Zynex Inc (ZYXI) 2018 Q4 法說會逐字稿

Good day, and welcome to the Zynex 2018 and Fourth Quarter Earnings Conference Call. (Operator Instructions) Certain statements in this release are forward-looking and as such are 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 Factor section of our annual report on Form 10-K for the year ended December 31, 2018, as well as forms 10-Q, 8-K, and 8-K/A, press releases and the company's website. Please note this event is being recorded. I would now like to turn the conference over to Thomas Sandgaard, founder, Chairman and Chief Executive Officer. Please go ahead.

Good afternoon, my name is Thomas Sandgaard, President and CEO of Zynex. Welcome to our fourth quarter 2018 earnings call. As many of you already know, we just uplisted to the NASDAQ stock exchange, and we started trading 2 weeks ago on February 12. It was exciting to ring the opening bell last Thursday. We made significant progress over the last several years. And being listed on NASDAQ will help us communicate our story to a broader audience than before. We're better positioned to attract institutional investors, which should fundamentally enhance the value of our company. 2018 was a great year for our shareholders. We were able to buy back $3.4 million of our common stock. We declared a special $0.07 per share dividend and now the NASDAQ uplisting. I'm excited going into 2019 with the momentum we've created over the past 3 years and would like to thank our employees, business partners and shareholders for their support.

I'm pleased to announce that the fourth quarter was our 10th consecutive quarter with positive net income. Our first quarter revenue was $9.3 million and with a net income of $0.08 per fully diluted share.

Revenue increased 15% compared to the same quarter last year, and we've reported positive net income of $2.6 million.

Revenue for the full year grew 36% over last year to $31.9 million, and 2018 earnings per share was $0.28. Our cash position increased to $10.1 million at the end of 2018 compared to $5.6 million at the end of 2017.

Helped by the strong operating cash flow. The company was able to buy back $3.4 million of our common stock through our stock buyback program, which effectively creates a significant anti-dilutive event, benefiting all shareholders.

We also paid a $2.3 million special dividend to our shareholders in early January of this year. 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, this 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 across the U.S., we grew 35% year-over-year in the fourth quarter, and we see reimbursement continue to be strong for our products. Orders grew 12% between the third and the fourth quarter 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 still not only stable but very healthy and viable.

Our products for pain management and rehabilitation still stand out as some of the best products 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 the rehabilitation markets. During the fourth quarter, we're obtaining the U.S. patent on our noninvasive Blood Volume Monitor. I cannot emphasize on that 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. The first product that noninvasively can indicate loss of blood during surgery, internal bleeding during recovery and has many of the additional applications as well. We hope to eventually announce CE Marking for the European market as well as an FDA clearance. We continue to see great potential in both of our product divisions, our existing revenue-generating area for pain management as well as the huge unmet potential for our Blood Volume Monitor. I will now turn the call over to Dan Moorhead, our CFO.

Thanks, Thomas. First, I'll review our 2018 fourth quarter results. Orders grew 35% year-over-year, which drove net revenue up 15% to $9.3 million from $8.1 million in 2017. Device revenue increased 39% to $1.8 million compared to $1.3 million last year. Supplies revenue increased 10% year-over-year to $7.6 million from $6.9 million. Our gross margins were 80% in the fourth quarter of 2018 versus 81% in 2017. Fourth quarter net income was $2.6 million or $0.08 per diluted share compared to net income of $3.3 million or $0.10 per diluted share in the fourth quarter last year.

Adjusted EBITDA, which is a standard EBITDA calculation, plus an exclusion of noncash, stock-based compensation and is reconciled in our press release was $3.1 million in Q4 compared to $3.9 million last year.

The decrease in net income and adjusted EBITDA year-over-year is primarily due to the investment in our sales force to drive current and future order growth and increase personnel in our headquarters, primarily related to our billing, quality and regulatory departments. We also have increased income tax expense year-over-year due to our profitability over the last 2 years, which used our net operating losses and put us in a taxable position.

