Zynex - Earnings Call - Q3 2019
October 29, 2019
Transcript
Speaker 0
Good day, and welcome to the Zynex Third Quarter twenty nineteen Earnings Conference Call. All participants will be in a listen only mode. Star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad.
To withdraw your question, please press then 2. 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 Form 10 ks for the year ended December 3138, as well as Forms 10 Q, eight ks and eight ksA, 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.
Speaker 1
Good afternoon. My name is Thomas Sandgaard, President and CEO of Zynix. Welcome to our third quarter twenty nineteen earnings call. I'm excited to announce another quarter of revenue growth and positive net income. Our third quarter was our thirteenth straight quarter with positive net income.
Third quarter revenue was $11,800,000 with net income of $06 per fully diluted share. Revenue increased 45% compared to the same quarter last year and we reported positive net income of $2,000,000 EBITDA in the quarter was just over €2,800,000 And year over year revenue increased. The last many quarters has been in the 35 range and our revenue growth has slowly started to accelerate this year due to the increase in sales reps and therefore an increase in orders. The investment in expanding our sales force continues to progress as we expand our geographic footprint across The United States. We grew orders 95% year over year in the third quarter and we continue to see strong reimbursement for our products.
Orders grew 30% between the second and third quarters as a result of more of our new sales reps becoming productive. This order growth is a result of aggressively adding new sales reps to the sales force every month, and the steep order growth is an early sign of order growth momentum and the subsequent revenue growth over future periods. As you may know already, the revenue on order is typically recognized over many months as patients continue to use our device and the related supplies for continued pain relief. In Q3, we sustained our aggressive sales force growth. We continue to add more than 10 new reps every month.
And in September alone, we added 15 reps. That pace should get us to around 200 sales reps by the end of twenty nineteen. Currently, we have 53 reps that are independent. Those are what we consider pre-twenty eighteen sales reps and approximately 130 new direct sales reps, all added in 2018 and 2019. For those of you that have been following the development of our sales force, you'll note that we in the past few months have piloted ways with about 47 independent sales reps, mostly nonproductive with very few or if any orders, and we don't expect to reduce this part of the sales force much further.
We hope to continue adding direct W2 sales reps with base salaries at a pace of approximately 15 per month going forward. Our cash position was $11,900,000 at the end of Q3 compared to 10,100,000.0 at the end of twenty eighteen. I'm pleased to see our gross profit margin remain at an 81% level, an indication that the industry for prescription strength electrotherapy is still not only stable, but very healthy and viable. 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 in the industry. The NexWave for pain management, our NeuroMove device for stroke rehab and NWave for incontinence treatment. Those puts us in a very strong product position in the rehabilitation markets. We continue to see great potential in both our product divisions, our existing revenue generating area for pain management as well as the huge unmet potential for the Blood Volume Monitor.
I will now turn the call over to Dan Moorhead, our CFO.
Speaker 2
Thanks, Thomas. First, I'll review our twenty nineteen third quarter results. Orders grew 95% year over year, which drove net revenue up 45% to $11,800,000 from $8,100,000 in 2018. Device revenue increased 47% to $2,700,000 compared to $1,800,000 last year. Supplies revenue increased 45% year over year to $9,200,000 from $6,300,000 Gross margins were 81% in the third quarter compared to 80% in 2018.
Beginning in 2019, we began breaking out sales and marketing expense from G and A. This breakout provides greater clarity related to our sales growth initiative and the overall financial statement impact. Sales and marketing expenses increased 148% year over year as we continue to grow our sales force. G and A expense grew 50% year over year. Much of the increase was related to the increased headcount in our billing and patient support functions related to our order growth.
Third quarter net income was $2,000,000 or $06 per diluted share compared to net income of $2,600,000 or $08 per diluted share in the third 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 is reconciled in our press release, was $2,800,000 in the third quarter of twenty nineteen. We 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. Now to our nine month results. Orders grew 65% year over year, which drove net revenue up 39% to $31,300,000 from $22,600,000 in 2018.
Device revenue increased 37% to $6,900,000 compared to $5,100,000 last year. Supplies revenue increased 39% year over year to $24,400,000 from 17,500,000.0 Gross margins were 81% in the first nine months of 2019 and 2018. 2019 net income was 6,500,000 or $0.19 per diluted share compared to net income of $6,900,000 last year. Adjusted EBITDA was $8,100,000 up 4% from $7,800,000 last year. We generated operating cash flows during the first nine months of 2019 of $4,200,000 compared to $6,700,000 in 2018.
