Zynex: Extreme Risk And Potential For Extreme Reward, Reducing Need For Pain Medication With Electrotherapy

| About: Zynex, Inc. (ZYXI)

Summary

Zynex’s most recent audit opinion has a going concern qualification, and company’s stock could easily go to zero.

In some cases, Zynex’s electrotherapy products may reduce or eliminate need for pain medication, thereby helping to address public health concerns.

Benefiting from the 2015 Q4 closure of its major competitor, Zynex is growing rapidly. Order growth is up 134% YTD, with Q3 revenues up 36% YOY.

Annualizing potential Q4 earnings based on Zynex revenue guidance results (roughly) in forward P/E of 3 and forward Enterprise Value to Earnings ratio of 5.

Zynex is likely to issue more stock soon - to pay off loans and support growth. This has both positive and negative implications for stock price.

One of the best things about Seeking Alpha is the availability of research regarding stocks so risky that virtually no Wall Street advisors or analysts who care about keeping their jobs would ever consider recommending them - however large these stocks' upside might be. The subject of this report is a company sufficiently dicey to earn its latest audit report a going concern qualification, but whose most recent quarterly results and guidance strongly suggest that a remarkable turnaround is underway.

Zynex (OTCQB:ZYXI) designs, manufactures, rents, and sells non-invasive medical devices, with a focus on electrotherapy products. Applications of electrotherapy include pain management, as well as stroke and injury rehabilitation. The use of electrotherapy for pain management has been cited as a useful means of fighting iatrogenic opioid dependence.

According to a 10Q filed by Zynex on 11/14/16:

"During the fourth quarter of 2015, the electrotherapy industry experienced a significant development when the Company's largest competitor (DJO/Empi) announced the closure of their Empi electrotherapy division. Empi previously held a large share of the electrotherapy market. Management believes this presents a significant growth opportunity for the Company. The Company has recruited many former Empi sales representatives, including those in areas where it had no previous representation. In addition, during 2016, the Company's orders have been steadily increasing as compared to 2015. To focus on growth and the potential for future positive cash flow, the Company has committed its limited resources to the new salesforce, including the supporting product production and supporting administrative (customer service and billing) personnel…Through September 30, 2016, we have recruited and retained over 70 former Empi sales representatives."

This strategy appears to be paying off. Per its 11/10/16 press release, ZYXI is growing rapidly, with orders for 2016 YTD up 134% versus the corresponding period in 2015 (21,036 vs. 8,972), along with a 16% revenue increase ($10.39 vs. $8.92 million). And its revenue growth is accelerating, as 2016 Q3 revenues surpassed 2015 Q3 by 36% ($3.63 vs. $2.67 million).

Moreover, company guidance for total 2016 revenues is between $15 and $16 million. Since 2016 YTD revenues are just $10.4 million, this implies a $4.6 to $5.6 million expectation for Q4 revenues, an increase of 28% to 56% from this past quarter (and a 70% to 107% jump from the $2.7 million in Q4 of 2015).

(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Three months ended

Nine months ended

September 30,

September 30,

2016

2015

2016

2015

Net revenue:

Rental

$

1,324

$

924

$

3,226

$

1,768

Sales

2,303

1,743

7,164

7,155

3,627

2,667

10,390

8,923

Operating expenses:

Cost of revenue - rental, product & supply

880

950

2,803

3,361

Selling, general and administrative expense

2,125

1,943

7,465

6,923

Income (loss) from operations

622

(226)

122

(1,361)

Other income (expense):

Interest expense

(90)

(98)

(262)

(368)

Total other income (expense)

(90)

(98)

(262)

(368)

Income (loss) before income taxes

532

(324)

(140)

(1,729)

Income taxes

-

-

-

-

Net Income (loss)

532

(324)

(140)

(1,729)

Plus: Net loss - noncontrolling interest

-

2

-

18

Net Income (loss) - attributable to Zynex, Inc.

