Zynex Inc (ZYXI) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Zynex, Inc. second quarter 2012 earnings conference call. Questions for today's call may only be submitted by using the webcast interface. In addition, today's conference is being recorded.

Statements made in this presentation include financial estimates and forward-looking statements that are not historical facts. Each of these statements and forward-looking statements involves risks and uncertainties. These statements 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 some information or the reliability of such assumptions. Accordingly, actual revenues and expenditures may vary significantly from this 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 of 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, 2011.

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 obligation to modify, amend, update, alter or change the estimates contained herein.

And now it is my pleasure to turn the conference over to Mr. Thomas Sandgaard, CEO. Please go ahead, sir.

Good morning. My name is Thomas Sandgaard. I am the President and CEO of Zynex. Welcome to our second quarter 2012 conference call.

This morning, we will review our second-quarter results and then take questions. As a reminder, questions will only be fielded from the webcast interface. If you have called in on the 800 number, you will be in listen-only mode.

I would like to start with an overview of our business. Our business manufactures, develops and sells noninvasive medical devices through four wholly-owned subsidiaries. Zynex Medical has been in existence for 16 years to design, manufacture and market FDA cleared medical devices for the electrotherapy market utilizing noninvasive muscle stimulation, electromyography technology, Interferential Current, and Transcutaneous Electrical Nerve Stimulation, or TENS devices. Our devices are intended for pain management to reduce reliance on drugs and medications and provide rehabilitation and increased mobility, all intended to be patient-friendly and designed for home use.

The products are cost-effective when compared to traditional physical therapy, deemed as an alternative to medication, and often result in better mobility, less pain and increased potential for a patient to return to work and a fuller life significantly earlier than the traditional therapies alone. Our products require a physician's prescription, because -- before they can be dispensed in the US.

We consider the physician's prescription, and order and it is on that basis that we provide the product to the patient and either bill the patient directly or the patient's private insurance or government insurer, Medicare or Medicaid, for payment.

We have the ability to accept any type of insurance, including government and workers compensation and believe we have established a sophisticated billing and reimbursement department to maximize reimbursements received from third-party payers.

We manufacture electrotherapy products, including the IF8000, IF8100, the TruWave, the E-Wave, the TruWave Plus and the next generation E-STIM device, the NexWave. But are all marketed to physicians and therapists through our expanding sales force. We believe the size of this available market in the US is just over $500 million annually.

Zynex NeuroDiagnostics, our second subsidiary, was formed to develop and market EMG, EEG, sleep pattern, auditory and nerve conductivity and neurological diagnosis devices and is currently in a development stage and does not yet produce significant revenue. Active products in this subsidiary include our Zynex developed NeuroMove, which is primarily used for stroke rehabilitation. This treatment enables neuroplasticity in the patient's brain, and products acquired through the acquisition of NeuroDyne in March 2012 for the evaluation and treatment of neurological and neuromuscular disorders as well as education and research. Our activities within this subsidiary to date includes research and development, sales and marketing to further develop and commercialize neurodiagnostic products. We believe the size of this available market for these type of products is around $900 million.

Then Zynex Monitoring Solutions, formed to develop and market medical devices for cardiac monitoring, is currently in the development stage and does not yet produce any revenue. We have developed a noninvasive device for monitoring central blood volume for use in operating rooms detecting excessive blood loss during surgery or detecting internal bleeding in the recovery room. A utility patent has been filed for this unique application which could serve a currently unmet need in the market for safer surgeries and safer monitoring of patients during recovery.

We are excited about our blood volume monitor, as we now have a working prototype going through clinical evaluations. We believe the size of this available market in the US will be approximately $3 billion.

And then, finally, Zynex Europe is our newest subsidiary, and was formed the first quarter of 2012. This subsidiary was established to further expand our international sales efforts and our expectation is to serve international customers better with this initiative.

I will now turn the call over to Anthony Scalese, our CFO, to review our second-quarter 2012 financial results.

