Zynex - Earnings Call - Q1 2020

Transcript

Speaker 0

Good day, and welcome to the Zynex First Quarter twenty twenty Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Certain statements in this release are forward looking, and such statements 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, the Risk Factors section of our Annual Report on Form 10 ks for the year ending December 3139, as well as Forms 10 Q, eight ks and eight Ka, press releases and the company website. Please note this event is being recorded. I would now like to turn the conference over to Thomas Founder, Chairman and Chief Executive Officer. Please go ahead, sir.

Speaker 1

Good afternoon. My name is Thomas Sandgaard, President and CEO of Zynix. Welcome to our twenty twenty first quarter earnings call. I'm excited to announce another quarter of revenue growth and positive net income. Our first quarter revenue of $15,200,000 increased 66% compared to the same quarter last year.

It was also the highest quarterly revenue in the history of the company. It was our fifteenth straight quarter with positive net income and $09 per fully diluted share income. Adjusted EBITDA for the first quarter was 3,000,000 an increase of 23% compared to the first quarter of twenty nineteen. The investment in expanding our sales force continues to progress as we expand our geographic footprint across The U. S.

We grew orders 126% year over year in the first quarter and we continue to see strong reimbursement for our products. This order growth is a result of aggressively adding new sales reps to the sales force every month and this deep order growth is a continued sign of strong demand for our products. Order growth momentum and the subsequent revenue growth we expect to see from these orders in future periods. As you may know already, the revenue of an order is typically recognized over many months or years after the order or you call it prescription. As patients continue to use our device and the related supplies for continued pain relief.

The length of time a patient uses our devices is primarily decided by the health insurance company as well as if the patient reaches a point of no longer needing the device. In Q1, we sustained our aggressive sales force growth. During the first quarter, we hired more than 70 direct sales reps. We have continued our aggressive hiring in Q2, adding over 48 new sales reps so far in April, as we push hard to reach our goal of filling all 400 territories across The U. S.

By November year. We expect to have just above 300 sales reps by the end of Q2. Revenue is now growing faster than in 2019 as we grew revenue 66% over the first fourth quarter growth between 2018 and 2019 was 52%. This is obviously a result of orders having grown well over 100% year over year for several quarters prior. Our business model was billing for the devices monthly use and supplies as they're consumed by our patients.

It's actually helpful in a temporary slowdown like now. 80% of our revenue is typically derived from orders received in prior periods even years earlier. Similar to many companies, we have seen the impact of COVID-nineteen pandemic, not only on the availability of physicians to prescribe our products, but also on navigating employee and supply chain issues. March orders were down 14% compared to the average number of orders in January and February. And April orders are down approximately 35% compared to the January and February average.

We still expect orders in Q2 to come in more than 50% higher than Q2 of last year and be back to the same doubling the numbers compared to last year's order numbers in Q3 and going forward. This minor temporary decline in orders speaks volumes to the relationships our sales force has with many prescribers and the need for them to prescribe non opioid, non addictive prescription strength solutions for the patients in pain. As a reminder, revenue from an me, revenue from an order is typically recognized over the time a patient uses our device and related supplies and therefore short term slowdown in orders has less impact on revenue and cash collections. Our cash collections in the first quarter and April were strong, which adds to our confidence in our full year estimates. Our operations continue without interruption despite a few of our employees staying at home due to either suspected illness or anxiety during this difficult period.

Our supply chain remains uninterrupted as we previously secured non Chinese second sources for all of our components and raw materials. In addition, it's our practice to keep several months of finished products on the shelf, have over four months of components on hand for internal assembly and twelve to eighteen months of orders placed with our vendors on top of the in house materials. It is critical for us to have the ability to ship immediately to a patient in pain as we receive a prescription. The opioid epidemic continues to be a serious issue in this country and we are 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. 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 NWave for incontinence treatment puts us in a very 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 a huge unmet potential for our blood volume monitor.

