Zynex, Inc.
Q2 2018 Earnings Call Transcript

Published: 4 Aug 2018

[Operator:]

Good day, and welcome to the Zynex Second Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [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. Risk factors that could cause actual results to materially differ from forward-looking statements are described in our filings with the Securities and Exchange Commission, including the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2017, as well as forms 10-Q, 8-K and 8-K/A, press releases and the company's website. Please note this event is being recorded. I would now like to turn the conference over to Thomas Sandgaard, Founder, Chairman and Chief Executive Officer. Please go ahead.

[Thomas Sandgaard:]

Good morning. My name is Thomas Sandgaard, President and CEO of Zynex. Welcome to our second quarter 2018 earnings call. I'm excited to announce another great quarter of revenue growth and positive earnings. Our second quarter revenue came in at 7.6 million, and we had our eighth consecutive quarter with positive earnings. Revenue increased 50% compared to the same quarter last year. And we reported positive net income of $2.4 million or $0.07 per fully diluted share. Our revenue in the second quarter was up 10% compared to the first quarter of 2018. The opioid epidemic continues to be a serious issue in this country. And we're increasingly working to get patients off opioids and for physicians to use our prescription-strength technology as the first line of defense when treating pain. Currently, the devastating impact has reached the level of where 114 people die daily due to opioid abuse. We continue to develop more tools to make physicians aware of our technology that literally has no side effects. Our orders grew 29% year-over-year in the second quarter, while reimbursement continues to be strong for our products. I'm very pleased to see our gross profit margin increase from 80% in the second quarter last year to 82%, equivalent to the 82% we posted in the first quarter, an indication that the industry for prescription-strength electrotherapy therapy is still not only stable, but very healthy and viable. Our cash position increased from 5.6 million at yearend to 6.3 million at the end of the second quarter. Our cash flow from operations continues to be very strong, and it was offset in the first half of the year by the company buying back $2 million in our stock buyback program. 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, which all puts us in a very strong product position in the rehabilitation markets. We're making progress on our new noninvasive blood volume monitor, the first product that can indicate loss of blood during surgery and internal bleedings during recovery and may have additional applications as well. We're hoping we can announce being granted one of several patents, getting CE Marking for the European market soon as well as see progress with the FDA. As a minor update, I can say that we successfully just recently completed additional safety and biocompatibility testing that was requested by the FDA. 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'll now turn the call over to Dan Moorhead, our CFO.

[Dan Moorhead:]

Thanks, Thomas. First, I'll review our 2018 second quarter results. Net revenue increased 50% to $7.6 million from $5 million in 2017. Device revenue increased 36% to $1.7 million compared to $1.2 million last year. Supplies revenue increased 55% year-over-year to $5.9 million from $3.8 million. The growth in revenue drove gross margins to 82% in Q2, up from 80% last year. Second quarter net income increased 61% to $2.4 million or $0.07 per diluted share compared to net income of $1.5 million or $0.05 per diluted share in the second quarter last year. Adjusted EBITDA, which is a standard EBITDA calculation plus an exclusion of noncash, stock-based compensation and is reconciled in our press release, was $2.8 million in Q2, up 41% from $2 million last year. Now on to the 6 months results. Net revenue increased 70% to $14.4 million from $8.5 million in 2017. Product device revenue was $3.3 million compared to $2.6 million last year. Product supplies revenue increased 91% year-over-year to $11.2 million from $5.9 million. The growth in revenue, again, drove gross margins to 82% in '18, up from 77% last year. 2018 net income increased 134% to $4.3 million or $0.13 per diluted share compared to net income of $1.9 million last year. Adjusted EBITDA was $4.9 million, up 89% from $2.6 million last year. We generated operating cash flows during the first 6 months of 2018 of $3.6 million, which was an increase of 93% compared to $1.9 million in 2017. On the balance sheet. As of June 30, 2018, our cash balance was $6.3 million compared to $5.6 million at December 31, 2017, due to strong operating cash flows during the first 6 months, although we did spend $2 million on repurchasing our common stock. Our working capital grew 60% to $7 million compared to $4.4 million as of December 31, 2017. I wanted to take a second to remind everyone of the progress we've made in the last 12 months. As of June 30, 2017, our cash balance was $140,000 and we had negative working capital of $1.7 million. We've come a long way in a year. One other notable item is, as of June 30th, we're pleased to report that we are debt-free. During the last 18 months, we paid $3.8 million in debt service related to our private placement and line of credit. And presently, have no debt outside of day-to-day operating liabilities. With that, I'll turn the call back over to Thomas.

