Zynex Inc. (ZYXI) CEO Thomas Sandgaard on Q3 2018 Results - Earnings Call Transcript

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About: Zynex, Inc. (ZYXI)
by: SA Transcripts

Zynex, Inc. (OTCQB:ZYXI) Q3 2018 Earnings Conference Call November 6, 2018 11:00 AM ET

Executives

Thomas Sandgaard - Founder, President, Chief Executive Officer and Chairman

Daniel Moorhead - Chief Financial Officer

Analysts

Jeffrey Cohen - Ladenburg Thalmann

Howard Halpern - Taglich Brothers

Marc Wiesenberger - B. Riley FBR

Michael Potter - Monarch Capital Group

Ken Jones - BJK Investments, LLC.

Michael Crawford - B. Riley FBR, Inc.

Operator

Good morning, everyone, and welcome to the Zynex Q3 2018 Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Thomas Sandgaard, CEO of Zynex. Please go ahead.

Thomas Sandgaard

Good morning, my name is Thomas Sandgaard, I'm President and CEO of Zynex. Welcome to our third quarter 2018 earnings call.

Today's certain statements in this release that are forward-looking and are such 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, 8-K amendments, press releases and the company's website.

First off, I'm excited to announce our ninth consecutive quarter of profit. Our third quarter revenue was $8.1 million and net income of $0.08 per fully diluted share. Our financial results are now so consistently positive that we have decided to distribute a portion of our earnings and accumulating cash balance to our shareholders in a special one-time dividend of $0.07 a share.

This is a very unique moment in the history of Zynex and for me in particular that we are now able to reward loyal shareholders for their patience and trust in the company, our products, our strategy and the value we create as part of helping patients avoid opioid addiction. Revenue increased 19% compared to the same quarter of the last year. And we reported positive net income of $2.6 million, up 18% from the same quarter the year before.

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 a level where tens of thousands die yearly due to opioid abuse. We continue to develop more tools to make physicians aware of our technology that literally has no side effects.

As we keep growing our sales force and geographic footprint of across the U.S., we grew orders 30% year-over-year in the third quarter while reimbursement continues to be stronger for our products. Orders grew 10% between the second and the third quarter. And for the month of October, we experienced order growth accelerating even further as a result of new sales reps becoming productive.

I'm very pleased to see our gross profit margin remain at the 80% level, an indication that the industry for prescription-strength electrotherapy is still not only stable but very healthy and viable. Our cash position increased from $5.6 million at year-end to $8.1 million at the end of the third quarter. Due to strong operating cash flows during the first 9 months of this year, the company bought $3 million of our common stock through our stock buyback program, which effectively creates a significant anti-dilutive event benefiting all shareholders.

Our products for pain management and rehabilitation still stand out as some of the best in the industry. The NexWave for pain management, our NeuroMove device for stroke rehabilitation and the InWave for incontinence treatment puts us in a very strong product position in these rehabilitation markets.

And I should also mention that we finally obtained the U.S. patent on our noninvasive Blood Volume Monitor. I cannot emphasize enough how important this is for protecting the value of this product in the future as we ultimately develop the market for noninvasive blood volume and fluid monitoring. It's the first product that can indicate loss of blood during surgery, internal bleeding during recovery and has many other additional applications as well. We hope to eventually announce CE Marking for the European market as well as FDA clearance.

We continue to see a great potential in both of our product divisions, our existing revenue-generating area for pain management as well as the huge unmet potential we see for the Blood Volume Monitor.

I will now turn the call over to Dan Moorhead, our CFO.

Daniel Moorhead

Thanks, Thomas. First, I'll review our 2018 third quarter results. Net revenue increased 19% to $8.1 million from $6.8 million in 2017. Device revenue increased 58% to $1.8 million compared to $1.1 million last year. Supplies revenue increased 11% year-over-year to $6.3 million from $5.7 million. Our gross margins in the quarter remained at 80%. Third quarter net income increased 18% to $2.6 million or $0.08 per diluted share compared to net income of $2.2 million or $0.07 per diluted share in the third quarter last year.