As most of you probably already know, we managed to get FDA clearance for our CM1500 blood and fluid monitor earlier this year. The CM1500 is a non invasive monitor intended to monitor patients' fluid balance in hospitals and surgical centers. We expect to initially target operating rooms and surgeries that typically display substantial blood loss as well as recovery rooms and ICUs where internal bleedings today are common and difficult to detect until serious complications occur. We believe this product will lead to safer surgeries, fewer complications and less mortality, one of the biggest unmet needs in hospitals today. I will now turn the call over to Dan Mordhead, our CFO.

Speaker 2

Thanks, Thomas. First, I'll review our twenty twenty first quarter results. Orders grew 126% year over year, which drove net revenue up 66% to $15,200,000 from $9,200,000 in 2019. Device revenue increased 74% to $3,400,000 compared to $2,000,000 last year. Supplies revenue increased 63% year over year to $11,800,000 from 7,200,000.0 Gross margins were 78% in the first quarter of twenty twenty.

Sales and marketing expenses increased 111 year over year as we continue to aggressively grow our sales force. G and A expense grew 55% year over year. Much of the increase was related to increased headcount in our billing and patient support functions related to our order growth. First quarter net income was $2,900,000 or $09 per diluted share compared to net income of $2,400,000 or $07 per diluted share in the first quarter last year. Adjusted EBITDA, which is a standard EBITDA calculation plus an exclusion of non cash stock based compensation and other income expense and as reconciled in our press release increased 23% to $3,000,000 in the first quarter of twenty twenty.

During the quarter, we had an income tax benefit of $483,000 for deductions related to stock option exercises. On the balance sheet, as of 03/31/2020, our cash balance was $14,600,000 up from $14,000,000 at year end. During the quarter, we increased our inventory levels by $1,000,000 to protect against possible supply chain slowdown related to COVID-nineteen. We have not had any supply chain issues to date. Our working capital grew to $19,900,000 at March 31 compared to $17,400,000 as of December 3139.

I'll now turn the call back over to Thomas.

Speaker 1

Thank you, Dan. I'm especially excited about our year over year growth in orders of 126% and our revenue growth of 66%. It's a huge testament to efforts to grow our sales force and clearly justifies the investments in our sales personnel, sales management and inside support functions. 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 continue to drive increased revenue and profitability.

We estimate our second quarter revenue to be between 17,500,000.0 and $18,000,000 with adjusted EBITDA between 3,200,000.0 and $3,700,000 This revenue range would be 70% to 75% higher than last year's second quarter revenue. This is up from the 66% year over year revenue growth we just saw here in the first quarter. And our annual guidance on revenue is maintained at $78,000,000 to $83,000,000 As a reminder, nearly all of our collections from billing comes from insurance companies, mostly private insurance, but also government, auto insurances, workers' comp and personal injury attorneys. Payments from those are either dictated by contractual amounts we have established, allowable amounts already well established throughout our industry and negotiate amounts on a patient by patient basis. These amounts are typically discounted by deductible and copay deductions and we end up getting much less than our MSRP as a typical as it is typical throughout the healthcare industry in The U.

S. This pattern is the same whether we get paid for the device or patient supplies. We are careful to make sure that our billing practice is always within the law and comply with all guidelines and regulations. We also undergo regular accreditation by a third party to ensure we continue to be compliant. 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. We're in the process of adding seven executives and managers to the Blood Volume Monitor division and start building an entire organization to launch that product after we recently had the product cleared by the FDA. We also recently obtained both the European and The U. S. Patent for that device and still working with the European notified body to obtain CE marking to eventually be able to sell the product in Europe.

We will continue to update everyone as we continue to build out this division. In summary, we announced yet another great quarter with strong growth in orders, growth in revenue and profit, which puts us in a very strong position going forward. We will now answer questions from our listeners.

Speaker 0

We will now begin the question and answer session. And our first question today comes from Jeffrey Cohen with Ladenburg Thalmann. Go ahead.