[Thomas Sandgaard:]

Thank you, Dan. Our focus continues to be on deploying and developing new sales reps at a rapid rate in geographic areas where we don't currently have coverage to take advantage of the void left in the market by two previously very large competitors. Our increased orders is due to our largest sales force combined with strong reimbursement for our products. And it continues to drive increased revenue and profitability for the company. We estimate our third quarter revenue to come in between $7.7 million and $8.2 million; to see EBITDA or adjusted EBITDA between $2.8 million and $3.3 million, which in effect should give us our earnings around $0.08 a share. My long-term goal for our electrotherapy and rehab division is to continue to grow our share of the huge market for prescription pain management and to take advantage of the huge void in the market after the disappearance of our main competitors. We're currently working on up-listing the company to a national stock exchange, which will ultimately improve liquidity in the stock and get more people exposed to our stock. It will potentially also improve our ability to use stock as a currency should we actively engage in acquisitions again in the future. As of today, we have no updates in terms of the status since our last earnings call. We will now take questions from our listeners.

[Operator:]

[Operator Instructions] Our first question will come from Jeffrey Cohen of Ladenburg Thalmann.

[Jeffrey Cohen:]

So a number of questions, I'll just go through in a specific order. It look like our estimates were spot on, except it looked like a little lighter in devices and heavier in supplies. Anything to read in there as far as recurring percentages, or I detect the predictability that you can talk about for the balance of 2018 at least?

[Thomas Sandgaard:]

Dan, you might have a little detail, but overall, it's still more of the same business. Obviously, as our orders continue to grow, and therefore, the installed base of patients using our devices, the supplies portion of our revenue is bound to increase as more and more patients gets added to the installed base. There's obviously fewer patients that gets off and have stopped using our device, whether it's because that they've down trading or insurance companies have decided to no longer cover the treatment. That installed base continue to grow. I don't know if you have any, anything to add?

[Dan Moorhead:]

Yes, no. I think if you just look at the mix now and the growth rates that we're predicting, I think if you just extrapolate the numbers from there you should be pretty close. I don't have your device versus supply split in front of me, but I think what came, what we reported was what I would have estimated, I guess, if we, when we get down to those lower levels.

[Jeffrey Cohen:]

Okay. And is there any predictability as far as current patients on therapy and duration of therapy? Or are you seeing any trends there? Has that been getting shorter or longer over the past few quarters?

[Thomas Sandgaard:]

If we look at the last couple of years, I'd say the trend is that insurance companies tend to have given those approvals for longer periods of treatment compared to the past. I don't think in the last few quarters we've seen any significant changes. It's pretty much the same.

[Jeffrey Cohen:]

And you're talking about the blood monitor and some progress there, it sounded like in Europe specifically. What was the FDA question you were talking about? Was it tested in feasibility or tested in viability? And when was the last communication with the FDA? Was it in this past quarter?

[Thomas Sandgaard:]

Yes. About a month or 2 ago, they asked for more data on safety testing. One of the most biocompatibility where the material we have touching the skin, namely on the wrist of the patient needed more data. So we assured that it's non-toxic or non-skin irritating for patients. And there's also some additional testing on the citational safety testing to a new standard that we had the product undergone. And we, the main thing is, we passed all of that, and we'll be sharing that with the FDA and hopefully, moving forward. It's obviously also a part of what will be part of the file as we're dealing with getting the product CE Marked. So those things are very similar there.

