Zynex, Inc.
Q4 2014 Earnings Call Transcript

Published: 2 Apr 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Zynex Incorporated 2014 Year-End 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, 2013. 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 fourth-quarter and full-year 2014 conference call. I want to focus on a few key issues for 2014. First I want to mention our new non-invasive blood volume monitor, the first product that can indicate loss of blood through surgery and internal bleeding during recovery. It's a huge unmet need in hospitals today. This month, we finally submitted an application to the FDA requesting that De Novo route for getting this unique technology approved. Check out our website for how it works. I'm very excited about launching this product. Other than that, we’ve been through two rough years. But the second half of last year clearly showed the effects of our stabilized revenues and sharply reduced expenses. In 2013, we saw revenue drop from $4 million in 2012 to $22 million and we lost $7 million simply because we didn't cut expenses fast enough to match the declining revenue from our electrotherapy business. As we’ve discussed in several earnings calls before, the decline was mostly caused by healthcare reform and then due to the industry spending more time promoting primarily compounded pain treatments. And we eventually made the decision to get our own pharmacy that was ready in early 2014. We lost another $4 million in the first two quarters of 2014 plus took an additional $2.5 million restructuring charge for a total loss of $13 million in 18 months. The last two quarters of 2014 showed a $1 million profit as expenses finally came in line with revenue, orders stabilized and we got things turned around. The first quarter additionally continues to trend, and we expect first quarter revenues to be on par with the 2014 run rate. We’ve had a rough time, we just came through, and so revenues have declined from $40 million to $11 million in just two years. [Indiscernible] were steady to 2014 at $3.5 million a quarter and due to cost reduction measures we’ve taken, we’ve stopped the bleeding. The good news is that the TENS electrotherapy [Indiscernible] for orders remained strong and is not declining although payments as always takes a long time to collect. The TENS market is full there and there’s a lot of market share that we can win and bring back. The challenges we see right now is that we find our compound pharmacies, the orders pay really well. They pay fast, but that industry is currently undergoing changes with pressure from the BVMs and the long-term prospects are hard to collect. Growing our sales force and monthly orders continue to be important for us and we are actually seeing signs of improvement. I want to remind everyone of our current business focus. Monetizing solutions with the introduction of the world's first blood volume monitor, we’ll be initiating FDA and international approvals. We’re starting initial production and getting ready to build sales channels, market awareness at hospitals et cetera. Then we have Zynex Medical, our existing revenue generator focused on pain management with electrotherapy and compound pharmacy, all conservative pain treatments. In this division, all orders require prescription and is paid for by insurance reimbursement. We’ve significantly reduced or eliminated our activities in billing and consulting in diagnostics and international division while we’ve been focusing on stabilizing the core parts of the company over the past year. I’ll now turn the call over to Brian Alleman, our CFO who will review our fourth quarter of 2014 financial results.

[Brian Alleman:]

Thank you, Thomas. Many of you have probably seen our financial results in the news that was released this morning were filed from the 10-K on Tuesday. And just an update to the safe harbor that was read at the beginning, basically 10-K is actually for 2014, updated for 2013. If you do not have a copy of the release or Form 10-K you can access one on the web at the SEC’s EDGAR website. 2014 was a pivotal year for Zynex. After several quarters of significant revenue declines, we finally stabilized. The introduction of the compound pharmacy added a great revenue source, and gave us the ability to start attracting new sales reps. During 2014, we narrowed our sales focus on TENS and compound pharmacy, reduced headcount by about 40%, restructured our billing department, negotiated a new lease agreement for our building that will save us approximately $1 million a year in 2015 and physically moved our operations in December. We also reduced the amount owed to our lender by $1.4 million, reduced vendor payables by about $200,000 and approved our inventory utilization. All of these moves had positioned us well for 2015 and beyond. Here is an overview of our fourth quarter and full-year audited financial results. Our Q4 total net revenue was $2,197,000 and was $11,117,000 for the full year. Revenue for the fourth quarter was hurt by the disruption to our operations resulting from the move in December. While painful in the current period, the benefits of the lower end and operational efficiencies from working in the smallest base are significant going forward. Cost of revenue resulted to both rental and sales was $1,406,000 compared to $1,383,000 in the prior year. We reported selling, general and administrative expenses or SG&A of $2,396,000 from the fourth quarter compared to $2.6 million for the third quarter, $2.9 million in the second quarter and $3.5 million in the first quarter. The significant reduction from Q1 to Q4 reflects the headcount reductions, general cost controls and negotiation of the new facilities leased. Based on the fourth quarter SG&A, on an annualized runrate we’ve reduced SG&A expenses by nearly 55% from the 2013 levels. For the fourth quarter of 2014, we generated a net profit of $515,000 or $0.02 per share including the net gain on lease termination of $2.2 million. For the year, the net loss was $6.2 million or $0.20 per share. Our line of credit balance at December 31 was $4,442,000 as compared to $5,820,000 as of December 31, 2013, a reduction of nearly $1.4 million year over year. The company continues to face liquidity challenges due to the lack of available borrowings under our line of credit. As we’ve discussed over the last several months, the company is in default of the terms of a credit agreement with the lender, and the lender has accelerated payment of the outstanding balance. However the lender has continued to make advances to the company based on cash collections and has agreed to forbear exercising his rights through June 30, 2015. The company is exploring ways to improve its liquidity and is actively seeking a new lender or investor to replace the existing lender and provide additional liquidity. However the company can make no assurance that we’ll be able to approve its liquidity or obtain new capital to replace an existing lender. For more in-depth discussion, please refer our recent filing and Form 10-K for the year ended December 31, 2014. In summary in 2014 we cleaned up our balance sheet, reduced our operating expenses, restructured key departments, launched the compound pharmacy and stabilized revenue. All of this has positioned Zynex well for growth in 2015. Thomas, I'll give the call back to you.