Now on to our full year results. Orders grew 33%, and push net revenue up 36% to $31.9 million from $23.4 million in 2017. Product device revenue increased 36% to $6.8 million from $5 million last year. Supplies revenue increased 36% year-over-year to $25.1 million from $18.4 million. The growth in revenue resulted in gross margins of 81% in 2018, up from 79% last year. 2018 net income increased 30% to $9.6 million or $0.28 per diluted share compared to net income of $7.4 million last year. 2018 net income was affected by increased income tax year-over-year of approximately $500,000 due to utilization of our NOLs.

Adjusted EBITDA was $10.9 million, up 15% from $9.5 million last year. We've generated operating cash flows during 2018 of $9.4 million, which was an increase of 14% compared to $8.3 million in 2017. On the balance sheet, as of December 31, 2018, our cash balance was $10.1 million compared to $5.6 million at December 31, 2017, due to strong operating cash flows during 2018, although we did spent $3.4 million on repurchasing our common stock.

Our working capital grew 83% to $8 million compared to $4.4 million as of December 31, 2017. Working capital was affected by the dividend we declared in Q4 of $0.07 per share or $2.3 million. I'll now turn the call back over to Thomas.

Thank you, Dan. Our focus continues to be growing our sales force at a rapid rate in geographic areas, which we don't currently cover to take advantage of the void left in the market by 2 previously very large competitors. Our increased orders due to a larger sales force, combined with strong reimbursement for our products, continues to drive increased revenue and profitability. We estimate our first quarter revenue to come in between $8.3 million and $8.8 million; and EBITDA between $2.2 million and $2.7 million; and earnings per share to end up around $0.05. 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 main competitors. This includes growing our domestic sales force, as well as potential acquisitions of complementary technologies. In summary, we announced yet another great quarter and another great year. 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 and staffing up in business development, et cetera. We're also looking at adding more products to add to that division, including additional product development internally. We will now answer questions from our listeners.

(Operator Instructions) Our first question will come from Jeffrey Cohen of Ladenburg Thalmann.

Can you hear me okay?

Yes.

Yes, we can hear you. Carry on.

Wonderful. So firstly, congrats on the uplisting. I have a handful of questions, so I'll just run right through them in no specific order. So in the fourth quarter, besides the special dividend, were there any shares purchased in the open market?

We did buy some shares in the fourth quarter. And we also bought a few in the first quarter of this year.

It looks like -- we spend about $400,000 in Q4. So that got us to about $3.2 million for the year. And [3.7]...

400,00 shares or dollars?

Dollars.

$400,000 in the fourth quarter?

Yes.

Okay. And a few or more in the beginning of the year as well.

All right, correct. We did spend some in Q1 as well.

Okay. Got it. So the sales expense number for Q4, just the overall SG&A at $4.6 million, should we think of that as kind of the new baseline that gets built upon going forward?

Yes. That's a good indication. Yes.

Okay. Okay, got it. So you continue to expand the number. And can you talk a little in terms about the seasonality of the quarters at least what you're experiencing. And the first quarter in particular, but yet, is your seasonality being, as you mentioned further exacerbated by the -- deductible in insurance plans?

Yes, yes that's right. We got 2 types of seasonality, one that impacts orders and another one that impacts revenue. Revenue is typically soft in the first quarter because many of the HMOs, they have deductibles that start over in the beginning of the year. And therefore, we obviously -- less cash from the same amount of gross billings in the beginning of the year, while the rest of the year is more -- I wouldn't call it predictable, but stronger compared to the first quarter. So we always see that. In terms of orders, there's seasonality that tends to follow the seasonality. And in terms of when prescribing physicians take their vacations. They take a lot of their vacations in the beginning of the year for the exact same reason. We don't have the ability to kind of micromanage our cash flow or revenue the same way, because a lot of our revenue comes from orders from a year ago or even longer and gets billed out on a monthly basis. So -- but on the order side, we see fewer orders -- sorry, fewer physicians being at work, and therefore, there are less potential orders that come in the first 1 or 2 months of the year. We see the same thing around July when there are the summer vacations. And we see the same thing, the last week of November, while December, even though there's quite a few holidays -- typically, is a strong month in terms of orders.