Cash flows were affected by increased tax expense in 2019 and the timing of 2018 tax payments, both of which were related to our NOLs, which were 100% utilized in 2018. On the balance sheet, as of September 3039, our cash balance was $11,900,000 up from $10,100,000 at year end, and our working capital grew 92% to $14,100,000 in Q3 compared to $7,300,000 as of December 3138. 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 95% and our revenue growth of 45. 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 previous very large competitors. Our increased orders due to a larger sales force combined with strong reimbursement for our product continues to drive increased revenue and profitability.
We estimate our fourth quarter revenue to be between 12,300,000.0 and $12,800,000 with adjusted EBITDA between 2,300,000.0 and 2,800,000.0 As a reminder, nearly all of our collections from billing come 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 preset in their computers or negotiated amounts on a patient by patient basis. These amounts are then typically discounted by deductible and copay deductions and we end up getting paid much less than our MSRP as a typical which is typical throughout the healthcare industry in The US. This pattern is the same whether we get paid for devices or patient supplies. Some people have speculated that we charge more than most, which we don't.
We are sort of in the middle of the industry. However, we're very careful to make sure our billing practices are 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. The split between device revenue and supplies revenue has always been fairly consistent over the past couple of decades. If you look at historical results and comparing those results, please keep in mind that we reclassified our device and supplies allocations beginning in 2018, and those reclassifications were pushed back into the 2017 numbers, but not to any periods prior to 2017.
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. On the product side, the patent obtained 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 staff up the business development side, etcetera. We're also looking at adding more products to this division, including additional product development internally. Later today, along with our normal quarterly SEC filings, we're filing an eight ks related to a supplement to the S-three we filed a little over half a year ago.
In short, we are allowing for €50,000,000 of the €100,000,000 active shelf registration to be used as an at the market or ATM offering. All it does is give us some flexibility and it's good housekeeping from a governance perspective. In summary, we announced yet another great quarter with strong growth in orders and revenue, which puts us in a position of strength going forward. We will now answer questions from our listeners.
Speaker 0
Thank you. We will now begin the question and answer session. The first question today comes from Jeffrey Cohen of Ibram Thalam. Please go ahead.
Speaker 3
Hi, Thomas and Dan. How are you?
Speaker 1
Hey, Jeff. How are you?
Speaker 3
Doing just fine. So three or four questions for you, if I may. Firstly, Dan, tax rate for the quarter, 18.6%. Are the NOLs gone? And should we anticipate that that rate kinda creeps up toward the mid to high twenties, say, 27%?
Speaker 2
Yeah. The NOLs are gone, and they've been gone in 'nineteen. It's really discrete items. So, you know, other tax preference items in the quarter, it was a lot of stock options, and those end up deductions in the quarter. So that's what drove the rate down from that 26%.
So I think it's I continue to forecast at the statutory rate, but to the extent there are options exercised during any given quarter, it can drop that rate from 26 down to, you know, 19 or 20%.
Speaker 3
Okay. So for modeling purposes, mid to high twenties would be a good conservative number over the
Speaker 1
Yeah.
Speaker 2
I think the mid twenties are I think that 25 is 25 or '26 is about right to model at.
Speaker 3
Okay. Got it. And then, Thomas, talk a little bit about the the sales channels that are in effect now. It sounds like the the vast majority continues to be through the direct channel, which, as you stated, you're gonna continue to add in the teens Right. Persons reported.
Yeah.
Speaker 1
We don't expect to be making any any more significant reductions to our independent sales reps. They they have their their territories that they cover, and they cover them pretty well. And all the additions are W-two or sales reps with base salary plus a less aggressive commission rate. And here by year end, we should have about half of all the territories we have identified or populated. And at some point, obviously, as I mentioned, we're trying to accelerate how fast we populate them.
And at some point, we get there, we'll obviously be spending more resources on making sure those reps become as productive as possible. So nothing has really changed compared to the plans we set out a year or two ago in terms of developing the sales force. The timing of when we eliminated some of the nonproductive independent sales reps Happened a little earlier than we probably expected. But other than that, it's working just as planned.
Speaker 3
Got it. And then talk a little bit about territories. Are you finding that you're adding in smaller, less populated geographies, or you're adding seconds and thirds in larger geographies?
Speaker 1
No. We have mapped out 400 territories. That all consists of approximately 800,000 people as a round number, and we just keep plugging in into those. We we don't have any territories that will suddenly have two people in them. It's all it's all mapped out already.
Speaker 3
Okay. And then could you reiterate what you're talking about with the the progress on the blood volume monitor, please?