[Jeffrey Cohen:]

Okay. And you feel more confident about a CE Mark, are you referring to do in 2018? Is there a specific time line?

[Thomas Sandgaard:]

Yes. We've obviously tried to not provide an estimated time line since these entities are somewhat out of our control. Obviously, it's up to us to provide good answers when they ask questions. But we try not to provide an exact time line, but it's moving forward. Products working great as far as I can tell, and it's, I'm positive.

[Jeffrey Cohen:]

Okay. Got it. Dan, it looked like taxes this quarter were approximately 10%. Is there a specific way or level that you might guide us to in the near-term?

[Dan Moorhead:]

Yes. I think, in 2018, and I think you'll see in the Q when we file that later today, but we expect the effective rate to be about 10% this year. If you recall, we had some NOLs that we had valuation allowances on. We removed those in '18, but instead of taking the huge benefit in one quarter and then bumping the tax rate way up because we're going to use the majority of it in 2018, we used the effective tax rate for '18. So it should be about 10%. Q1 was a little bit of an anomaly due to we had some large discrete items or stock comp deductions that took that 10% rate down to a benefit because there was a large number there in Q1. But generally, we should be around 10% effective rate in the rest of the quarters in '18. And then once we've burned through everything in '19, you're going to get back to that normalized kind of 25%, the 21% Fed, and 4% to 5% stake to get you in that 25% range in '19.

[Jeffrey Cohen:]

Okay. Perfect. Got it. And can you just, you said you bought back, was it $2 million in stock over the past couple of quarters? So did you complete that? And will you reset that?

[Thomas Sandgaard:]

Well, the second round of $2 million buyback is still in effect. And obviously, there are certain rules that we have provided for the 10b5/10b18 with our broker, and they're executing according to that. So we don't necessarily buyback stock every day, but we'll obviously have both in the first and the second quarter of this year.

[Jeffrey Cohen:]

A couple more for me. You talked about margins being healthy and viable. That means one would anticipate to take a step in this, let's call it, low 80% range over the coming quarters?

[Thomas Sandgaard:]

Right. As long as we don't see any either uncertainty or changes or trends that indicate otherwise, it's what's going to look like for a foreseeable future [indiscernible].

[Jeffrey Cohen:]

And then lastly, any update as far as the exchange goes and the up-list as far as a time line or anticipated exchange? Or...

[Thomas Sandgaard:]

There are no significant development, I can add a little flavor to it that we've requested a meeting with NASDAQ and we're waiting to eventually meet with them to learn more about the status if we can provide more information and just help move the process forward, but that's about it.

[Operator:]

Our next question will come from Howard Halpern of Taglich Brothers. Please go ahead.

[Howard Halpern:]

I don't know if you would care to offer, but do you have sort of a round number on what you're installed base customers are?

[Thomas Sandgaard:]

Hooyah, that will be a very wrong number. If we look at the number of files, we technically have opened and are dealing with primarily because we have, it's open because of our dealings with them with insurance companies. It's somewhere between 60,000 and 70,000.

[Howard Halpern:]

And in terms of, you talked about adding new sales reps, what parts of the current geographic expansion do you want to see occur by the end of 2018?