Adjusted EBITDA, which is the standard EBITDA calculation plus an exclusion of noncash, stock-based compensation and is reconciled in our press release, was $20 million in Q3 compared to $3.1 million last year. The slight decrease in adjusted EBITDA year-over-year is primarily due to the investment in our sales force to drive current and future orders and increased personnel in our headquarters primarily related to billing, quality and the regulatory departments.

Now on to the 9-month results. Net revenue increased 48% to $22.6 million from $15.3 million in 2017. Product device revenue increased 35% to $5.1 million from $3.8 million last year. Supplies revenue increased 52% year-over-year to $17.5 million from $11.5 million. The growth in revenue drove gross margins to 81% in 2018, up from 78% last year.

2018 net income increased 71% to $6.9 million or $0.20 per diluted share compared to net income of $4.1 million last year. Adjusted EBITDA was $7.8 million, up 39% from $5.6 million last year. We generated operating cash flows during the first 9 months of 2018 of $6.8 million, which was an increase of 43% compared to $4.7 million in 2017.

On the balance sheet, as of September 30, 2018, our cash balance was $8.1 million compared to $5.6 million at December 31, 2017, due to strong operating cash flows during the first 9 months of 2018, although we did spent $3 million on repurchasing our common stock. Our working capital grew 98% to $8.6 million compared to $4.4 million as of December 31, 2017.

I'll now turn the call back over to Thomas.

Thomas Sandgaard

Thank you, Dan. Our focus continues to be on growing our sales force at a rapid rate in geographic areas, which we currently don't cover to take advantage of the void left in the market by 2 previously very large competitors. Our increased orders due to our larger sales force, combined with strong reimbursement for our products, continue to drive increased revenue and profitability.

We estimate our fourth quarter revenue to be between $8.6 million and $9.1 million; EBITDA or adjusted EBITDA between $3 million and $3.5 million; and continue quarterly earnings around $0.08 a share. This will add up to a total revenue in 2018 of between $31.2 million and $31.7 million compared to $23.4 million in the 2017. And our adjusted EBITDA 2018 is now projected to come in between $10.8 million and $11.3 million compared to $9.5 million in 2017. Earnings are now trending to $0.28 per fully diluted share for the full year.

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 2 main competitors. We also continue our up-listing effort 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 new update as to the status since our last earnings call.

In summary, we announced yet another great quarter with strong growth in orders, revenue and profit. I hope the special dividend just announced will be appreciated by our shareholders. The patent obtained on our Blood Volume Monitor indicates the beginning of the next phase of developing this division with more clinical research to support our advertising, staffing up in business development, et cetera. We are also looking at adding more products to add to this division, including additional products developed internally.

We will now answer questions from our listeners.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from Jeffrey Cohen from Ladenburg Thalmann. Gentleman, please go ahead with your question.

Jeffrey Cohen

Hell, Thomas and Daniel, how are you?

Thomas Sandgaard

Good morning, Jeff, how you doing?

Jeffrey Cohen

Just fine. So I'm going to apologize in advance for any questions which are redundant. So could you talk a little bit about the size of the sales force in the field and also total FTEs and changes over the last quarter and maybe what you'd expect over the next 2 quarters?

Thomas Sandgaard

Yes, the sales force is now up to just over 140 sales reps, which approximately 40 of those were added throughout this year. So we had about 100, but they were all very independent and not - for the most, not spending all their time on selling Zynex's products up until beginning of this year. So 40% of our sales force is now obviously relatively new, some may just have started this week. But they are 100% dedicated to Zynex products. And we are seeing great growth in that. I remember having estimated earlier in the year that we would be up to about 50 of new sales reps at the end of the year. We probably will be very close to that number. The performance of that group of sales reps are a little lower, 20% consistently higher than our original estimate when we launched that program of adding all these new sales reps. So order growth is slightly better than we expected. And we're nearly at our benchmark in terms of how fast we're adding them.