Speaker 1
Not a whole lot to report. We are doing an additional round of testing with the testing laboratory that the FDA asked us to do. We we now are testing for environmental testing, vibration and shock and and and things like that that you you could argue if if they're actually necessary or not. Some people argue that they're not, but we we made the decision to just go forward We we should have most of that done in in the month of December.
Few other questions we are answering. We we also have, the pilots of of of some some, actual clinical studies, IRB approved clinical studies in the works. And we're also testing on some things that are for next generation of the product as well.
Speaker 3
Okay. Do you think we'll see any studies or any podiums from any of the IRBs in the next year?
Speaker 1
Oh, it depends on how fast they can get out if they need to get completed. And, obviously, then getting them publicized sometimes can be a lengthy process. So that's that's hard to say at this point in time here. So Okay. I'd like to wait to comment on that.
We're a little further ahead.
Speaker 3
Okay, got it. Great quarter. Thanks for taking the questions.
Speaker 1
Yeah, thank you.
Speaker 0
The next question today comes from Mark Wiesenberger of B. Riley FBR. Please go ahead.
Speaker 4
Yes, good afternoon. Thanks for taking the question. With regards to the order growth, could you maybe provide a little bit more color or segment out where the orders are coming from? Is it new doctors? Is it existing doctors that you've had that are increasing the number of prescriptions they're writing?
And kind of just give us a little more commentary
Speaker 3
there.
Speaker 1
Well, it's a mix nearly all of the growth is obviously coming from new reps we've hired here over the past two years. So some reps that got hired maybe a year ago, a year and a half ago, they're breaking into traditional clinics. And so we see some new prescribers from those. And obviously, all the new reps, a few of them are actually beginning to send in the first few orders, that all adds up to the kind of order growth, 95% year over year that we've experienced in the third quarter.
Speaker 4
Okay. I know you've got some longer term targets for reps to generate about $1,000,000 in annual sales. But kind of currently, what is the top rep producing on a quarterly basis? How has that been trending over the last few quarters?
Speaker 1
I think we can say we we have a few more reps that are beginning to to creep up into what we call top reps. But those people up at the top five, six, seven, they are depending on the mix of orders, etcetera, they're producing between one five and one eight. So that's still what we've seen in the past. But, of course, we hope to get us a decent amount of our sales reps long term up in that range. But that's obviously a long term goal.
Speaker 4
Great. Very helpful. Can you remind us, is there a standard kind of quantity and cadence of supplies patients usually receive? And then kind of piggybacking on that, is there a process for patients to either request more or less supplies? And what percentage of patients actually kind of vary from that kind of standard quantity?
Speaker 1
Well, in terms of requesting more or less supplies, that is what our call center I believe we probably have 12 people there, And a big chunk of their phone calls are all about are about those type of things where patients either need more supplies or less supplies. In terms of if there's a standard, it's really up to the individual insurance company and how they allow or how many supplies they allow for the patients. Some insurance company has rules in there where we we need to check with the patient every three months, and then we can continue if we get a confirmation. So it it it's really all regulated by the insurance companies, and they obviously get an initial amount of supplies when when we ship the device. And from from there on out, it's it's really what what kind of quantities that the insurance company allows.
So we have we have a big big part of that. Our billing department is involved in in managing all that so that, we we make sure we we ship out, as as much as insurance, allows, but also get it billed for so we can get paid for it, obviously.
Speaker 4
Understood. A few more from me here. When doctor prescribes the device, is there any indication of what modality they're specifically recommending for the patient? And would that potentially impact insurance reimbursements? I I know the inferential current is potentially 40 times more powerful than the 10.
So, I mean, does that impact does that have any impact?
Speaker 1
It it it is one of those things that, again, depending on the insurance company,
Speaker 3
how
Speaker 1
they they have it listed in their computers and and how we get paid for it. Something sometimes there's a neuromuscular electrical stimulation code that can be applied if if the doctor prescribed that, that's another modality in our device that pays a different amount, again, depending on the insurance company. So it's a bit of a puzzle depending on what kind of indications we get with the prescription that literally the ailment that we are treating and the information we get on file. Also what insurance companies allow. And obviously, the three different modalities in the next wave, there are different allowable amounts.
Sometimes it's all the same. So it's really on a case by case basis.
Speaker 4
Sure. Have you seen any change in the duration of insurance reimbursements? Think previously you said most patients kind of use it for six to nine months. Is that still the time period that insurance is providing coverage?