Speaker 3

Hi, Thomas and Dan. How are you?

Speaker 1

Good. How are you doing, Jeff?

Speaker 3

Just fine. So fantastic quarter. A few questions. Did you break out the device and supply revenue for the quarter?

Speaker 2

Did we break

Speaker 1

It's on

Speaker 2

the face of the income statement in the press release.

Speaker 1

So That's all we should do.

Speaker 4

Yeah. Yeah.

Speaker 1

Maybe don't know if you can

Speaker 4

Okay.

Speaker 3

Oh, there it is. 344 1178. Okay. Got it. And then can you talk about the blood volume monitor a little bit as far as timing to market, as far as placements, manufacturing supplies?

And it sounds like you're going direct and not planning on using any collaborations or distributors domestically?

Speaker 1

Initially, we are working on building the organization to support it. We and as part of that organization, there'll be a couple of people that we expect will have strong relationships in that space and therefore be able to not only just sell devices into some key hospitals, but also help us develop some key opinion leaders as well as potentially place some devices on loan for testing so they can see it actually works for them. But we also expect to develop relationships with some of the larger medical device companies. I wouldn't be surprised if that take a little longer. And hopefully, we will be able to prove the concept and create interest on our own and therefore indirectly spark more interest from other companies.

Speaker 3

Okay, got it. And on the sales force, it sounds like you're full steam ahead to get 300 plus by the end of Q2. And how does that look for the back half of the year and going forward? Is there a number which I think you said in the past

Speaker 1

Yes, then we'll have five months to get from 300 to 400. That's 20 a month. And right now, we're running at a cadence of more than 48 a month. So there should be room for potential slowdown mistakes and as well as some potential attrition when people don't perform.

Speaker 3

Got it. And Dan, any commentary in particular on the margins? A little bit shy of what we expected and what you had most of last year, but how should we think about going forward? Or was there a particular item or two that hit the first quarter slightly?

Speaker 2

We'd say normal is 78% to 82%. Sometimes it's on the high end. It depends on product mix, payer mix. There's a lot of factors in there. Deductibles at the beginning of the year can weigh on margins a little bit.

So we think they're in the normal range and we expect them to stay in that normal range.

Speaker 3

Okay. And then lastly for me, have you seen any change amongst the payers from this year, first four quarters of this year, just generally speaking, as far as coverage reimbursement duration and how that may affect how docs are prescribing compared to pharmaceuticals? Thank you.

Speaker 1

No real in the shorter term, no real change in terms of how our products are prescribed. Obviously, there's more just temporarily here for a couple of months more tailor medicine. And our sales reps been able to maintain our relationships or their relationships with those doctors that are doing more of that and therefore kept the prescriptions coming in at a pretty steady rate. So that's very impressive. In terms of reimbursement, we have not seen any significant change.

Our cash collections in the first quarter and April has come in stronger than they normally do in the early phases of the year where it's typically a little depressed because of patient insurance deductibles. So that was a positive surprise. We have seen here with a little after the COVID crisis really kicked in that a few very large insurance companies decided to scrutinize claims less than they normally do and therefore that has expedited payments a little. It doesn't look like that long term will change how much we get paid on the average prescription. But it has helped our cash flow a little bit.

But other than that, it is at least as good as it used to be, let me put it that way.

Speaker 3

Okay. And how does it feel? Does it feel like you're getting scripts written earlier in the cycle? Are docs avoiding pharmaceuticals at a greater degree to go straight to bioelectrics?

Speaker 1

I should say that we don't really see any significant development. It's probably something that happens much slower over time. Yet, I would expect as we get sales reps out in every corner of the country that there'll be more physicians that will be reminded about it and therefore more likely to exactly do what you're suggesting prescribe this non addictive technology rather than opioids as the first line of defense. So, I could definitely see that, but probably more as a result of getting our sales force in every corner of the country.

Speaker 3

Okay. Got it. Nice quarter. Thanks for taking my questions.

