Zynex Inc (ZYXI) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Zynex first-quarter 2014 earnings conference call and webcast. Today's conference is being recorded. 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 on present circumstances, information current 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 representation 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 obligation 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.

Good morning. My name is Thomas Sandgaard, President and CEO of Zynex, and welcome to our first-quarter 2014 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 18 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 in 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 and 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 health insurer for payment.

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

We manufacture electro therapy products such as our newest generation e-stim device, the NexWave, and our Zynex-developed NeuroMove, which is primarily used for stroke rehabilitation. It is a treatment that enables neuroplasticity in the patient's brain.

These products are marketed to physicians and therapists through our sales force and at the end of 2013 we commenced operation of an in-house non-steroidal compound pharmacy specializing in topical and transdermal pain cream. These pharmacy products complement our electrotherapy products and are also marketed to physicians and sold through our existing sales force.

Another division, Zynex NeuroDiagnostics, was formed to develop and market EMG, EEG, sleep pattern, and nerve conductivity devices and currently [we have two] products in this subsidiary include our NeuroDynamics products, which is used for the evaluation and treatment of neurological and neuromuscular disorders as well as used in education and research.

We recently reduced spending in this division significantly to focus more on our TENS and pain cream businesses and reduced the overall burn rate for the Company with this initiative.

Zynex Monitoring Solutions was formed to develop and market medical devices for cardiac monitoring. It is currently in the development stage and does not yet produce any revenue.

We have developed a noninvasive device for monitoring [sensor] blood volume for use in operating rooms detecting blood loss during surgery and detecting internal bleeding in the recovery room. A utility plan 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 have limited our investment in this division but continue to be excited about the potential for this product. As cash flow permits, we will continue our investment in clinical trials in this division.

And Zynex International was formed to further expand our international sales efforts. Our expectation is to serve international customers better with this initiative and, while our international sales are still limited, we are making progress. Our NeuroMove devices were approved by the SFDA in China and NeuroMove and NexWave was also approved by the FDA equivalent in Russia.

Zynex Billing & Consulting, this division was formed to engage in medical billing and consulting services for doctors? offices and hospitals and generates service-based revenue for us.

I will now turn the call over to Anthony Scalese, our CFO, to review our first-quarter 2014 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 our first-quarter financial results, our Q1 net revenue was $3.167 million as compared to $7.668 million for the first quarter of 2013, representing a 59% decrease. The majority of net revenue for Zynex was derived from our Zynex Medical electrotherapy products; however, we generated approximately 4% from the sale of our pain creams and a small amount from our Zynex NeuroDiagnostics and Zynex Billing & Consulting subsidiaries.

As we previously noted, during 2013 industry challenges related to Health Care Reform affected the market for our Zynex Medical electrotherapy business. Specifically because of coverage of reimbursement changes for durable medical equipment uncertainty existed at the medical practitioner level, causing a delay in decline and demand for our electrotherapy products. We have also experienced coverage and reimbursement challenges from government and third-party payers related to certain medical indications for our Zynex Medical electrotherapy products.

The first quarter of every year is also impacted by insurance reimbursement seasonality in which patients' insurance plan deductibles reset, causing a decline in our revenue. 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 first quarter 2014 represented primarily all products from our Zynex Medical electrotherapy subsidiary and reflect 58% per device sales and rentals, 38% for recurring consumable supplies, and 4% for topical pain creams or pharmacy. This compares to a net revenue mix of 49% for device sales and rentals and 51% for recurring consumable supplies for the first quarter of 2013.

Our Zynex Medical revenue is reported net after adjustments for estimated insurance company reimbursement deductions known as contractual adjustments. These contractual adjustments affect our collectability 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/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 provide additional opportunity for us to sell more of our recurring consumable supplies.

Our gross profit for the first quarter of 2014 was $2.170 million or 69% of net revenue as compared to $5.477 million or 71% of net revenue for the first quarter of 2013. The decrease in our gross profit percentage was primarily a result of lower sales volume for the period as the Company had less net revenue to cover manufacturing and fixed costs. Our gross profit margins will incur fluctuations as our revenue volume changes and as insurance reimbursement trends and our revenue mix changes.

The reported selling, general, and administrative expenses of $3.456 million or 109% of net revenue for the first quarter of 2014 as compared to $5.839 million or 76% of net revenue for the first quarter of 2013. Decreases in our SG&A expenses during the first quarter of 2014 as compared to the first quarter of 2013 were primarily attributable to lower sales commission based on the decrease in orders in net revenue and the reduction in headcount and other fixed expenses made during the latter part of 2013 to adjust to our current demands.