Speaker 1
Yes, that's the average. Obviously, there's certain more chronic conditions where insurance companies tend to cover it for a very long time. And then there's the more acute, for instance, after orthopedic surgery, that sometimes is covered for a shorter period of time. I believe the latest number I've seen is somewhere between eight and ten months, is the average in all of that. And obviously, we have some patients that don't get covered at all, And they obviously track down the averages dollar wise and time wise.
Speaker 4
Sure. And final one from me, and I'll turn it back over. When was the last time a regulatory body contacted Zynex or came out to a facility unrelated to the blood volume monitor? And was there anything that was found in violation?
Speaker 1
The last time we had a government audit, that would have been in the spring of this year. The FCA came out in one of their surprise audits. They left two days early, we had no major and no minor observations.
Speaker 4
Great. Thank you very much. That's it from me.
Speaker 1
Thank you.
Speaker 0
The next question today comes from Yi Chen of H. C. Wainwright. Please go ahead.
Speaker 5
Thank you for taking my questions. My first question is, how long do you expect a new newly hired sales rep to realize his full potential?
Speaker 1
Transceptual Yeah. Yeah. Can can often take up to towards eighteen months. Once they are three to four months in, we have a pretty good idea, but it's still getting to the point of just getting over 10 or 15 orders for the typical reps. Some blow it out of the water right after the first three or four months and typically, you can keep producing a high amount of orders.
But on the average, we got to be well away at twelve months before we kind of know what plateau where they would probably plateau. And again, like many other things in this industry, they fall I wouldn't call it all over the map, but there are so many different scenarios. And obviously, we keep growing the sales force, eventually more and more of our focus will be directed towards making them more productive than they currently are versus right now, the majority of the focus is on the recruiting. That obviously is going really well. And then the initial training where we bring sales reps into the office here and spend two point five days training them.
And as we deploy them, when they get back home, our regional sales managers then get with them and make sure they get off to a good start. We also have a process where we provide what you can consider semi warm leads to brand new sales reps so that they have a higher success rate other than just looking up the local yellow pages. I hope that answers your question.
Speaker 5
Right. And also, I mean, just to follow-up, at your expected level of sales for a single sales rep, what would be the ratio of the annual sales generated by that sales rep compared to the cost of that sales rep?
Speaker 1
Cost of a sales rep versus maybe we should look at it as a percentage of of revenue. Sure. I I think long term, we are looking at, and now I'm just guessing, 10% to 15% of the revenue is what we pay sales reps and base salaries, health insurance, car allowance, sales commission, obviously, which is gonna be the the biggest part of it. That's that's the kind of numbers we are we are looking at, which is not too too different from other companies in the medical device industry.
Speaker 5
Got it. Got it. And, also, additionally, is the company currently implementing any additional strategy or policy to further improve the reimbursement that you receive from reinsurance companies, you know, particularly from those insurance companies who have not historically paid for NexWave device and supplies?
Speaker 1
Oh, yeah. That's that's a good question. Obviously, one of those things we're dealing with is, as far as I've seen over the past twenty four years in this industry, the main change I've seen is, would be the name of the insurance company that's the most difficult this month keeps changing. And what that also means that there are certain areas that that that some of the larger HMOs or or commercial insurers that sometimes either slow down payments or or instill different criteria for how we should bill them for them to actually cut us a check. Then there are times where we've been better at negotiate.
Speaker 3
Hello?
Speaker 1
Yeah. Can you hear us?
Speaker 5
Yeah. Now I can hear you.
Speaker 1
Oh, okay. So it it it it it really, it it ebbs and flows, all the time what what type of insurances, pay better. It's it's it's been, the same kind of fluctuations over the past twenty four years. When we, in the past, didn't collect as well as we do now, has really been related to shooting ourselves in the foot in terms of we've been able to hire better quality people for our billing department. But that practically means that we are less likely to miss if an insurance company paid for a couple of months and then skipped a couple of months and then started paying again and all in very different dollar amounts.
And we're better at catching that now so that we don't leave as much money on the table when an insurance company clearly wants to cover a patient but may have skipped a couple of months. That's a typical pattern in our industry. The better people we have that can recognize patterns and also people in the billing department that are good at negotiating. That combination has really helped in the past four or five years in our financials. So that's there's really nothing that that looks like it's gonna change dramatically on us.
It it's been fairly fairly consistent over the past twenty four years.
Speaker 5
Okay. Thank you.
Speaker 0
This concludes our question and answer session. I would like to turn the conference back over to Thomas Sandgaard for any closing remarks.
Speaker 1
I hope today's earnings call has been informative for everyone, and I appreciate the interest in Zionix 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.