[Thomas Sandgaard:]

Thank you, Brian. Let me summarize. The last half of 2014, our revenues stabilized in our pain management division while all the reduced expenses allowed us to show profitability again. Our cash collections have been steady for over a year, and the renegotiating of our building lease saving a million dollars a year was crucial in our turnaround along with the significant reductions and efficiencies in the organization, and on the payroll expenses. Even though we continue to be in default of our bank line of credit, we’ve a good relationship with [indiscernible] and look to not only get within compliance, but also replace the line with another loan facility long term. We're estimating the same runrate or better for the first quarter of this year. And most importantly our non-invasive blood volume monitor is finally becoming a real product, in pilot production and we look forward to getting the FDA approval as well as getting it introduced to the international markets. We are ready to take on 2015 with full force and we’re excited that we got through 2013 and 2014 without incurring any shareholder dilution. And this concludes our presentation, and we will now take questions that come in over the web interface. And Brian, if you can read some of those questions that are coming in? Question-and-Answer Session

[Brian Alleman:]

Sure, we actually have a couple of questions related to the blood volume monitor. If I can sort of summarize the questions, it really goes around, could we get a little more insight about your initial plans for getting the blood volume monitor to market? And what’s the status, have we heard anything back from the FDA?

[Thomas Sandgaard:]

Well it's nearly a month ago that we send in a pre-sub to the FDA applying for -- to see if we can get into through the De Novo route. The De Novo route is a new process, that the FDA has opened up for that use of technology, that doesn't already exist in the market, something that's even revolutionary like this product. There’s a separate group of people that will look at that, they are going to be comparing it and using the regular checkmarks to existing products will eventually clear the product or obviously not. We expect that we’ll be hearing back from them in less than two months from today. And after that, the FDA will be getting the full formal application from us. That can easily take more than six months. So it’s not unrealistic that we may [indiscernible] on having this product -- maybe towards the end of this year. We also [Indiscernible] that working on to see if we can get the products approved from the international markets. [Indiscernible] for Europe and then many different [Indiscernible] for the international market. But obviously the need is just as big internationally as is here domestically. The initial production was primarily designed so that we can collect more clinical data and also to introduce the product to leading hospitals, both here and internationally. We’re obviously very excited due to the strong correlation we see between actual blood loss and our index to guide the professional and the need to better manage [fluid] balance in the hospital is huge, both during surgery and also in recovery. But having an early detection of in terms of bleeding, something that currently can only be detected when it’s really getting bad. The fact that this blood volume monitor is non-invasive and is very easy to apply, just on one arm makes it user friendly and we’ve high hopes for a significant market adoption on this product.

[Brian Alleman:]

The next question revolves around the compound pharmacy. The recent items in the news surrounding compound pharmacy and internet marketing and telemarketing practices, how has it affected the Zynex compound pharmacy?

[Thomas Sandgaard:]

Well fortunately, it hasn’t affected us. We’ve seen this industry see some really bad press. And it’s actually has become a very large industry. We estimate the compound pain treatment market to be around $3 billion annually and we’ve recently seen an introduction of [indiscernible] [0

[Brian Alleman:]

I think this next question, I can take. It’s what’s the status of your relationship with your vendor?

[Brian Alleman:]

Triumph Healthcare Finance has been, in my time with the company which is since July 15 of 2014 and in my view it’s been excellent. They have been very, very supportive. You know we do continue in a state of default, but the bank has made advances available based on our cash collections. And with the reduction in our expenses and the steadiness of our cash flows, they have been adequate frankly to maintain our operations. They have agreed to forbear on exercising their right to default through June 30 which is a very good thing for us. And you know obviously we’re looking to replace the lender, we’re looking to bring in either a new investor or a new secured lender. But the bank has been just absolutely supportive. And in my opinion, the relationship is very, very good. And I don’t see any other questions being on this. What’s your current estimate for 2015?

[Thomas Sandgaard:]

Well, I am confident that we’ve turned the corner in the second half of 2014 and we’re continuing the positive trend going into 2015. We’re not yet able to give any guidance and we should be able to update our shareholders soon, and going forward here throughout the year. At this point, that's all I could say about the estimate for 2015.

[Thomas Sandgaard:]

That concludes our earnings call for the fourth quarter of 2014. Thank you very much for anybody that has listened into the call. I appreciate it.

[Operator:]

And that does conclude today’s call. Thank you for your participation. You may now disconnect.