$

532

$

(322)

$

(140)

$

(1,711)

Net Income (loss) per share - attributable to Zynex, Inc.:

Basic

$

0.02

$

(0.01)

$

0.00

$

(0.05)

Diluted

$

0.02

$

(0.01)

$

0.00

$

(0.05)

Weighted - average number of common shares outstanding:

Basic

31,271,234

31,271,234

31,271,234

31,271,234

Diluted

31,271,234

31,271,234

31,271,234

31,271,234

Click to enlarge

Source: Zynex press release dated 11/10/16

As far as what this means for earnings, let's assume that net income as a percentage of revenues stays constant between Q3 and Q4 at 14.7%, which is somewhat conservative because ZYXI's expenses have been relatively fixed. (For the first nine months of 2016, ZYXI's operating expenses were $10.3 million, versus the same $10.3 million during the corresponding period in 2015.) This implies Q4 earnings of $675,000 to $823,000, which equates to EPS of 2.2 to 2.6 cents.

Note that revenues in Q4 of 2015 were $2.7 million, less than 25% of total 2015 revenues. I interpret this to mean that 2016 Q4 projections are not benefiting to any meaningful extent from seasonal factors. Thus, if we assume zero earnings growth for 2017 (which, assuming the company survives, is a conservative assumption), annualizing the Q4 EPS expectation gives us 2017 projected EPS of 8.8 to 10.4 cents.

It follows that the current stock price of 28 cents represents a P/E multiple of 2.7 to 3.2 times forward earnings. Given ZYXI's sizeable negative book value, it should also be noted that a similar calculation based on enterprise value (EV) yields an EV/E in the range of 4.5 to 5.5 times forward earnings.

One major dark cloud hanging over the stock price is the need for additional liquidity to fully exploit growth opportunities. To quote ZYXI's CEO: "Our growth is significantly limited by lack of liquidity that has made it difficult to keep up with order volume in production and has slowed down sales growth." Given ZYXI's debt-heavy balance sheet, this no doubt means raising cash through the sale of additional equity and dilution of EPS.

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)

September 30,

December 31,

2016

2015

(UNAUDITED)

ASSETS

Current Assets:

Cash

$

91

$

8

Accounts receivable, net

3,981

2,426

Inventory, net

96

305

Prepaid expenses

28

27

Total current assets

4,197

2,766

Property and equipment, net

517

801

Deposits

55

55

Intangible assets, net

44

74

Total assets

$

4,812

$

3,696

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:

Line of credit

$

3,027

$

4,002

Current portion of capital leases

109

109

Accounts payable

3,090

2,477

Deferred revenue

528

89

Income taxes payable

79

79

Accrued payroll and payroll taxes

883

484

Deferred insurance reimbursement

880

-

Accrued expenses

64

299

Total current liabilities

8,660

7,539

Capitalized leases, less current portion

165

216

Warranty liability

12

12

Total liabilities

8,837

7,767

Stockholders' Deficit:

Preferred stock; $.001 par value, 10,000,000 shares authorized, no shares issued or outstanding

-

Common stock, $.001 par value, 100,000,000 shares authorized, 31,271,234 shares issued and outstanding

31

31

Paid-in capital

6,018

5,832

Accumulated deficit

(9,985)

(9,845)

Total Zynex, Inc. stockholders' deficit

(3,936)

(3,982)

Non-controlling interest

(89)

(89)

Total stockholders' deficit

(4,025)

(4,071)

Total liabilities and stockholders' deficit

$

4,812

$

3,696

Click to enlarge

Source: Zynex press release dated 11/10/16

My take, however, is that ZYXI would be cheap even at P/E or EV/E levels substantially higher than what they are right now - especially given its rapid revenue and earnings growth. The inevitable negative impact on stock price of issuing more equity would, I believe, be temporary so long as revenues and earnings stay strong. Ultimately, the resultant revenue and earnings growth could well outweigh the EPS dilution associated with selling additional shares. In addition, strengthening its balance sheet would, in all likelihood, increase investors' confidence in ZYXI's financial stability and thereby raise the earnings multiple they are willing to pay.

Make no mistake, though - as its 10K notes in detail, ZYXI is subject to a lengthy list of risks. As a result of these risks, which include being in default under its line of credit, the company's most recent audit opinion was qualified with respect to its viability as a going concern. Needless to say, very few investors have the courage to get involved with such a high risk situation, but I see that as a positive for those of us who do. All things considered, I see the potential for reward as substantially outweighing its risks - despite ZYXI's very significant chance of going to zero.

Disclosure: I am/we are long ZYXI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: ZYXI sells for less than $1 per share, has a market cap under $10 million, and is highly illiquid.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.