ZYXI (2019 - Q1)

Good evening, and welcome to the Zynex First Quarter 2019 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 Factors 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. Thomas S

Thank you. Good afternoon. My name is Thomas Sandgaard, President and CEO of Zynex. Welcome to our first quarter 2019 earnings call. I’m pleased to announce that the first quarter was our 11th consecutive quarter with positive net income. Our first quarter revenue was $9.2 million and with a net income of $0.07 per fully diluted share. Revenue increased 34% compared to the same quarter last year, and we reported positive net income of $2.4 million. Our cash position was $9.4 million at the end of the first quarter compared to $10.1 million at the end of 2018. The decrease in cash was due to the payment of our fourth quarter special dividend of $2.3 million. Due to strong operating cash flows, the company was able to buy 3.8 million of our common stock during the last 1.5 years through our stock buyback program, which effectively created a significant anti-dilutive event, benefiting all shareholders. 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 across United States, we grew 30% year-over-year in the first quarter and we see reimbursement continue to be strong for our products. Orders grew 4% between the fourth and the first quarter as a result of new sales reps becoming productive. Last year, we added approximately four reps per month, mostly in the last quarter of the year, and this year, we are on track to be adding 10 new reps every month. That pace should get us to approximately 250 sales reps by the end of 2019, with 100 reps being independent pre-2018 sales reps and 150 being new direct sales reps, all added in 2018 and 2019. I’m very pleased to see our gross profit margin remain at the 81% level, an indication that the industry for prescription-strength electrotherapy is 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 for stroke rehab and the InWave for incontinence treatment, that puts us in a strong product position in the rehabilitation markets. 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. We succeeded in getting listed on the NASDAQ stock exchange in February of this year and have since noticed a significant increase in the daily volume traded as well as the price. And I should also mention that we hope to eventually get included in the Russell 2000 Index. I will now turn the call over to Dan Moorhead, our CFO.

Thanks, Thomas. First, I’ll review our 2019 first quarter results. Orders grew 30% year-over-year, which drove net revenue up 34% to $9.2 million from $6.9 million in 2018. Device revenue increased 24% to $2 million compared to $1.6 million last year. Supplies revenue increased 37% year-over-year to $7.2 million from $5.3 million. Gross margins were 81% in the first quarter of 2019 versus 82% last year. You’ll now notice we are breaking out sales and marketing expense from G&A in 2019 and the comparable period in 2018. This breakout provides greater clarity related to our sales growth initiative and the overall financial statement impact. Sales and marketing expenses increased 89% year-over-year and 15% compared to Q4 2018 as we continued to aggressively grow our sales force. G&A expense grew 13% year-over-year and 8% compared to Q4. Much of the increase in Q1 was related to our NASDAQ uplisting and the related expenses. Our other income includes the $880,000 deferred insurance reimbursement, which had been on our books since 2016. Management determined based on state statutes that this amount was no longer a valid liability, and therefore, the liability was removed from our balance sheet. We recognized the amount through other income as we believe that is the most appropriate presentation. First quarter net income was $2.4 million or $0.07 per diluted share compared to net income of $1.9 million or $0.06 per diluted share in the first quarter of last year. Adjusted EBITDA, which is a standard EBITDA calculation plus an exclusion of non-cash stock-based compensation and other income expense and is reconciled in our press release, was $2.5 million in Q1 compared to $2 million last year. We also have increased income tax expense year-over-year due to our profitability over the last two years, which utilized our net operating losses and put us in a taxable position. On the balance sheet, as of March 31, 2019, our cash balance was $9.4 million compared to $10.1 million at December 31, 2018. Q1 2019 operating cash flows increased 78% year-over-year. The decrease in cash in Q1 was due to the payment of our fourth quarter special dividend of $2.3 million, which was paid in January. Our working capital grew 34% to $9.8 million in Q1 compared to $7.3 million as of December 31, 2018. During Q1, we implemented ASC 842, the new lease accounting guidelines, which caused us to record approximately $3.5 million in lease liabilities on the balance sheet, of which $700,000 are current. We also recorded the related assets, but those are all non-current in nature so there was a negative effect on working capital related to the implementation. With that, I’ll 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 two 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 second quarter revenue to be between two – between $9.5 million and $10 million, EBITDA between $2.3 million and $2.8 million and earnings per share around $0.07. 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 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 with strong growth in orders, revenue and profit. The patent obtained late last year 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’re also looking at adding more products to add to that division, including additional product development internally. We will now take questions from our listeners.

[Operator Instructions] The first question comes from Jeffrey Cohen of Ladenburg Thalmann.

This is actually Destiny on for Jeff. I just had a couple of questions. I’ll start maybe with your comments on the sales force. I know – I remember from last quarter, you mentioned you were going to be restructuring your sales force a tiny bit, maybe by adding some regional managers. Have you implemented that yet? Or is that still to come? And then has the training cycle also changed? As you mentioned, you’ll be enhancing initial training efforts. Is it six quarters? Four quarters? What are we looking at now?

That’s correct. We’re actually right now in the middle of the restructure on the regional sales manager level, and it’s all playing out pretty well. We’re also looking at – we’re remapping the – all our – the territories across the country so that we can accommodate the 400 sales reps that we anticipate long term, so we can accommodate that already with the setup that we have right now. So all that is taking place right now as we speak. And assuming that the average sales rep, long term, will generate a revenue of $1 million each, if everything plays out as we expect it on that side as well as reimbursement remaining strong, that should obviously get us to a sizable annual revenue.