Okay. Got it. Dan, it looks like the tax expense is about $550,000 wider, what we expected. So anything you made to mention as far as NOLs or all your NOLs gone?

They are gone. Yes. So it was just really a true up. Q4 is always a true up of the entire year. We did have some discrete items roll through. But we should see more normalized tax expense of that said, 21 plus, an estimated 5 states around 26% in 2019 and forward.

Okay. 26% is a good number to use you believe?

Yes.

Okay, got it. And then, any read into the fourth quarter -- looks like higher growth on the device versus the consumable side. Is there anymore read there as far as you’re picking up more new users at a faster pace than prior quarters or no real read into that?

I don't think there is a real read into it. We get some timing on the device side. At the end of the quarter what gets shipped and what gets received by customers. And then you also have the lease versus purchase side. So that you can skew the numbers just a little bit. If I was to look at the growth rate, I think if you look at them annually, it's probably a little better if you compare those 2. Just to say okay, the quarterly is this, and the annual is this other number. And so if you check those against each other, they should be pretty close. But the annual number is a good number as well to just double check with.

Okay. And then, lastly, one more. I know I keep asking this every quarter. Thomas, you made some commentary as far as Blood Volume Monitor and you mentioned some about correspondence. Has there been any correspondence that you can speak of recently? And any expectations?

Nothing significant that has changed our expectation. It's still an unknown when we'll cross the finish line there. Obviously, we keep working with the FDA and we keep making progress in terms of the timeline on CE Marking. And, we -- at least, we got the patent, now we need those 2 more milestones, and after that, since in my opinion, the product is working great. It's still yet to be seen how well the market actually responds to it, and how many of those devices say, they'd be interesting in purchasing despite how great I'd see that the product works. And that's still remains to be seen. So once you through the regulatory clearances then obviously, the commercial adoption as a product in the market will be interesting to follow.

Okay. Will we hear anything about future correspondence? Or will we only see or hear about a CE clearance or an FDA clearance?

And I think at this point, we might as well just sit tight until we get the clearances.

And our next question will come from Howard Halpern of Taglich Brothers.

In terms of the sales force and the growth that's going to occur, how -- what is your total sales force? And if you could break it down into how many are dedicated to selling your product. And then, going forward, what do you expect the sales force to look like at the end of the year?

So we have approximately 100 that are independent sales reps that carry all the products. We have approximately 60 that are dedicated to us with a base salary, plus a less aggressive commission. We hope to have added another 15 to 20, hopefully closer to 20 here at the end of the year, at first quarter. And therefore, I hope that we will be well over 100 dedicated self reps, perhaps closer to 120, while we still maintain the independent sales reps. We make sure that we have no geographic overlaps, so that we don't cannibalize our existing sales force while we grow out the total geographic coverage.

Okay. And what would you estimate, I guess, your coverages right now? And what -- within U.S. and by the end of the year, how much of the U.S. do you hope to have covered?

Of course, I'd always go for 100% market share, 101% if I could. Mathematically, that's obviously not possible. But long term, and that's probably 5 years out, we're looking at a potential of 400 sales reps across United States. And then in the years following that, get all of those so productive that we cover, what a couple of large competitors had left in the market for prescription-strength electrotherapy, which is approximately $400 million in annual revenue.

And one last one. You talked about increasing the staff at your headquarters especially, I guess, in the billing processing area. Is that going to become even more efficient and maybe quicker turnaround or potentially quicker turnarounds in the billing process?

We have, over the past 3 years made significant improvements to the quality of our insurance billing. And so I don't think we'll see the numbers improve, so in terms of the efficiencies there. What we'll see is that the number of billing staff here and supporting functions will not grow at the same rate as the revenue. We're investing in the sales force right now, and we're also adding people on the inside to do order entry, to talk to patients, to do insurance billing, to do incoming calls from patients, et cetera. And that will grow at a lower pace than our investments in the sales force as well as a lower pace compared to revenue. So we will -- what we expect to be seeing going forward is a continued economics of -- the benefits of economics of scale.