Speaker 4

Yeah. Thanks, Dave. Have great day.

Speaker 0

And our next question comes from Yi Chen with H. C. Wainwright. Please go ahead.

Speaker 4

Thank you for taking my question. My first question is for the 2020 revenue guidance, have you incorporated the consideration that the COVID-nineteen pandemic could persist through summer and there could be a second surge in the fall and winter?

Speaker 1

We have incorporated that orders slowed down to some degree in the very March and obviously slowed down to that same degree throughout the entire month of April as I mentioned a little earlier. We expect May to be soft, the first half or two thirds of May to be soft to the same degree, then pick up right start picking up again right towards the May. And for the month of June to eventually get back to a rate where our sales reps will be producing at a little less, but nearly the same amount of orders per rep per month that we saw earlier in the year. So from an order standpoint, instead of growing well over 100% compared to the year, what we expect to be 50% to 55% over the second quarter last year. So much softer than we saw.

But because of our revenue or business model where a short period of downfall or shortfall of orders like that, that doesn't really impact our revenue much as most of our revenue comes from the first quarter and most of last year when we received orders. So therefore, we have a lot of predictability in terms of where the year is going to end up. That predictability actually helps us in a situation like that. So we take a huge hit when doctors are not as available as they used to be.

Speaker 4

Got it. I recall you mentioned that by the end of this quarter, you expect the total sales rep number to reach 300, right? Can you remind us the current number for sales reps?

Speaker 1

Currently, as of today, we have about two sixty sales reps plus or minus five, I think. And as we speak, we might be adding one or two. So we have another 40 to go. And if we assume we can hire 40 to 50 a month, then there's room for a lot of attrition to hit. We'll be well over 300 by June 30.

Speaker 4

Okay. Could you comment on the tax benefit in the first quarter? Do you think that could recur in the following quarters?

Speaker 2

No. It won't recur in the subsequent quarters. It's a one timer related to some large option exercises from years back. So I would continue in the future to forecast in that 25% range, the 21% fed plus 4% state.

Speaker 4

Okay. Got it. Last question. Could you give us a rough time frame for the potential commercial launch of Blood Volume Monitor?

Speaker 1

Towards the very end of the year.

Speaker 4

Got it. Thank you.

Speaker 1

We have no reason to hurry. We need to build the organization.

Speaker 4

Yes. Thank you and congratulations on a solid quarter. Yes. Thank you.

Speaker 0

And our next question comes from Mark Wiesenberger with B. Riley. Please go ahead.

Speaker 5

Thank you. Good afternoon. Can you talk about the sales rep and healthcare provider interactions? What percentage of the sales reps are still able to meet in person with doctors and how what percentage are meeting virtually? And then on that same point, with regards to the new orders, kind of can you give us a breakdown which came from existing relationships versus new providers?

Speaker 1

I think the short answer is to really go into detail, the answer would be no. But I can tell you that we actually see even our new reps that just recently got trained through a technology called Zoom, I think it was called, over a week rather than flying into Denver and got very extensive training that way. We've seen, maybe with one or two exceptions, we've seen every single one of them getting at least one, if not up to a dozen orders simply by creatively contacting physicians in this space and eventually getting an ear. In some cases, they've been able to and this also goes for the existing reps. They've been able to drive by clinics and drop off material like the customized prescription pads we provide for clinics and demo devices, etcetera.

So we are able to without a whole lot of face to face contact still keep those relationships going. And obviously, those seasoned reps we have with strong relationships, they can just text, email or call those physicians and keep reminding them that, hey, this is better than popping pills. So the actual mix between how the orders have come in like that, we're not really try we're not slicing the cake in that fashion, let

Speaker 4

me put it that way.

Speaker 5

Understood. It sounds like you're leaning heavily on Zoom and other virtual tools for training. What's your expectation on how long that's going to last throughout the year? And I guess maybe talk about experience that the reps are getting kind of virtually relative to what they would be getting in person. And would you expect that reps that have been trained virtually will ultimately come to Zynex for physical training?

