus something like opioids that we obviously believe is prescribed way too often.

[Operator:]

And our next question is from Alex Hamilton with CGR. Please go ahead.

[Alex Hamilton:]

That was actually my question was in terms of opioid epidemic. China gain acceptance of it, what is the hurdle? I mean, you've made a lot of progress. Is it just an education process and it’s just going to take a while? Can you sort of talk about how that's been going?

[Thomas Sandgaard:]

Yes, we actually have some we believe will be pretty unique tools that would be deployed there some for our salesforce to educate positions. We do find that that's very few physicians that are still prescribing opioids that are not as aware of our technology as they potentially could be. So we have some great tools coming up. That's at least in the short term our primary focus. We tend to try to educate insurance companies whenever we possibly can. And obviously we also try to reach the public in general. We are being more active on social media. We try to be active in also recommending people where to look to get off of opioids. It could be groups where you offer ways of rehabilitation, et cetera. So we try to be active in all kinds of angles, but I think our primary focus short term will of -- our increased activity will be on trying to demonstrate the physicians that [Indiscernible] to opioids, and that hopefully will make a change in a reduction in opioids prescribed and an increasing in our devices being prescribed.

[Operator:]

And our next question is from Don McDonald with Consilium Global Research. Please go ahead.

[Don McDonald:]

A quick question on your blood volume monitor business. Going forward, do you think that how we will accelerate the top line and how we will expect the gross profit margin going forward?

[Thomas Sandgaard:]

Let's see the -- in terms of how we’ve accelerated it's something we expect will be very much a hockey stick. It's an honor of, it’s like flipping in the switch because those are very expensive devices and this is as far as we can tell a huge demand for better fluid management in the hospital sector and surgical centers. So if and when we get the approvals whether we get it in Europe before ad the U.S., we don’t know. I believe that I will have a difficult impact on our revenue. In terms of the profitability or the profit margins, actually probably first mentioned that the SG&A associated with launching this product will probably be significant. But other than that, we again expect to have a very large portion of the revenue from the consumables and the gross profit margins, I would expect overall to be in better than what we see in the pain management market with our electrotherapy products. With significant amount of SG&A that it will take especially on the sales and marketing and developing strategic partnerships etc etera. That we would obviously need of our high profit margin to pay for that, but I'm very optimistic also from a financial perspective that that could be a very healthy preposition.

[Don McDonald:]

Thank you.

[Thomas Sandgaard:]

It looks like that was the last question.

[Operator:]

Yes, sir, and this will conclude our question-and-answer session. I would like to turn the conference back over to Thomas Sandgaard for any closing remarks.

[Thomas Sandgaard:]

Thank you. I hope today’s earnings call has been informative for everyone, and I appreciate the interest in Zynex and listening in on this call. Thank you, and a great day to all.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.