Thank you, Thomas. I assume that most of you have seen our earnings news that was released this morning. If you do not have a copy of our earnings release, you can access one on the web on the SEC's EDGAR site.

As an overview of our second-quarter and year-to-date financial results, we posted net revenue for the second quarter 2012 of $10.026 million compared to net revenue of $8.395 million for the second quarter of 2011, which represents a 19% increase. Year-to-date 2012 net revenue was $18.970 million as compared to $15.028 million for the same period in 2011, representing a 26% increase. The majority of net revenue for Zynex was derived from our Zynex Medical electrotherapy subsidiary. However, we generated a small amount for our Zynex NeuroDiagnostics subsidiary, including revenue from our latest acquisition during the second quarter and year-to-date 2012.

The growth in our net revenue is a direct result of the increase of prescriptions or orders that we received during the first and second quarters for products in our Zynex Medical subsidiary and continued expansion of our geographic sales reach through the addition of domestic electrotherapy industry sales professionals. Orders for our Zynex Medical products lead to rental income, which we anticipate receiving on a recurring basis over the time patients use our products, direct sales of our products and corresponding recurring sales of electrodes and other consumable supplies for our products.

Our revenue mix for the second quarter 2012 represented primarily all products from our Zynex Medical electrotherapy subsidiary and reflected 36% for device sales, 24% for rentals and 40% for our consumable supplies. This compares to a net revenue mix of 34% device sales, 29% rental and 37% consumable supplies for the second quarter of 2011.

Our electrotherapy products are subject to reimbursement policies of third-party payers, which typically dictate whether our products will be purchased or rented. Therefore, revenue mix of net rental and net sales revenue may fluctuate from time to time. However, we strive to increase the total number of units in the field regardless of whether they are rented or purchased, as more units in the field represent a bigger market and provide additional opportunity for us to sell more of our recurring consumable supplies.

For the second quarter 2012, our consumable supplies increased 29% over second quarter 2011.

Our gross profit for the second quarter and year-to-date 2012 was $8.240 million or 82% of net revenue and $15.371 million or 81% of net revenue as compared to $6.668 million or 79% of net revenue and $11.857 million or 79% of net revenue for the second and year-to-date 2011.

Our gross profit margins will incur fluctuations as our revenue volume increases and as insurance reimbursement trends and our revenue mix changes. During the three-month period ended June 30, 2012, we experienced a 19% increase in total net revenue over the comparable period in 2011. The total net revenue increase for the period positively impacted our gross profit percentage as we had incremental net revenue that exceeded fixed costs of manufacturing. Our revenue mix for the second quarter of 2012 positively impacted our gross margins as we experienced an increase in consumable supplies, which typically yield a higher gross profit margin, and our product sales included a large portion of our next-generation TENS units, the NexWave, which carries a lower material cost than our previous iteration of TENS devices.

Our SG&A expenses for the second quarter and year-to-date 2012 increased to $7.308 million or 73% of net revenue and $13.953 million or 74% of net revenue from $5.769 million or 69% of net revenue, and $11.097 million or 74% of net revenue for the second quarter and year-to-date 2011.

Increases in the Company's SG&A expenses during the three- and six-month periods of 2012 were primarily attributable to sales and marketing, specifically for sales commissions based on the increase in net revenue, and investments made to expand the Company's Zynex Medical field sales force.

The Company generated a second-quarter 2012 income from operations of $932,000, income before income tax of $844,000, and net income of $473,000 or $0.02 per share versus the second quarter of 2011 income from operations of $899,000, income before income taxes of $822,000 and net income of $484,000 or $0.02 per share.

The Company generated a 2012 year-to-date income from operations of $1.418 million, income before income taxes of $1.237 million and net income of $793,000 or $0.03 per diluted share. This compares to a 2011 year-to-date income from operations of $760,000, income before income tax of $625,000 and a net income of $374,000 or $0.01 per share.

I will now turn the call back to Thomas.