(Operator Instructions) Our next question will come from Marc Wiesenberger with B. Riley FBR.

Over the last few months, we've seen the company put out 3 new high-quality marketing videos. Should we expect to see kind of a new marketing push towards new audiences in light of some of the continued pressure on the opioid epidemic. I know that topic seems to be on 60 Minutes every few weeks now, so should we see you getting a little more aggressive with these marketing videos and campaigns?

Yes. Actually, the main video we have that on our website now that talks about the opioid crisis and how our product can come in. And hopefully, become the first line of defense. That video, we are planning on -- actually we've tested it, and it will be launched in a few weeks to our entire sales force. It's a video book. So instead of leaving a traditional brochure, it's a video book that our sales reps can either leave with the physician or even the office manager, the office assistant to then have the physician take a quick look at. It's a couple of minutes, and it's a very unique tool that people are not used to seeing. And it has a very, very powerful video that comes with it. And with the testing, we've done with a few sales reps so far, has been remarkable in terms of getting time in front of the physician to basically get through the gatekeeper and getting a dialogue initiated. So I expect a lot from that new tool we're introducing into the sales force. And it's based on those videos that you are referencing there.

Is there any chance that, that could be targeted to patients as well. I know you have historically only gone to the doctor, but is there any way to maybe get to the patients who then can request the NexWave from their physicians as opposed to just the doctors recommending that?

Oh, it smells more like the over-the-counter market. I shouldn't say cheap but a lot less expensive and may be less efficient TENS devices and all that. There is an effort from a few companies to address that market. It's not really something we see impact the prescription market. It's -- so far, we've seen it very difficult in this market, including the stroke rehab market for the NeuroMove as well as the InWave for incontinence. It's been very difficult to generate a pull effect or pull strategy, where patients walk up and ask for products, like you sometimes see with pharmaceutical products. I don't think the revenue levels and -- versus the amount of the investments that, that would be required to actually make a dent in that would make things come together. So at this point, we -- let's develop the 400-man sales force, have them become productive, let's get up to $400 million in annual revenue. And maybe it's a way to further development -- further develop the market for better pain management to maybe go the -- to-patient route. But I think we are few years away. And I think, it's probably something we'd consider once we've run -- run out of opportunities through that direct sales force.

Sure. Understood. With some of the newer reps approaching their 1-year anniversary, can you see any noticeable productivity trends in the data? And are there any anecdotes you'd like to share? I know previously you talked about a recent rep that was able to jump to the top of the leaderboard in a few short months. Are you seeing any kind of similar trends lately?

Yes, we've a couple of more reps that have really transitioned to the top of the leaderboard and that are in the relatively new sales rep category. There's still a lot more that can be done there. A focus, because recruiting has gone pretty well for a while. Then there are 2 more components to dealing with new sales reps. One is the initial training, the other one is the day-to-day management of those people. We have -- here, the last several weeks -- couple of months actually been focusing on beefing up our initial training of sales reps, that seems to show really good results. And in the coming months, we'll be beefing up the management of our sales force on a more regional sales manager basis. We actually today, made some very significant changes to the structure of our sales and marketing organization. And we'll be talking about that here in the very near future.

Understood. And last one for me, are there any updates -- I know it's fast approaching that there's the decision with regards to the 880,000 insurance reimbursement that's booked as deferred insurance liability. Any status update on that?

We have not heard anything from the claimant. So we're still in kind of that statute of limitations, so we're waiting for that to expire. And then, at that time, we'll address it.

It'll be up to our CPA from our auditors to guide us to just make that bleed into -- you probably see a quarter with a little more revenue than what really belonged in the quarter because it's from a long time ago. And it might hit a couple of places in the balance sheet as well. So we'll leave that up to Dan and the auditors to get the math to flow correctly in that.

Ladies and gentlemen, this will conclude the question-and-answer session. At this time, I'd like to turn the conference back over to Thomas Sandgaard for any closing remarks.

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.