Zynex Inc (ZYXI) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Zynex, Inc., first-quarter 2013 earnings conference call. As a reminder, for the Q&A session questions can only be submitted 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 involves 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 on Form 10-K for the year ended December 31, 2012. 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. As a reminder, today's call is being recorded.

It is now my pleasure to turn the call over to Mr. Thomas Sandgaard, CEO. Please go ahead, sir.

Good morning. My name is Thomas Sandgaard, President and CEO of Zynex. Welcome to our first-quarter 2013 conference call. This morning we will review our first-quarter results and then take questions.

To start, I would like to provide an overview of our business. Our business manufactures, develops, and sells noninvasive medical devices through five wholly and majority owned subsidiaries.

Zynex Medical has been in existence for 16 years to design, manufacture, and market FDA-cleared medical devices for the electrotherapy market through the utilization of 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 with traditional therapies alone.

Our products require a physician's prescription before they can be dispensed in the US. We consider the physician's prescription an 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 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, such as our NexWave, that are 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.

Zynex NeuroDiagnostics was formed to develop and market EMG, EEG, sleep pattern, auditory, and nerve conductivity neurological diagnosis devices and is currently in a development stage and does not yet produce significant revenue. Actual 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 also products acquired through the acquisition of NeuroDyne Medical in March 2012 for the evaluation and treatment of neurological and neuromuscular disorders, as well as education and research.

We also distribute EEG products from other manufacturers. Our activities within this subsidiary to date include R&D and sales and marketing to further develop and commercialize newer diagnostics products. We believe the size of this available market for this type of products is around $900 million.

Then Zynex Monitoring Solutions, that was formed to develop and market medical devices for cardiac monitoring and is currently in the development stage and does not produce any revenue yet. We have developed a noninvasive device for monitoring central blood volume for use in operating rooms, detecting blood loss during surgery, and detecting internal bleeding in the recovery room. The 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 trials. We believe the size of this available market in the US alone could be as much as $3 billion.

Zynex Europe was formed to further expand our international sales efforts, and our expectation is that we can serve international customers better with this initiative. During the fourth quarter of 2012 we formed our fifth subsidiary, Zynex Billing and Consulting, to engage in medical billing and consulting services for private practices and hospitals.

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

Thank you, Thomas. 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 the first-quarter 2013 financial results, first-quarter 2013 net revenue was $7.668 million as compared to $8.944 million for the same period in 2012, representing a 14% decrease. The majority of net revenue for Zynex was derived from our Zynex Medical electrotherapy subsidiary; however we generated a small amount from our Zynex NeuroDiagnostics subsidiary.

The decline our net revenue is a direct result of the decrease in prescriptions or orders that we received during the quarter for products in our Zynex Medical subsidiary. 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 electorates and other consumable supplies for our products.

Our revenue mix for the first quarter represented primarily all products from Zynex Medical electrotherapy subsidiary and reflected 49% for device sales and rentals, and 51% for recurring consumable supplies. This compares to a net revenue mix of 57% for device sales and rentals, and 43% for recurring consumable supplies for the first quarter of 2012.

Our Zynex Medical revenue is reported net after adjustments for estimated insurance company reimbursement deductions, known as contractual adjustments. These contractual adjustments affect our collectibility and impact the amount of net revenue we are able to report.

The insurance reimbursement policies of third-party payers also dictate whether our products will be purchased or rented. Therefore our 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.

Our gross profit for the first quarter was $5.477 million or 71% of net revenue, as compared to $7.131 million or 80% of net revenue for the same period in 2012. Our gross profit margins will incur fluctuations as our revenue volume increases or decreases and as insurance reimbursement trends and our revenue mix changes. Our first quarter represented a lower sales volume, which contributed to a decline in our margins as we had less net revenue to cover our fixed costs and manufacturing.

Our SG&A expenses for the first quarter decreased to $5.833 million or 76% of net revenue, from $6.645 million or 74% of net revenue for 2012. Decreases in the Company's SG&A expenses during the first quarter were properly attributable to sales and marketing, specifically for sales commissions, which is variable based on the decrease in net revenue and reductions in salesforce headcount.

The Company reported a first-quarter loss from operations of $356,000, loss before income taxes of $492,000, and net loss of $304,000 or $0.01 per share, versus the first-quarter 2012 income from operations of $486,000, income before income taxes of $393,000, and net income of $320,000 or a $0.01 income per share. I will now turn the call back to Thomas.

Thank you, Anthony. I would like to highlight a few things from our first quarter. Our top line decreased 14% as compared to the prior-year quarter. During the first quarter, we encountered industry challenges specifically related to healthcare reform and business seasonality that affected demand in our core business, Zynex Medical. We believe uncertainty exists at the medical practitioner level related to changes in healthcare, which has delayed orders for our Zynex Medical business.

In an effort to minimize the impact of these challenges we made modifications to our direct salesforce within our Zynex Medical business, including reducing the number of nonperforming sales employees, modifying sales compensation packages, and increased the level of salesforce training as it relates to healthcare reform. These efforts helped reduce our overall selling, general, and administrative costs for the first quarter of 2013. It actually resulted in a $1.199 million expense savings over the fourth quarter of 2012, but also impacted the amount of orders that we received, contributing to a decrease in net revenue for the period.

The first quarter of every year also presents a high degree of seasonality due to insurance resets of patients' deductibles, which tends to slow reimbursement in orders for Zynex Medical business. We continue to view the electrotherapy market as a stable and mature business where we are competitively positioned to grow market share. We believe the adjustments made during the first quarter will allow us to achieve profitability for the full year ended December 31 of this year.