[Thomas Sandgaard:]

So to provide a little more flavor or a little more detail on that. We set out in the beginning of this year to grow our sales force in cities where we haven't had presence for a while. And my goal was to end up with a net of 50 new active and well producing reps by yearend in addition to what we already had going into the year. And it looks like we are on track for that. Obviously, that means that we're hiring 60, 70 or more reps and have some attrition because some people don't make it despite having great talent and good resume, et cetera. So in terms of that, we slowed down a little bit in May and June to make sure that those that we had added in the beginning of the year made it to the next level. And therefore, our long-term survivors as part of our sales force, and we're now back to increasing at a rapid rate. We are on track in terms of how many we've hired. I think we've hired a little over 30. We had approximately a little over a handful of people that have dropped off that were not making it. And so we're on track net-net in terms of how many reps we had added. We're ahead of our original plan in terms of how many orders that group of reps are producing by, are more than 10%. So very excited about that. I can also add that our orders in June were a little lower than what we had expected. Yet, we've seen in July that it's one of the best July's we've ever had. And that has more than made up for the slower-than-anticipated month of June. So I'm very optimistic in terms of order growth for the third and the fourth quarter as a result of that.

[Howard Halpern:]

One last question on SG&A, and then may connect to what you just said. You said you took a little bit of a pause in hiring in May and June. Is that one of the reasons why sequentially G&A came down just a little bit?

[Thomas Sandgaard:]

One, but maybe Dan, you can provide more detail. Yes.

[Dan Moorhead:]

It's part of it. But we have, during Q1, there's onetime items. There's other things that kind of pop in. The audits expense in Q1. You have other things that pop up. So there's seasonal things that pop up. So generally, our expense base stayed about the same. We just had some timing things that made it drop slightly in Q2.

[Operator:]

Our next question will come from James Williams of Newbridge.

[James Williams:]

I just had a question. I know you can't really go into much detail about the listing, but my question is, is that, I guess, normally, there was a minimum stock price that normally they like to see like whether it'd be $3, $4 or what have you. With the stock falling back under $3 over the last month and closing under $3, does that anyway a possible hinder, the listing requirement?

[Thomas Sandgaard:]

The application is still active. And you're correct the $3 threshold is one, that's important for the category where we would qualify with NASDAQ. We're, we will not, we're not required to be over $3 for very many days to qualify, but we need all the t's crossed and the i's dotted and all the checkmarks to be in place with NASDAQ. And this is, obviously, one of many. But considering our financial performance, it's not really an area that I'm too worried about. I'm confident that will take care of itself.

[James Williams:]

So it does need to get back over $3 for a few days for that to happen?

[Thomas Sandgaard:]

Yes.

[Operator:]

Our next question will come from Yi Chen of H.C. Wainwright.

[Yi Chen:]

My first question is, is there any seasonality involved in the revenue stream from device and supply sales?

[Thomas Sandgaard:]

There is some seasonality, both in terms of orders and that is very much a reflection of when a doctor is typically on vacation. And one of those is, obviously, at the beginning of the year when the doctor goals are really not met, doctor seem to go on vacation and let other providers absorb some of that, those insurance deductibles. And otherwise, in the summer period and then you have Thanksgiving period where you see slowdown in terms of orders. In terms of the revenue side of it, as you saw, for instance in the first quarter that, that was a little over revenue wise in the fourth quarter of last year, that has to do again with insurance deductibles. So the data services we'll build out for in the beginning of the year, some of that will be absorbed by insurance deductibles rather than into payments to us. So we typically have a little lower revenue there. Later in the year, the revenue we're reporting will, obviously, pick up as a result of that. So there's a little bit of seasonality. It's more on the order side than it is on the revenue side though.

[Yi Chen:]

But for fiscal year 2018, do you expect the revenue growth rate to be as high as those observed in 2017 over 2016?

[Thomas Sandgaard:]

Percentage wise, that was nearly a 50% growth. We expect to see more or less the same in terms of dollars that we saw between the two years, also percentage wise, that was obviously, will obviously be a lower percentage. I think, if you look at what people out there estimate, that's somewhere between 30% and 40% rather than close to 50%.

[Yi Chen:]

Do you expect, do you see the market has more competitors nowadays compared to a year or two years ago?

[Thomas Sandgaard:]

Compared to one year ago compared to a 1.5 year ago?

[Yi Chen:]

Yes, one year.