We generated a first-quarter 2014 loss from operations of $1.286 million, loss before income taxes of $1.444 million, and net loss of $1.430 million or $0.05 per share versus a first-quarter 2013 loss from operations of $362,000, loss before income taxes of $492,000, and net loss of $304,000 or $0.01 per share.

Our cash and line of credit balance as of March 31, 2014 was $189,000 and $5.608 million respectively as compared to our cash line of credit balance as of March 31, 2013 of $681,000 and $6.602 million. We are currently facing liquidity challenge due to the decline in our revenue and lack of available borrowing under our revolving line of credit.

We are currently exploring ways to improve our liquidity, including raising capital from both debt and equity sources and are in discussions with our lender with respect to waivers and relief under the credit facility. We are working diligently to resolve these challenges; however, we can make no assurance that we will be able to improve our liquidity.

For a more robust discussions, please go to the SEC's EDGAR site and refer to our first-quarter 10-Q which will be filed today. I will now turn the call back to Thomas.

Thank you, Anthony. I would like to highlight a few things from our first quarter 2014.

As we have previously discussed, during 2013 we encountered industry challenges related to Health Care Reform that have affected our electrotherapy business. That resulted in a decline in our revenues and a net loss for 2013 that continued into the first quarter of 2014.

So our turnaround appears to have taken about five quarters starting with a significant decline in revenue in the middle of Q1 last year and now having stabilized the past few months -- since December of last year.

We aggressively reduced our expenses during 2013 and have recently made additional expense reductions, which occurred throughout the beginning of the second quarter to just about now having reached a level that is scaled right for our current business level.

However, while our net revenue declined in the first three months of 2014 by 59% as compared to the first three months of 2013, it declined just over 5% as compared sequentially to the fourth quarter of 2013, reflecting a stabilization of our electrotherapy business. The leveling out of our core business can be attributed to changes we made to streamline our sales process and introduce new products into our existing sales channels. These changes make it easier for physicians to prescribe our products.

Moving beyond to cost-cutting measures we completed during 2013 and onto just recently, we are now focused on capitalizing on new opportunities. During December of 2013 we commenced operations for a non-steroidal compound pharmacy with our Zynex Medical division, trading a complete suite of conservative treatments for pain management in the market, offering topical and transdermal pain creams in complement with our existing electrotherapy pain management products.

Our compound pharmacy is licensed with the DEA and has obtained state licenses in Colorado and 36 other states. We are pursuing licenses in all 50 states this year and our compound pharmacy is primarily focused on prescription pain creams which incorporate between two to eight different active pharmaceutical ingredients to alleviate pain in localized areas, resulting in minimal systemic absorption and thus minimal side effects.

The pain creams are individualized for each patient's unique pain symptoms, utilizing the multiple mechanisms of actions of the active pharmaceuticals. These varying pain creams provide pain relief for a wide range of ailments from anti-inflammatory pain or from neuropathic pain, general pain, and headache pain.

The medications are incorporated into and pulled through the skin using the latest in transdermal emulsions. The pain creams, as well as our scar and wound creams, typically require a prescription and are billed through the patient's insurance.

Our compound pharmacy allows us to leverage the existing electrotherapy sales force, servicing the same channel with pain creams. This creates a more rounded product portfolio for the Company and a double revenue opportunity with each sales call.

Revenue from the sale of compound pain cream [treats] approximately 4% of total net revenue during the first quarter of 2014. We continued to gain traction in pain cream revenue during April and have almost exceeded our first-quarter revenue in just the first months of the second quarter. The typical pain cream sale cycle includes refills, an element of recurring revenue similar to our electrotherapy products.

In Zynex NeuroDiagnostics, as mentioned earlier, we have significantly reduced our burn rate and are now focused on the products we acquired through the acquisition of NeuroDyne in 2012.

In our Zynex Billing & Consulting division, which is an outsourcing medical billing company for physicians and hospitals, we have been working to continue to win additional contracts to further increase our service-based revenue.

Revenue from our billing and consulting division represented approximately 3% of the total consolidated revenue for the first quarter of this year and we recently signed a contract that could add approximately $0.25 million in annual revenue. We anticipate revenue from this contract beginning in the third quarter of this year.

In our international business, as our NeuroMove and x-ray products received FDA equivalent approval in Russia and the NeuroMove received SFDA approval in China, we intend to focus on these international markets and have added new international distributors in Russia, China, and India and a few other countries with the goal of increasing sales during 2014.