Our SG&A expenses were 76% of net revenue for the first quarter of 2013 as compared to 74% for the same period in 2012. Our actual SG&A expenses declined by $812,000 in the comparable period of last year and declined by approximately $1.2 million in the fourth quarter of 2012 as we continued to evaluate and tighten our operating costs.

We made conscious investments in our NeuroDiagnostics subsidiary for sales and marketing and began aggressively expanding our salesforce there. We also made investments in our Monitoring Solutions subsidiary to continue the development of our blood volume monitor, which includes clinical trials. Total SG&A expenses incurred in our NeuroDiagnostics and Monitoring Solutions subsidiaries represented approximately $677,000 for the quarter.

We strive to generate positive cash and profitability. During the first quarter of 2013 we recorded a net loss of $0.01 a share. We adjusted our revenue and EPS guidance down for 2013 as we are closely working to overcome challenges presented by healthcare reform.

Since the last -- throughout the last several years we have focused on building our core Zynex Medical revenue base through additions to our salesforce, and have grown revenues at an approximate compound annual growth rate of just over 50%. During the latter part of 2012, we made specific cost reductions to focus on profitability and free cash flow, and continue to evaluate make modifications during the first quarter of 2013 to ensure profitability for future quarters.

Our blood volume monitor being developed in our Monitoring subsidiary continues to make progress, and we are participating in clinical trials expected to run 2013. These clinical trials are being used to gather data to further validate the algorithm contained within the device as well as provide substantiation for 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 blood loss during surgery and internal bleeding during recovery. The device is intended to serve what we believe 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 further clinical evaluations a 2013 release date is possible, although we cannot provide any guarantees.

We continue to gain revenue traction in our NeuroDiagnostics subsidiary. This is a result of the ongoing efforts to build this subsidiary and represents both domestic and international sales.

We've begun aggressively expanding our NeuroDiagnostics salesforce to more rapidly penetrate the available market. The Company now has 12 full-time sales reps marketing patient solutions in its NeuroDiagnostics division.

During the first quarter of 2013 we signed a sales and marketing agreement with Neurovirtual to distribute EEG and sleep diagnostic products in the US. We believe that we will see rapid growth of the revenue within our NeuroDiagnostics division this year.

Our subsidiaries Zynex NeuroDiagnostics and Monitoring Solutions provide a broader platform in 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.

During the fourth quarter of 2012 we started the new subsidiary, Zynex Billing and Consulting, to leverage our billing and reimbursement core competency. This subsidiary provides insurance billing and consulting for private practices and hospitals. We have already begun to see revenue contribution this division and expect it to grow further in the remainder of the year.

We are also looking at potential acquisitions to more rapidly penetrate our existing and possibly new markets. And finally, we are executing our business plan with the goal to reach a more recognized stock exchange such as American Stock Exchange or NASDAQ.

I appreciate your interest in Zynex and participation in our earnings call, and we will now take questions. Once again, if you have questions, please use the webcast interface.

I will be reading the question, and either Thomas or I will be responding. First question. Can you comment on the top-line slowdown and your future growth expectations, and discuss pricing and reimbursement trends further?

This is Thomas. A combination of reimbursement changes, which is obviously external, and also restructuring of our salesforce, which is an internal issue, that combination resulted in a decline in revenue for the first quarter. The industry in general is also experiencing changes, and I believe we have preemptively put us in a position to continue to be a strong player in this market.

While we still anticipate to see growth in this segment, we're dedicating a lot of resources to accelerate growth in now our other subsidiaries.

Second question. Is the total electrotherapy market dealing with the same issues?

As I just mentioned earlier, they certainly are and reimbursement is becoming more difficult. So while we are adding more products to our lineup, we are consciously aligning our infrastructure and cost base to adapt to this new environment. The main goal for us is to continue to drive cash flow and profitability.

Third question. Do you believe you will have sufficient room on your current line of credit for the remainder of the year?

This is Anthony. Yes, as we have discussed in this call, the first quarter has traditional pressures of seasonality with insurance resets which, because of some of the reform have extended those a little bit, which places more pressure on our line of credit. However with the plans that management has in place, including cost reductions and expectations of orders and growth, we see that it is sufficient through the rest of this year.

Please expand on the Neurovirtual agreement? And what is expected by adding sales reps in your NeuroDiagnostics business?

Let's see. Under the agreement with Neurovirtual, we distribute products from them in the US under an exclusive agreement; and we have added about a dozen very seasoned sales reps to drive the growth in this area.

Brain monitoring, EEG, and sleep diagnostics, these are very well-established markets with a limited number of suppliers, and we actually expect to establish a fairly strong position in a relatively short period of time. Ultimately this will add revenue that is not dependent on insurance reimbursements. And long-term therefore we will be creating a stronger platform for the Company.

In 2014, which of the other divisions beyond Zynex Medical should make a significant contribution to operations, and why?

Let's see, 2014, that's less than a year away. Certainly we see the acceleration mostly come from the NeuroDiagnostics division. We should probably also expect just a slow, steady growth in our Billing and Consulting division.

While you say that, that the Monitoring Solutions for the development of the blood volume monitor and products that derive from that technology may be not speculative, but it's one of those things that we may have great technology but you never know how well the market will accept it. The rewards will be great if it takes off; but that's one of those seeds we have planted that are certainly long-term.

So NeuroDiagnostics, probably where we will see the most significant growth in terms of the absolute dollar amount, while Billing & Consulting will just continue to solidify the base of revenue that we have and add to our free cash flow.

Well, that was the end of the questions for this earnings call. I appreciate everybody participating in the first-quarter earnings call and thank you very much.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.