Thank you, Anthony. I would like to highlight a few things from our second quarter of 2012. First off, we are pleased with our continued top-line growth as we achieved it during the second quarter of 2012. The revenue was driven primarily by the increase in prescriptions on orders received during the quarter, and represented primarily business conducted on our Zynex Medical subsidiary.

Our SG&A expenses for the second quarter of 2012 were as expected. We incurred the biggest increase in SG&A in the sales and marketing area, which corresponds with the increasing number of orders we received and the continued geographic expansion of field sales representatives.

These expenses were primarily incurred in our Zynex Medical subsidiary, but we made conscious investments in our NeuroDiagnostics subsidiary for product development and sales and marketing activities, and we made investments in our Monitoring Solutions subsidiary to continue the development of our blood volume monitor which also includes clinical trials.

Total SG&A expenses incurred in these two divisions represented approximately $400,000 for the quarter and $700,000 for the year. We strive to generate positive cash and profitability every quarter. During the second quarter of 2012, we reported strong earnings and $0.02 a share net income per diluted share.

We again confirm our initial financial outlook for 2012 to report total net revenue of between $38 million and $40 million, and net income per diluted share of between $0.06 and $0.08 a share. This guidance will be revised on a quarterly basis as necessary.

Our blood volume monitor being developed in our Monitoring Solutions subsidiary continues to make progress, and we are participating in clinical trials expected to run through the remainder of 2012. These clinical trials are being used to gather data to further validate the algorithm contained within our device as well as provide substantiation for an FDA submission and international regulatory clearance.

Our blood volume monitor is a noninvasive medical device for monitoring central blood volume that will be used in operating and recovery rooms to detect excessive blood loss during surgery or internal bleeding during recovery. The device is intended to serve what we believe as -- is a currently unmet need in the market for safer surgeries and safer monitoring of patients during recovery. We anticipate that if we continue to have success with these further clinical studies, a 2013 release date is possible, although we cannot provide any guarantees.

We continue to gain revenue traction in our NeuroDiagnostics subsidiary, which included some contribution from our latest acquisition of NeuroDyne Medical. This is a result of our previous effort to put into this subsidiary and represents both domestic and international sales. We have begun further expanding our NeuroDiagnostics sales force to more rapidly penetrate the available market.

Our two subsidiaries, NeuroDiagnostics and Monitoring Solutions, provide a broader growth platform for the Company. It also helps diversify our product lines and gives us access to larger markets. We will continue to develop these subsidiaries in future periods

Concurrent with the focus on the new subsidiaries, we continue to expand our sales force for our core electrotherapy or Zynex Medical products. Revenue growth in this subsidiary is reliant on geographic expansion as we primarily conduct business with local doctors and clinicians.

Therefore, we continue to add direct sales force in the second quarter of 2012 to add to our existing sales force. We now have well over 200 direct or independent field sales representatives in over 38 states, versus approximately just over 100 sales representatives one year ago.

Our geographic expansion of sales reps allow us to enter parts of the US that we have not yet penetrated. This should lead to increased -- revenue increases, including recurring consumable supplies as more units in the field represent more demand for the consumable supplies.

For illustration, a sales rep typically covers less than a 30-mile radius from their home, so, obviously, there are many territories throughout the country that are still untapped.

We are also looking at expanding our product line within our Zynex Medical subsidiary, which will include products that already have insurance coverage. We believe this helps us to continue to diversify our product lines, generate additional revenue and provide competitive advantages with existing clinics. We expect to release new products during 2012.

Finally, we're executing our business plan with the goal to reach a more recognized exchange, such as the American Stock Exchange or NASDAQ.

In conclusion, we are pleased with our financial results for the second quarter and year-to-date 2012. For the remainder of the year, we'll continue to execute our plan to drive revenue, profits and cash flow in our Zynex Medical subsidiary and continue to invest money in our NeuroDiagnostics and Monitoring Solutions subsidiaries to provide future growth of the Zynex.

We believe we will begin to see revenue growth within our NeuroDiagnostics subsidiary during 2012 and we'll also continue to work diligently on our non-invasive blood volume monitor in our Monitoring Solutions subsidiary. We believe that we have the right team and structure in place to capitalize on our opportunities.