Okay. Got it. And then if you think about it, what percentage of the accounts that were kind of left from the competitor leaving do you think that your reps have captured to date?

Not a whole lot, just maybe a few tens of millions, not hundreds of millions yet. We’re still in the early stages of making our sales reps productive, et cetera. But as you mentioned, in terms of training new sales reps, we’re doing great now. We have a great program in place where we train two to three sales reps every week. Bring them to Denver, get them trained, do some local in-services here with them where they get to see how it really works, et cetera. So we have a great training program up and running that is going to take us much, much further and much faster than, let’s say, one or two years ago when we were adding sales reps.

Okay. Got it. And then I just wanted to finish off with your comments on acquisitions and then adding more products, and you were going to maybe look into complementary products or technologies. Could you give us an example of something like that? And then your internal R&D, are we – should we see anything within the next two quarters? Or is that further past maybe 2020?

That was a very broad question. So of course, for the pain management or pain and rehab division, we are tentatively looking at various technologies that can be used for – to support in pain or rehab that would basically mean – meet the criteria of having the same call point as our existing sales force. The existing sales force is becoming a great asset now with the size it has and the geographic coverage. And we’re also looking at potentially technologies that would be complementary to the Blood Volume Monitor and fit well in terms of sales into the hospital and surgical center area. And yes, that’s probably the best way I can describe it. But especially for the pain management area, I think it’s important to note that we’re beginning to have a substantial asset in that sales force we’re building.

[Operator Instructions] The next question comes from Marc Wiesenberger of B. Riley FBR.

On the last call, I think you talked about some potentially new marketing materials that were being rolled out to the sales force. Has that been rolled out? And to what percentage of the sales force? And can you talk about some trends you’re seeing and how that’s helping grow orders?

Yes. Thanks, Marc. You’re hitting me just a couple of days too early. We had a slight delay in getting these, what I was referring to, we call them video books. It looks like a book, and you open it up and it’s similar to one of those Hallmark birthday cards. When you open it up, it plays music. This one here plays a video, and it’s the same video you find on our website where it has a great – very catching introduction of some medieval people fighting in – at one of those festivals and then it turns into showing a soldier that has come back from the field and is injured, has been on opioids and is now using our device to be able to minimize his use of opioids, and there’s some great testimonial statements on there. It takes a minute or two to play, but what it really does is with the testing we have had, it allows our new sales reps that may not have a whole lot of clinics that they are in with yet to get through the gatekeeper, to get the attention from the physician to say, hey, I need to talk to you because you have something that can help me. Because one of the problems these prescribing physicians has is, obviously, that they often get accused of overprescribing opioids, and the more they can minimize it, the better. And here we are, right in the face that we should be able to help them solve that problem. And ultimately, we’ll hopefully end up serving and helping even more patients to relieve some pain. So that’s the tool I was referring to. We’ve tested it. We got a decent quantity in already, and it’s just about to go out to our sales force.

Understood. You talked about the cadence of sales rep growth, now looking to add about 10 per month. What about – has there been any churn with the existing reps? And then a follow-on to that, can you talk about the trends in profitability from new reps?

Yes. Other than you see a slight increase on the S portion of the SG&A and obviously G&A not growing as fast, it’s somewhat minimal. We’re still able to post reasonable profits even while we are growing at this pace. We have not seen any turnover in the independent or 1099 sales rep force we had prior to 2018. So that remains intact and is a nice, stable, solid base to our order intake. And we also have a pretty high, what do you call, survival rate in the new sales force, where only long-term maybe 20% or 30% of them are not surviving due to performance or for other issues. So that looks very positive. I’m very encouraged in terms of what this new sales force is going to bring us long term as they eventually start becoming productive.

And then in terms of any new profitability trends from the new reps?

Not really. It’s what – the trends we saw in early 2018 and throughout 2018 are pretty much the same as we see right now. And you might be hinting at the better training efforts. It looks early on that there are signs that we’ll make the average new rep even more productive, but it’s a little too early to tell. You got to look at, at least six months of history before you start seeing that these brand-new reps are now more productive than those we hired a year ago. But early signs indicate that, probably, yes.

Great. And one final one from me. I think recently, you publicly talked about some clinical studies that are being undertaken for the Blood Volume Monitor. Could you elaborate a little bit on that?

Yes. They would be in the area of – one will be similar to what we did already but in a more regulated form and obviously through a clinical research organization that helps us. So one will be just drawing blood and comparing what – the numbers in the display to when you don’t draw blood but have the patient in the same position. That gives us a very easy to measure correlation with our Blood Volume Monitor index as well as the other parameters that we are measuring. We are also looking into two other studies where we monitor patients that are in the recovery room to hopefully identify and confirm that they are good – that there’s a good correlation between our device and when alerts are necessary in terms of detecting internal bleedings. The third one is in the area of simply using it during surgery and using it in situations where there typically are excessive blood losses and, obviously, being – saline being – or blood plasma is being added, but – to see how much real value we can add in that space. So it’s now becoming very practical rather than just the more theoretical proof of concept, et cetera.

This concludes our question-and-answer session. I would 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 to 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.