Zynex, Inc.
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Zynex Third Quarter 2014 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 on present circumstances, information currently available, and assumptions about future revenues, industry growth and general economic conditions. Estimates are inherently uncertain as they are based on 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 and Form 10-K for the year ended December 31, 2013. Therefore, neither 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. At this time it is my pleasure to turn the call over to Mr. Thomas Sandgaard. Please go ahead, sir.

[Thomas Sandgaard:]

Good morning. My name is Thomas Sandgaard. I’m the President and CEO of Zynex. Welcome to our third quarter 2014 conference call. This morning we will review our third quarter results and then take questions. To start, I’d like to provide an overview of our business. We manufacture, develop and sell non-invasive medical devices and compound pain creams. The company has been in existence for 18 years from early manufacturing and selling electrotherapy devices. Our devices are used for pain management to reduce the reliance on drugs and medications, and provide rehabilitation and increase mobility. The products are cost and clinically effective compared to traditional physical therapy and all medications. Our compound pain creams provide an excellent alternative to all medications as they are applied directly to the area of pain and are not susceptible to addiction by the patient. Our products are cleared by the FDA, when it comes to our electrotherapy line and require a physician’s prescription before they can be dispensed in the U.S. We have the ability to accept any type of insurance including government and worker’s comp, and believe we have established a sophisticated billing and reimbursement department to maximize reimbursements received from third-party payers. We manufacture electrotherapeutic products such as our newest generation in E-STIM device, the NexWave for pain management, the InWave for incontinence treatment and the NeuroMove which is primarily used for stroke rehabilitation. It’s a treatment that enables Neuroplasticity in the patient’s brain. These products are marketed to physicians and therapists through our sales-force. In early 2014, we saw our in-house non-sterile compound pharmacy have been ready specializing in topical and transdermal pain treatments. These pharmacy products complement our electrotherapy products and are also marketed to physicians and sold through our existing sales-force. Brian Alleman, our CFO will here momentarily discuss the financial results in more detail, but I’d like to highlight a few things. For the third quarter, we previously estimated to come in between $4 million to $4.2 million in the quarterly revenue. We actually came in at $4.4 million which was compared to $3.2 million for the first quarter of the year and $1.3 million to the second quarter of 2014. The backlog in shipping consumable supplies that we discussed last quarter has been resolved and we’re beginning to see growth in all of our electrotherapy devices. Revenue from the compound pharmacy continues to grow nicely, with revenues of $390,000 for the third quarter compared to $258,000 in the second quarter. Finally, the company generated a net profit of $258,000 or $0.01 of share for these three months ended September 30, 2014. I’ll now turn the call over to Brian Alleman to review our third quarter 2014 financial results.

[Brian Alleman:]

Thank you, Thomas. Many of you have probably seen our earnings news that was released this morning. If you do not have a copy of the release you can access one on the web on the SEC’s EDGAR site. We also filed our Form 10-Q last night, which also will be available on the SEC EDGAR site in the next day or so. Here’s an overview of our third quarter and nine month unaudited financial results. Our Q3 revenue was $4.404 million compared to $1.349 million in the second quarter and $3.167 million in the first quarter. Revenue has been stabilized and we’re now seeing an increase in orders for electrotherapy devices. For the nine months, total net revenues were $8.921 million. As we talked about last quarter, second quarter revenues were negatively impacted by delays in shipping, consumable supplies to patients. That issue was fully resolved in the third quarter. Cost of revenue related to both rental and sales business was $1.383 million in the quarter, compared to $1.171 million in the second quarter. We reported selling, general, administrative or SG&A expenses of $2.609 million for the third quarter, compared to $2.947 million for the second quarter, and $3.456 million in the first quarter. The reduction in spending reflects reduced headcount and general cost control measures. In addition, in the third quarter we benefitted from $85,000 reduction in rent charges for our building from the month of September. In October, we executed agreements with our landlord that, one, terminates our existing lease on December 31, 2014; two, reduces the monthly rent from approximately $128,000 to $43,000 a month for the period from September 1 through December 31; third, the agreements established a new lease effective January 1, 2015 with a two year term and fixed monthly payments of approximately $49,000 per month for about 1/3 of the space we currently occupy. These agreements will result in annual savings of approximately $1 million. For the three months ended June 30, 2014, we generated a net profit of $258,000 or $0.01 per share compared to a net loss of $5.553 million or $0.18 a share for the second quarter. As we noted before the second quarter loss includes the $2.655 million write-off of non-core inventory that we discussed last quarter. In the first quarter the net loss was $1.430 million or $0.05 per share. Our cash in line with credit balance as of September 30, 2014 was $319,000 and $4.541 million respectively, as compared to our cash in line with credit balance a year ago on September 30, 2013, $468,000 and $6.291 million for the credit line, a reduction of nearly $1.8 million on the line credit line balance year-over-year. Since December 31, 2013, the balance on the credit line has been reduced by nearly $1.3 million at September 30. The company continues to face liquidity challenges due to lack of available borrowings under its revolving credit facility. The company is in default of the credit agreement with the lender and the lender has accelerated the payment of the outstanding loan balance. However, the lender has continued to make advances to the company based on cash collections. The company is exploring ways to improve its liquidity, which is actively seeking a new lender or investor to replace the existing lender. However, the company can make no assurance that it will be able to prove its liquidity or obtain new capital to replace the existing lender. For more in-depth discussion, please refer to our third quarter Form 10-Q. I will now turn the call back to Thomas.