I appreciate your interest and Zynex and participation on earnings call. And we will now take questions.

Once again, if you have a question, please use the webcast interface.

This is Anthony. I will be reading the questions, and then we will be responding.

The first question is -- can you provide a general idea of how many patients have been enrolled for blood volume monitor trials running during 2012?

At this point, we cannot really comment on exactly how many patients, but I can speak to that we will accelerate the number of clinical trials throughout the rest of 2012 and pretty much have back-to-back clinical studies in several parts of the world through the rest of the year.

The next question -- what was the outcome from the shareholder derivative lawsuit Hatch hearing that was scheduled for June 27, 2012?

Let's see. At our last earnings call, we mentioned that the derivative lawsuit was already settled, and we can obviously confirm that, and has since been approved by the court. So it's now behind us.

Can you provide an update on your Q1 acquisition of NeuroDyne?

Yes, I am pleased to announce that the acquisition is now at a point where we can say it is fully integrated. And we're at a point where we have just recently closed down the Boston facility and we have begun hiring sales and marketing -- or, additional sales and marketing personnel out of our Colorado facility.

We have also hired several engineers to further develop both hardware and software and expand on the product line we acquired there. And, obviously, on the back end, both the quality and the manufacturing of the NeuroDyne product line has now been streamlined and is up and running at the same level to -- compared to the other product lines we have in the other divisions.

Next question -- are you concerned with the recent Supreme Court decision regarding health care? And, how will it impact the business?

Well, in terms of Obamacare, we'll probably see more -- if that continues as it looks right now, we'll probably see more patients being covered by some type of insurance. We could probably also expect more price pressure, and obviously we will continue to experience pressure on products like TENS in terms of coverage from, for instance, Medicare.

But, overall, we actually expect it, at least in the short and medium term, to only have a neutral impact on the Company.

Next question -- how is Zynex responding to the negative CMS decision memo for TENS therapy that was issued June 8, 2012, and how will that impact future revenues?

Medicare is, fortunately, a very small portion of our total business. So, again, short-term, I don't expect it to have any significant impact on our revenue, and Medicare's decision was for an isolated indication for use as well.

Next question -- why has the switch to the HIPAA 5010 caused difficulties in Zynex receiving payments from third-party payers? And, is this expected to be an ongoing issue for Zynex?

The conversion to 5010 is in conjunction with the expansion of the additional diagnosis codes ICD-9 to ICD-10, and it really merely is the electronic claim submission. What Zynex has witnessed with this is that the intermediary which processes claims and certain carriers had a hard time with some of the electronic transmission and processing, and so that meant some claims got dropped; some claims were artificially denied, so on and so forth.

We believe that we have it identified and certainly have been working with the intermediary and certain carriers to get that rectified. We do not believe that it is -- have any real long-term impact. There is, however, we will need to be able to go back. We've identified those claims, and then collect on those again that were missed by the carriers or the core submission by the intermediary.

Next question -- how many sales reps does Zynex have at the current time, and are there plans for additional reps being hired in 2012?

Let's see. At this point, we have between 200 and 300 sales reps and patient centers deployed across the country, and we will -- we have plans to continue to hire highly qualified sales reps very aggressively throughout the rest of the year.

Next question -- how much borrowing capacity do you have under the [Durell] line at the end of Q2, and what is your plan relative to cash management?

The total Durell line is $7 million. So we had a little over $2 million available for that line. That obviously fluctuates up and down. We expect it to be sufficient for us with our current business needs. As the growth continues and we continue to manage working capital, specifically inventory, which is driving some of the working capital requirements for us, we do not believe will be an issue moving forward.

It looks like we have answered all the questions that have come in at this point in time. So we will now conclude the earnings call, and I would like to thank everybody for participating and for everybody's interest in Zynex. Thank you.

Thank you, and again, ladies and gentlemen, that does conclude our conference. We thank you all for your participation.