Speaker 1

I think the training is so good to take the last question first. I think the training seems to be so good as we're probing into the efficacy of it that we for as long as this is still an issue and traveling is not the safest thing to do that they can continue to be trained. We have a very large class of probably 60 sales rep in the May that will be trained that way. And in terms of when the impact of all this is over, most importantly, decided that May one COVID is over. So that's easy.

No, I'm just kidding. We think that as states are opening up, we see some mostly in the Southeast. They are beginning to open up for business. And we expect in that part of the country to be just a week or two, maybe three weeks maximum away from when they stopped opening up. It's still uncertain to what degree those clinics will have a policy that allows the sales reps to be running around inside of those clinics just like they used to, but we definitely see things opening up.

There'll be other states, typically states that have been harder hit or maybe politically are more shutdown than other states that will probably follow by several weeks after that. But I think as we get towards the May, should be in a position where some states start operating more normal.

Speaker 5

Understood. Real nice acceleration in supply growth in the quarter. Have you expanded any offerings in with supplies for the next wave? And if so, do the payment and or reimbursement dynamics with them look different than the other previous supplies and consumables?

Speaker 1

Could you repeat that question again? I didn't understand the first part of your question.

Speaker 5

Sure. Have you expanded your supply offerings that go along with the Next Wave? And if so, are the payment dynamics associated with them similar to the other products or the other consumables?

Speaker 1

No. Nothing has changed.

Speaker 5

Okay. So be but beyond the electrodes, there's no kind of wraps or anything that go around that might be easier for patients to attach like back There

Speaker 1

are, for instance, low back garments that work with electrodes, so it's easier for patients that have a hard time reaching their backs to place electrodes that way. Actually adds to the reimbursement when we can get that added to the treatment for the patient. Typically after we get the prescription, find out with the insurance if they allow that. There's also sleeves, knee, elbow and hand gloves that can be used to provide the electrical stimulation. And they also pay very well, but it's something we've done for years.

And I'm not I don't think the percentage of that has increased to any significant amount.

Speaker 5

Understood. Got it. Two more from me. Have you as you look reviewing your accounts, maybe noted any elevated counterparty maybe across any of your items, accounts receivable, anything like that that you're worried about as financial stresses throughout the economy?

Speaker 1

Not at all. I mean, we've seen some very large insurance companies, UnitedHealthcare being one of them actually accelerating payments to us. So it looks like their financial health is capable of doing that.

Speaker 5

Great. And then last one, I think you announced a sales leadership change recently with the large growth that you're having with your sales force. Could you maybe talk about the timeline and the reasoning behind that move? And is that going to impact any change in strategy? Thank you.

Speaker 2

I don't think there's a change in strategy there. It was just a change that was decided internally and made during Q1. So there's no change in strategy. Everything's still the same as it was running before.

Speaker 5

Great. Thank you very much.

Speaker 0

And our next question comes from James Terwilliger from Northland Securities. Please go ahead.

Speaker 6

Hello, Thomas. Can you hear me?

Speaker 4

Yes, can hear you.

Speaker 1

How are you?

Speaker 6

Okay. Very good. Congratulations on some really nice numbers. I've got three questions for you and then one for Dan. I don't want to leave Dan out.

On the monitor side, and I think you've touched upon this, you're almost fortunate not to have a huge launch right now with the way COVID has shut down the hospital market. As you look to do that limited launch or build that team of five to seven, many times when people get these products approved, it's been such a process with the FDA that sometimes by the time it gets approved, they have some new bells and whistles already in their mind. Does that work here? Is there any clinical feedback that before you launch the monitor next year that you might want to tweak a few things? Or is the monitor pretty much ready to go?

Speaker 1

The monitor is pretty much ready to go. Yet, we have another version of this product. We call it the CM1600 internally that we are you could say more or less halfway done finishing up. And obviously, there's so many changes to that product. We expect to run that through the FDA as well.