[Thomas Sandgaard:]

It's about the same. We don't really see any competitors coming into the market. And the competition we have is very limited, very localized. And we're really the only provider with a national footprint and expanding rapidly. But into the market that used to be well served and really well developed by a couple of very large competitors that have either closed the business or have changed the business model. So it's not really competitive.

[Operator:]

Our next question will come from Marc Wiesenberger of B. Riley FBR.

[Marc Wiesenberger:]

Can you talk about any traction you're seeing with products deployed in rehab clinics and then ultimate conversion into prescriptions?

[Thomas Sandgaard:]

Well, yes, there's two sides to that question. One is on the pain management side. The other one on our stroke rehabilitation product, the NeuroMove. We changed our business model on the pain management side about four years ago, three years ago. So that we now have hardly, we hardly have any consignment inventory with clinics that then will be provided to patients and we will subsequently get the paper work. That was very costly for us in terms of the inventory. At some point, we had just on cost basis we had over $4 million sitting in consignment inventory like that. We've changed the business model to a, to one that is more, a little closer to what you see in the pharmaceutical industry where we get the prescription send in here, we get in touch with the patient where they file the insurance information. And then we drop ship the devices from here rather than having the inventory out. It's much more efficient. And it's also much better in terms of having accurate information. We can go off when we build the patient's health insurance. So it has really helped making the entire business and the business model much more effective. So to answer your question now, we now have very little business that gets converted to prescription because of units are out there. Some clinics have a demo unit, they can choose a clinic, but otherwise, it's very limited to what's out there. We just recently introduced a program for our NeuroMove device for stroke survivors, where we are able to provide a device for clinic as long as they buy and pay for, where the supply is namely electrodes that are used for the treatment and based on that see prescriptions. We have not seen much traction on that yet. And one of those things where we might make some adjustments to that program and see if we can generate more business that way.

[Marc Wiesenberger:]

This quarter, it looked like you reallocated between, in Q2 of 2017 between device and supplies. Should we expect to see that for Q3 '17? And then what's the kind of breakdown between product and supplies that we should kind of expect going forward? For the last 2 quarters, it's been about 20%, 22% for rent, for products, and supplies has been kind of 76%, 77%. Is that should we expect that going forward?

[Thomas Sandgaard:]

Yes, I think that's the, if I was going to have a portion of between the two, I think that's about right. And yes, again in the 10-Q you will see that we did some reclasses. We got some better information. So we're, we've done some reclasses just between the 2 revenue categories, and we'll continue to do those in 2017. So once we finish '18, you'll see the full reallocation for 2017. But I think your, around that 25-75, split between the two is a reasonable way to project it.

[Operator:]

Our next question will come from Alex Hamilton of Consilium Global Research.

[Alexander Hamilton:]

You guys are always very savvy, very flexible in terms of the business models. When this current stock buyback is done, especially, if we're concerned about stock price and up-listing, have you given thought as to what's next in terms of capital allocation?

[Thomas Sandgaard:]

Well, on a high-level, obviously, we're seeing $2 million to $3 million being added to the bank account every quarter. Hopefully, if things progress well, we can do even better than that. So you can, with that information, you can kind of project where we would be at year-end and going into next year. So we are, we obviously are self-sustaining in terms of the funds that are needed to run the business. And I think it would only be if we were to engage in and may be acquisitions or other things that would require several millions of dollars to engage and that we would raise some additional money. My preference would be to go through a raise of additional funds after an up-listing to better exchange. So we are to some degree ignoring the possibility of making acquisitions right now as I think it'll be in the best interest of all shareholders to not raise money until we have more liquidity in the stock, which would be the result of an up-listing.

[Operator:]

[Operator Instructions] And as I'm not showing any further questions, at this time, I would like to turn the conference back over to Mr. Sandgaard for any closing remarks.

[Thomas Sandgaard:]

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

[Operator:]

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