Jeffrey Cohen

Okay, any commentary as far as revenue composition, medical revenue composition as far as any of the other platforms? Is it safe to assume that nothing else beyond NexWave was "material" for the quarter? And could you talk a little bit about any pricing changes as well?

Daniel Moorhead

Yes, the mix hasn't changed. It's still primarily NexWave and everything else is immaterial at this point.

Thomas Sandgaard

Yes, NexWave and associated supplies obviously.

Jeffrey Cohen

Okay, got it. And anything more beyond what your comments were on the Blood Volume Monitor? Now that you had the patent news behind, anything closer or less close for the quarter that you're aware of as far as your application or status?

Thomas Sandgaard

We had a follow-up conference call with the FDA yesterday that went reasonably well. And so things are in process.

Jeffrey Cohen

Closer?

Thomas Sandgaard

Closer.

Jeffrey Cohen

Okay. And speaking of closer, anything closer on the update with NASDAQ and/or listing?

Thomas Sandgaard

No, not really. That keeps being in progress. And we do have a dialogue with them. And we keep working to the, let's say, the issues and the waiting that we are enduring here, so...

Jeffrey Cohen

Got it. And then finally, for me, kind of big-picture, 30,000-foot view, could you talk a little bit about recent activities in the opioid deterrence market? Any changes, legislation, reimbursement, anything that's kind of changed big picture in that market that may affect you both positively or adversely potentially?

Thomas Sandgaard

Obviously, we see reimbursement being strong for our products being prescription-strength and is a very effective as well as inexpensive technology compared to all medication. Other than that, we obviously see an increased interest in solving the problem with the opioid epidemic. However, we're not really seeing any significant changes, so the problem remains gigantic.

Jeffrey Cohen

Perfect. Okay, thanks Tom. Thanks Dan.

Operator

Our next question comes from Howard Halpern from Taglich Brothers. Please go ahead with your question.

Howard Halpern

Congratulations on the quarter, guys.

Thomas Sandgaard

Thank you.

Howard Halpern

In terms of the, I guess, the new adds to the sales force, are they really the driver for that nice bump year-over-year in device revenue?

Thomas Sandgaard

Yes, that would be a straight correlation.

Daniel Moorhead

It'd be a lot of it. We kind of kicked off the new sales force hiring end of Q4, beginning of Q1. So a lot of the growth this year would be attributed to that new sales force that we have.

Howard Halpern

And when you bring on new sales reps, how long does it take to get even to the midway point of what you would hope they should be producing over the long term?

Thomas Sandgaard

It depends. We saw one here last month that, in her second month, moved up to #1 on the rank. But for the most, we see to hit that midpoint be somewhere between 6 and 9 months. So it's a very slow process, obviously. Then after that we get to bill for those orders. And most of the revenues, recurring revenue, when we have received the order and obviously when there is a significant delay until we actually see the cash. So from when we hire a rep to they actually start getting a significant amount of orders to we actually get all those orders billed for over the next many quarters and until we see the cash, it's a long delay. So considering all the initiatives we put in place this year, I think most of the result of that we'll benefit from next year.

Howard Halpern

Okay. And in terms of the nice, steady growth in the device area, should we be seeing an uptick in the next, I don't know, fourth quarter, first quarter or second half of next year? Should we be seeing the uptick in the product sales at some point based on the increased number of devices sold?

Daniel Moorhead

I would - the supplies trend is pretty in line with the device growth. So I don't know that you're going to see anything astronomically different from what you've seen on the growth rates on the supply side versus device right now. So obviously, it depends how soon the new sales force kicks in, in their growth rates on their individual sales targets. But I think the - I would say the allocation right now between device and supplies and their respective growth rates should stay fairly consistent.

Howard Halpern

And what are you seeing in terms of - or are you seeing potential acquisition candidates that might fit with what you're doing to help mitigate the opioid epidemic? Are companies coming to you? Or are you seeing companies out there that are potential targets?