[Thomas Sandgaard:]

Thank you, Brian. As we have talked about revenues have stabilized and we’re seeing an increase in orders for electrotherapy devices. In addition, revenue from our compound pharmacy continues to increase. We will be increasing our marketing initiatives to renovate the pharmacy brand and grow our presence within key pain management markets in the year ahead and will also selectively add experienced sales reps to support the geographic ramp of the compound pharmacy in the U.S. Mike Frabotta, who joined us as Vice President of Sales in October will be instrumental in leading this effort. Mike has a tremendous track record and experience within this particular industry so we look – we are very excited about his participation. Our compound pharmacy allows us to leverage the existing electrotherapy sales-force often servicing the same accounts for pain creams. This creates a more rounded product portfolio for the company and a second revenue opportunity with the lead sales call. Zynex is the only company in the industry that offers electrotherapy and pain cream solutions on the same prescription pad. During the third quarter, we continue to make progress on the development of our new blood volume monitor. We are currently building additional beta units as we call them, they’d be used in field testing to collect more commercial feedback, as well as collecting clinical data before we submit an application to the FDA. Revenue for Q3 benefited from the revenues recognized from shipping the supplies delayed from the second quarter and revenue for the fourth quarter is forecasted to be in the range of $3.5 million to $3.7 million. We expect to post a small cost to income from operations in the first quarter. In conclusion, we believe revenue has finally stabilized and we are poised for growth. We have taken the appropriate steps to right-size our operations, our strategic move into topical pain creams will yield higher margins and a shorter collection cycle than our core electrotherapy products. With our core electrotherapy business stabilizing and growing, building our sales-force and leveraging the growing sales-force to drive sales for electrotherapy and pain cream solutions is our top priority during the month ahead. I appreciate your interest in Zynex and participation in our earnings call. We will now take questions and once again if you have a question please use the webcast interface.

[Brian Alleman:]

Okay. So we’ll give it just a second for the questions to come up. Okay. The first question seems to revolve around the line of credit and what’s our current status with our lender. As I noted before, we are in default of the loan agreement and the lender certainly has its rights under that default. However, our relationship with the lender is actually quite good. They continue to make advances. We have a lot communication with them. And it seems to be operating quite smoothly. That being said, we are out actively in discussions with new potential lenders looking at various forms of potential lending and those steps are moving forward, but there really can’t be – again, we can’t give any assurance that we’re going to be able to bring in a new lender, but we are very hopeful. Thomas, there’s a question on the pain cream business. Is there a seasonality function to the pain cream business?

[Thomas Sandgaard:]

As we know the market for prescribing products for pain management in general and market we’re obviously very familiar with, we obviously see the seasonality around when physicians primarily on vacation, which is typically around July and December, we sometimes have slower months. And we typically also the deductibles having an impact on collections in the first couple of months of a year, but other than that as fast as we’re growing in the pain cream industry, it looks like we’re growing right through any kind of seasonality in that market. And I should probably also mention that other than seasonality it is a market or an area that we see that, has potential for changes and has potential lower reimbursement sometime in the future. But at this point in time we see it as a very healthy market and we’re very excited to see the kind of growth we do in that space right now.

[Brian Alleman:]

We have a question regarding profitability going forward and do we anticipate profitability going forward. As Thomas said in the guidance for Q4, we are expecting to be slightly positive on the operating income, income from operations line, so that’s before interest and taxes. I would expect it as our revenue continues to grow from that level we will increase that income from operations line moving forward.

[Thomas Sandgaard:]

It’s good. It doesn’t look like we have any other questions today. So I would like to thank everybody that participated and listened in on this earnings call for their interest in Zynex and listening in on the third quarter results. Thank you very much.

[Operator:]

That does conclude today’s teleconference. We thank you all for your participation.