It's not just a few modifications that we can stick in the file. All of it was significant improvements. So you're right, we've been at it for so long and all the newer bells and whistles in order to be smart about the FDA process. We're sticking into the next generation. Good Well,

Speaker 6

no. And even with what's happened in the hospital setting, it's almost you're almost fortunate not to be trying to get into the hospital, especially if they're closed. A lot of other device companies are struggling with that. So it's almost I don't want to call it a benefit. There's nothing about COVID that's a benefit.

But nonetheless

Speaker 1

was trying to do things in an orderly fashion.

Speaker 6

My next question is really going back to the sales force, and I think a lot of it's been answered. But from a high level, what are you Is it more of a pharma background, a medical device background? What type of clinical focus are you looking for? Is it rehab?

Is it pain? Just tell me what is when because it's so important to hire the right person. So how do you define the right person?

Speaker 1

We define the right person by someone that is good at creating relationships or even more plainly, good at making friends. They also need to have a certain amount of drive to make things happen because they're out there on their own. And to begin with, they have no existing relationships. So you got to be able to get the door smacked and closed in your face and still keep going and come back every week to see those clinics. Those are the things we look for.

And it's actually where we add someone that has prior medical sales background, whether it's pharmaceutical or medical device. They all come with I wouldn't call it bad habits, but habits that doesn't necessarily fit with our sales strategy and how we're building the sales organization here early on. So candidates with some basic business experience, hopefully some sales experiences, but not necessarily in the medical space are usually what we hire. That would be I would say, 90% of those that get hired right now have that profile without prior medical sales experience.

Speaker 6

Excellent. Thank you. And then very quickly on seasonality and deductibles. Is in terms of the seasonality and deductibles, is Q1 kind I mean, but you put up such strong growth, but is Q1 kind of a time that with some seasonality and deductibles, it's kind of a push and that things get stronger? How should I think about the deductibles as we move throughout the year and any type of seasonality?

Speaker 1

Deductibles hit in two ways. First, they hit us on the order side because in January and to some degree, February, there's typically not that many physicians to see because they don't want to take the hit of patient deductibles where they get to bill an insurance company, but they see the very low or $0 check as payment for that Then go hunt down the patient for their copay. We can't really be selective on that. We are out there all the time trying to help patients. But it's we get slowed down by having fewer physicians available.

And then we see a little bit in the summer simply because of physician takes some vacation there. We see around Thanksgiving that entire week is usually very slow. And December is typically a strong month for us in that most physicians are at work and available to write prescriptions. On revenue side, since our revenue comes from recurring revenue from orders from just a quarter before or one or two years before, It typically goes in monthly intervals, sometimes with other regular intervals. That means that if we get a prescription in December, we can't suddenly stop billing in January and February to avoid that deductible shortfall that there might be and then pick it up later.

We have to bill for it because if the patient was using the device and getting supplies in January, we have to bill for that. And that date of service we built that's on the claim. That's what counts for the deductible calculation. So typically our cash collections are somewhat weak in the first quarter of every year. And therefore, we go as conservative as we possibly can in terms of revenue recognition.

So that's always from a revenue standpoint, unproportionately weak compared to the rest of the year.

Speaker 6

Excellent. Thanks. And then just lastly, that actually leads into my question for Dan. Dan, I may have missed it. Did you give a DSO number for the quarter?

Speaker 2

We're typically right around there's

Speaker 3

a lot of

Speaker 2

different ways to calculate it. We're about forty five days, which is about average for us.

Speaker 6

Okay. Excellent. Thanks, guys. Congratulations on a nice quarter. I'll jump back in queue.

Thank you very much for taking my questions.

Speaker 4

Thank you.

Speaker 0

And this concludes our question and answer session. I'd like to turn the conference back over to Mr. Thomas Sandgaard for any closing remarks.

Speaker 1

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

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines, and have a great day.