Thomas Sandgaard

There are a few companies that would be potential targets. Obviously, products that complement our NexWave device and, as you mentioned, products without side effects can help alleviate pain or be beneficial for other rehabilitation purposes.

Howard Halpern

Okay. Okay, well keep up the good work, guys.

Thomas Sandgaard

Thank you.

Operator

Our next question comes from Marc Wiesenberger from B. Riley FBR. Please go ahead with your question.

Marc Wiesenberger

Good morning. Thank you. As the company is growing, can you talk about some of the internal initiatives that are driving increased efficiency maybe from the sales and/or billing perspective?

Thomas Sandgaard

Billing is obviously - yes, let me touch on billing first and then sales. Billing, we have - we have obviously modified our billing processes as well as I believe we have - if you look at the workforce we have to date in that part of the company, being much better in terms of understanding what insurance companies need and in terms of working the files, working with the insurance company to get paid. It's been a great help - that improvement started about 2 years ago and we still see very strong, very consistent reimbursement for our products.

Then in terms of initiatives in sales, other than hiring more sales reps, one of the things we do now is since this is a market that was developed several decades ago by some very large competitors for the most, we've been very successful in having a group here internally simply to research in every city we go into. An example is San Antonio, where we hired for 4 sales reps earlier in the year. We had our inside sales group call every clinic in that city and where we got reasonably warm leads and in some cases, "Yes, please come visit us as soon as possible." Or we can give out those leads to brand-new sales reps with relatively little experience in the industry and give them a very successful experience to begin with, where they would quickly get orders, et cetera.

For an industry where sales reps are often involved in a lot of cold-calling, a lot of rejection, a lot of gatekeepers at the doctors' offices that make sure that we don't get to take too much of the doctors' time, making their time efficient, especially in the beginning, has made the addition of new sales reps very successful. It's very few that we've seen a drop-off because of lack of performance compared to what we saw several years ago, when we added sales reps as well. So I think the fact that we're doing a better job in billing and that we are supporting our sales reps with efforts here from our sales support has proven to be very efficient. And I think we're just at the beginning of what all that is going to give us.

Marc Wiesenberger

That's great. Where are you targeting kind of your next geographic push? Any specific place where you're not kind of well-staffed at the moment?

Thomas Sandgaard

Yes, the answer is pretty simple. Any city where we don't have a significant amount of reps already is being targeted. As an example, we're in the process of adding - we had a few reps in the Los Angeles area. We've added 5. We hope to, here in the next month or so, have an additional 5 in the Los Angeles area and so on. And our goal is obviously to blanket the entire country with high-quality sales reps that makes it difficult for competition to then break in, should competition show up, and to be able to service all the physicians that should really be prescribing this as well as possible.

Marc Wiesenberger

Excellent. What's the typical demographic of the NexWave customer?

Thomas Sandgaard

The NexWave customer is typically a patient in pain. And it often is a result of, for instance, orthopedic surgery, where a patient would use our device to decrease pain, increase blood circulation and just overall increase and facilitate recovery after surgery. Traditional low back pain is a big application, tennis elbow or carpal tunnel. There's also knee - the knees is often an application. So pretty much all - any patient that's in pain, whether it's chronic pain or acute pain, we can help with this device.

Marc Wiesenberger

In terms of the age, race, geographic, are there any trends that you see in the data?

Thomas Sandgaard

It's very widespread. There are very young people as a part of our patient population. There's - older people are - so we see the entire age spectrum. And there's really no - nothing other than, obviously we need to have a sales rep presence in the geographical area to get the orders. They don't come by themselves.

Marc Wiesenberger

Great. And then just one more for me. Following up on your anecdote about the number - or in the second month, your rep moved up to the #1 rank. What geography was that in?

Thomas Sandgaard

That was on the East Coast, kind of the Mid-Atlantic area.

Marc Wiesenberger

Great. Thank you very much.

Thomas Sandgaard

Thank you.

Operator

Our next question comes from Michael Potter from Monarch Capital Group. Please go ahead with your question.