International revenue for the first quarter of 2014 was less than 1% of the total consolidated net revenue. We believe international sales are an attractive growth opportunity over the longer term and further our sales to international distributors and (inaudible) to insurance reimbursement.

In 2013 and continuing through the first quarter this year we made the decision to slow our investments in the blood volume monitor project being developed in our subsidiary. However, we'll continue to evaluate our working prototype in additional clinical evaluations based on our profitability and cash flow during the year.

In conclusion, and as mentioned in our press release this morning, our 2014 operating plan is focused on achieving positive cash flow. We believe the Company's strategic move into topical pain creams will yield higher margins and a shorter collection site than our core electrotherapy products.

With our core electrotherapy business beginning to stabilize, the ability to leverage our existing infrastructure and sales team with our compound pharmacy solution is a key initiative during this year and going forward. We have a plan in place and are working diligently to regain profitability during 2014.

I appreciate your interest in Zynex and participation in our earnings call. We'll now take questions. And once again, if you have a question please use the webcast interface.

This is Anthony. I will be reading the questions as they come in and then either Thomas or I will respond. First question, what were some of the biggest challenges you faced last year?

Well, obviously the decline in TENS orders sparked initially by changes in Medicare reimbursement and we saw fewer doctors wrote prescriptions and late last year and beginning of this year we still saw the decline. The biggest challenge for us was to align costs with the changes in revenue as it was incurring. Fortunately, that has now stabilized.

Second question, what are the biggest changes Zynex has made since last year?

Obviously cost reductions to align our fixed expenses with the revenue we were generating in primarily the Zynex Medical division and NeuroDiagnostics. And in the middle of the second quarter this year just now, we are now seeing -- finally the full impact of those cost reductions.

We are finally getting started with the pharmacy business. As we mentioned previously, it's getting started slower than expected but we are now [focused on stabilizing] for the pharmacy business. We're seeing a significant amount of growth and, as mentioned, April and already here into May we've seen some significant numbers in this division.

Can you offer a possible explanation for the stabilization of your electrotherapy products?

Well, obviously reimbursement for HMOs and what is compensated has not really changed. Only Medicare changed in terms of a few diagnosis codes that they didn't want to cover and Medicare business was already a very small portion of our business and we no longer take Medicare business. And the doctors have stopped writing prescriptions during last year with [now] a known entity.

So the reductions in the overall orders that are described in this industry, the reduction has stopped and that has obviously stabilized. So we are watching how many orders we are getting on a daily basis and for the past five to six months has been a stable number.

What products will you offer from your new pharmacy?

Pain cream, scar creams, wound creams, are the major [projects], all based on individual prescriptions written by doctors and drop shipped to the patients and in many cases with refills attached to it. As this business unit grows, this will provide additional opportunities for eventually adding more products that can be compounded or otherwise are being produced in our compounding pharmacy.

Do you believe you will see an increase in your TENS businesses this year?

Yes, but probably a marginal increase and we see that our TENS now being offered as an adjunct to offering pain creams, it provides our sales force with two conservative treatment options for the doctor. And this is very unique in our industry, so I expect to see a marginal increase in the TENS business partly because we are offering alongside with the pain creams.

Does Zynex International have any plans for further expansion?

Obviously the world market for medical devices like ours is a huge untapped potential and we will keep adding more distributors across the world.

What are your goals for 2014 and beyond?

Okay, that obviously starts with the pharmacy business. It's a $2 billion opportunity in this country. We got started slower than expected but now see significant numbers in April and May. We also see in that area that the margins we are expecting, they are actually better than we planned for originally, so that is very encouraging.

It's also important for us because the payment cycle is a lot faster than we see on DMEs or our TENS business, so that's an important part of the turnaround we are in the middle of right now. We see our TENS business to be flat or with a small growth. We continue to see and expect to see more growth in our billing and consulting business and long-term -- we see that we probably have something we can call a rocket ship and blood [volume on].

It looks very promising. Obviously it's just we've seen what kind of market acceptance there will be if hospitals will apply this to a high degree in hospitals to detect excessive blood loss or internal bleeding. But the potential is huge.

And we also see there is a long-term international opportunity for all of our products. Again, it's something that we are developing very slowly and as our cash position allows. So those are our goals for this year and for the few years to come.

It doesn't appear that there's any further questions.

Okay, well thank you very much to everybody that participated in this earnings call. We will now conclude the earnings call and thank you very much.

That does conclude our conference today. Thank you all for your participation.