Michael Potter

Hey guys, congratulations on another very good quarter. Most of my questions have been answered, but I'm hoping maybe you can give me a little bit more color on the blood monitor approval process. You mentioned that you had a call with the FDA yesterday. Do you anticipate that we're going to receive our CE Mark - I think you had mentioned in the past, before the end of the year. Is that still the case? And then what additional information is the FDA looking for?

Thomas Sandgaard

In terms of the FDA, we have a number of questions, some of them are related to some clarification on safety testing. There was a question about a backup battery. There was also questions about the index we are displaying. And some of that is more clarification in terms of how each of the parameters we are measuring actually end up in the index. So in a couple of days, we should be able to get back to the FDA on that. And they'll keep working on it. But there might be a number of more rounds before we are done. In terms of CE Marking, that's more of a regimented process, it's a combination of all the safety testing we've done on the product, our 13485 quality systems certification and putting all that together. And we're using an entity called Nemko, that's the certified body. And that process is also moving along.

Michael Potter

Do you still anticipate receiving the CE Mark before year-end?

Thomas Sandgaard

We're getting so close now. That might be a stretch. But of course, I'm hoping I'm not too far off.

Michael Potter

Okay. And you mentioned the share buyback that we bought $3 million shares. But how many shares...

Thomas Sandgaard

At the end of the third quarter, yes.

Michael Potter

For the 9 months, were any additional shares - one of us - you go ahead, please?

Daniel Moorhead

Go ahead.

Michael Potter

Were any additional shares repurchased in the third quarter?

Daniel Moorhead

Absolutely, yes.

Michael Potter

How many shares repurchased in Q3?

Daniel Moorhead

Let me see. I don't have the share in front of me. It will be in the Q later today. But the dollar value in the quarter was we've spent about $1 million in the quarter. And we've been averaging about $3.15, $3.20 a share. So the $1 million divided by 3, so roughly 300,000 shares.

Michael Potter

Okay. And is - are you continuing in Q4?

Daniel Moorhead

There have been purchases in Q4, yes.

Michael Potter

And how much is left on the plan?

Daniel Moorhead

I don't have that in front of me.

Thomas Sandgaard

Not a whole lot.

Daniel Moorhead

Yes, it's minimal.

Michael Potter

Okay. And I'm assuming the board is going to take another look at continuing a share repurchase program?

Thomas Sandgaard

Correct, yes. Obviously, that - and also in light of the dividend, we're also looking at how the cash we have available, how we spend that.

Michael Potter

Okay, can we talk about the support staff a little bit? We talked about the increase in salespeople. How many additional support people did you bring on?

Daniel Moorhead

During the quarter or during the period?

Michael Potter

Let's do the quarter-end for the year and for the 9 months.

Daniel Moorhead

During the quarter, it was mostly sales. There would have been some support. Most of the support really came in - and if you look at SG&A trends, it's Q4 '17 when SG&A really jumped. Remember, we paid off the debts right at the end of Q2. We started cash, the ability to cash flow. And that's when we really started hiring. We were pretty lightly staffed before that. So you can see most of the support staff was kind of Q4, Q1. And then obviously we have small adds in between there. But on the billing side, year-to-date, we've added about 10 people on the support side, more on the patient support and order conversion, there's been 7 or 8 year-to-date. And those will start to flatten out as we get - we'll scale it from here.

Michael Potter

Okay. So we added an additional 18 people year-to-date in...

Daniel Moorhead

Yes, in round numbers, yes.

Michael Potter

Okay, in G&A.

Daniel Moorhead

Yes.

Michael Potter

Alright, terrific. Thanks guys, keep up the good work.

Daniel Moorhead

Thank you.

Operator

Our next question comes from Ken Jones from BJK Investments, LLC. Please go ahead with your question.

Ken Jones

Thank you. First of all thank you gentlemen for fabulous quarter. I appreciate it.

Daniel Moorhead

Thank you very much.

Ken Jones

My question really, when I listen to the political discussions around the American opioid epidemic, I don't hear any discussion of the nondrug alternatives. And I'm curious if there's been any thoughts about promoting this within the general public and political spheres.

Thomas Sandgaard

Yes, it's actually something we discuss frequently. Obviously, we look at it as when you - it's pretty textbook in terms of how you market your product, in this case, the NexWave. And what we are finding is that the only factor that really decides or determines if a perception is written, because that's what really matters, up until that point, it's only an interesting topic. But once a prescription is written, then we are able to bill forward. We're able to help the patient with the product, obviously. And in order to drive that prescription, it is, for the most, face-to-face encounter between a physician and a sales representative from our company. And the better we equip those sales reps, the better material they have and the better story they have to get in the door with - in this case, the fact that opioids are a problem, it's a problem for the physicians as well from a state level and from all kinds of angles. They're being pounded to try to mitigate this problem. And we offer - we obviously support our sales reps to be able to have a message that resonates with that. But in terms of political influence or in other ways, maybe we could potentially do advertising in various media, it could be online, it could be TV, radio, et cetera. There are many different avenues that are really helpful for certain type of products in certain markets. But this particular market here, we get the most bang for the buck by supporting our sales reps to have that face-to-face encounter with the physician.

Ken Jones

Thank you.

Operator

[Operator Instructions] Our next question comes from Mike Crawford. Please go ahead with your question.

Michael Crawford

Thanks. Also calling from B. Riley FBR. And Thomas and Dan, thanks for returning capital to shareholders with the special dividend and with the buyback. But with your additional free cash flow generation, I'm just curious how you look at investing into the business, should you be able to proceed with the Blood Volume Monitor product you invented, Thomas.

Thomas Sandgaard

Right. So obviously we have a decent cash cushion now relative to the company's SG&A expenses. That's really what - how I look at it. It's nearly a 1-year run rate of SG&A we have accumulated. And with that, we are able to make some minor investments in further developing the organization and the initiatives that are needed for in that space. For a full-blown launch, we may have to look at outside capital. And there are a number of different strategic options for that division that we'll be looking at because I believe - as we get closer to regulatory approvals and with the patent obviously, with that protection that I'm really excited about, will that be a - we need to put things in place, so we can develop this. It's hard to stay if we will need outside capital. But it's a possibility. But there might also be other strategic options we will consider.

Michael Crawford

Okay, great. And just a follow-up to that, let's say that if you get the approval to market this in Europe and the U.S., then would you sit down to decide whether to proceed? Or is that already given that you're pretty sure you will proceed if you get approval?

Thomas Sandgaard

I'm not sure proceed with - I may have missed something...

Michael Crawford

What's going out to invest into the channel and your operations, to go out and actually market this new product on top of the NexWave?

Thomas Sandgaard

Well, obviously as an organization, I believe we have pretty good experiences with being cost-efficient and not spending too much money. But it is obviously an area, when we talk about monitoring in operating rooms and to take the internal bleedings in the recovery room. We're talking about an area that's very expensive. These devices are also very expensive. So there's a lot of money at stake here. If we do it right, revenues can totally overshadow what we're currently doing with our pain management division and the gross profit margins. It looks like that it could be even better. But that comes with a lot of initial investments, developing what we call key opinion leaders. We could also potentially talk strategic partnerships with some larger medical device entities. And then we might look at having to acquire maybe a sales organization to also have our own sales channel. There's a lot of things we need to look at. But with the patent and as we're getting closer to the approvals, as you mentioned, we're now at a point where we are - we're beginning to dive into that whole space and looking at the strategic options.

Michael Crawford

Okay, great. Well, we look forward to seeing how that in folds. Thank you very much.

Thomas Sandgaard

Thank you. It's exciting.

Operator

[Operator Instructions] And at this time, in showing no additional questions, I'd like to end today's question-and-answer session and turn the conference call back over to management for any closing remarks.

Thomas Sandgaard

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

Operator

Ladies and gentlemen, that does conclude today's conference call. We thank you for joining today's presentation. You may now disconnect your lines.