Zynex - Earnings Call - Q4 2019

Transcript

Speaker 0

And welcome to the Zynix twenty nineteen Q4 and Full Year Earnings 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, 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 ks for the year ended December 3139, as well as Forms 10 Q, eight ks, and eight Ka, 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 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 fourth quarter and full year twenty nineteen earnings call. I'm excited to announce another quarter of revenue growth and positive net income. Our fourth quarter revenue of $14,200,000 increased 52% compared to the same quarter last year, which was the highest quarterly growth rate of 2019.

It was also the highest quarterly revenue in the history of the company. It was our fourteenth straight quarter with positive net income as we reported $09 per fully diluted share. Adjusted EBITDA for the fourth quarter was also an all time high at 4,100,000.0 an increase of 30% compared to the fourth 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 129% year over year in the fourth quarter, and we continue to see strong reimbursement for our products. Orders grew consecutively 31% between the third and the fourth quarters as a result of more of our 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 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 the prescription as patients continue to use our device and the related supplies for continued pain relief.

The length of time the patient uses our device is primarily decided by the health insurance company as well as if the patient reaches a point of no longer needing the device. In Q4, we sustained our aggressive sales force growth. Our 10 ks will report 176 total sales reps. That included 134 direct Cynix only reps, but that number doesn't include new hires that have a start date in 2020 due to end year holidays. As of today, we have well over 200 sales reps.

And through last week, we've added more than 40 direct reps this year, 16 in January and 24 alone in February, as we push hard to reach our goal of filling all 400 territories across United States. Another important achievement during 2019 was the improvement of our sales onboarding and training. Our investments have paid off, and the average sales rep production during the first ninety days has more than doubled during 2019. We'll continue to refine our training program as it's critical for our reps get off to a good and fast start. We also continue to improve on our efforts to provide warm leads for our newly trained reps as soon as they're deployed.

I should point out that our orders continue to grow at an accelerating rate and cash collection from insurance companies, they remain fairly constant. And as monthly rentals and supplies are billed for many months and years after the prescription is received. So to put it into perspective, and some of you that look at these things might want to take notes here. So if we try to follow order growth and revenue growth, orders grew between 2127% in the 2018 compared to the year before, while revenue only grew between 1519%. Then in the first quarter of twenty nineteen, orders grew 28% and revenue grew 34%.

So there was a little catch up from prior periods there. In the second quarter of twenty nineteen, orders grew 65% as we have reported, while revenue grew 36% year over year. In the third quarter of twenty nineteen, orders grew 95%, while revenue now had increased up to a growth rate of 45. In the fourth quarter last year, orders grew 129%, so more than double over the year before, while revenue slowly grew up to a growth rate of 52%. And for the first quarter of this year, right now, we are two thirds into the quarter.

We are on pace to beat the fourth quarter year over year order growth, while we are estimating revenue growth at approximately 55%. I believe this gives a pretty good overview of how much lag there is from prescriptions I received to revenue recognition. I'm very pleased to see our gross profit margin remain at the 81% level for 2019, 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 of the opioid crisis 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 pain management, our new move device for stroke rehabilitation and the InWave for incontinence treatment. Those products put 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 the 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 a few days ago. The CM1500 is a noninvasive monitor intended to monitor patients' fluid balance in hospitals and surgical centers. We expect to initially target ORs and surgery 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. Until now, our efforts have primarily been on engineering, regulatory and clinical research.

The product works well, and we have so far produced three dozen of these devices. We got all the packaging, production procedures and everything ready for a market launch. And we will initially focus on developing key opinion leaders or KOLs in the medical, hospital and research communities, building an organization of business development people, marketing, we'll be increasing the clinical research and also expand our production capabilities for this product line. Even though this is a very different call point than our pain management business and therefore, a separate business unit, we will initially be able to leverage and take advantage of the synergies from our well established production lines, human resources, quality control, etcetera. I will now turn the call over to Dan Moorhead, our CFO.

Speaker 2

Thanks, Thomas. First, I'll review our twenty nineteen fourth quarter results. Orders grew 129% year over year, which drove net revenue up 52% to $14,200,000 from $9,300,000 in 2018. Device revenue increased 117% to $3,800,000 compared to $1,800,000 last year. Supplies revenue increased 37% year over year to $10,400,000 from $7,600,000 Gross margins were 80% in the 2019 and 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 110% year over year as we continue to grow our sales force. G and A expense grew 25% 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.

Fourth quarter net income was $2,900,000 or $09 per diluted share compared to net income of $2,600,000 or $08 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 other income and expense, and as reconciled in our press release, increased 30 to $4,100,000 in the fourth 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 on to the full year results. Orders grew 83% year over year, which drove net revenue up 42% to $45,500,000 from $31,900,000 in 2018.

Device revenue increased 57% to $10,700,000 compared to 6,800,000 last year. Supplies revenue increased 39% year over year to $34,800,000 from $25,100,000 Gross margins were 81% for the years 2019 and 2018. 2019 net income was 9,500,000 or $0.28 per diluted share compared to net income of $9,600,000 last year. 2019 net income was impacted by an additional $1,800,000 in tax expense as we utilized our NOLs during 2018. Adjusted EBITDA was $12,100,000 up 11% from $10,900,000 last year.

We generated operating cash flows during 2019 of $6,300,000 compared to $9,400,000 in 2018. Cash flows were affected by increased tax expense in 2019 and growth in inventory and receivables. On the balance sheet, as of December 3139, our cash balance was $14,000,000 up from $10,100,000 at year end and net of the $2,300,000 dividend, which was paid in the first quarter. Our working capital grew 137% to $17,400,000 at year end compared to $7,300,000 as of December 3138. With that, 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 129% and our revenue growth of 52%. 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 products, continues to drive increased revenue and profitability.

We estimate our first quarter revenue to come in between 14,000,000 and 14,500,000.0 with adjusted EBITDA between 2,300,000.0 and $2,800,000 As a reminder, first quarter revenue is historically affected by health insurance deductibles not being met in the beginning of the year. And for the full year of 2020, we estimate revenue between $75,000,000 and $80,000,000 and adjusted EBITDA in the range of 15,000,000 to $18,000,000 As a reminder, nearly all of our collections from billing comes from insurance companies, mostly private insurers, but also government or 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 negotiated amounts sometimes on a patient by patient basis. These amounts are typically discounted by deductible and co pay deductions, and we end up getting much less than our MSRP as is typical through the healthcare industry in The U. S.

This pattern is the same whether we get paid for the device or whether we get paid for the patient supplies. We are careful to make sure our billing practices are always within the law and compliant with all guidelines and regulations. We also undergo regular accreditation by a third party to ensure that 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.

The latest news, as you have heard, is that the FDA just now decided to clear our CM1500 noninvasive blood volume monitor for sale in The U. S. We have already obtained patent protection in both The U. S. And Europe.

And while we have obtained FDA clearance in The U. S, we are still working with the European notified body to obtain CE marking. We will continue to update everyone as we are building 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

Thank you. We will now begin the question and answer session. And the first question today will come from Yi Chen C. Wainwright.

Please go ahead.

Speaker 3

Hi, this is Bubalen calling in for Yi Chen, and congratulations on the strong quarter. So I wanted to talk a little bit about the Next Wave. So how many sales reps have been have you guys added so far in 1Q twenty twenty for the marketing needs of Next Wave? And how many additional reps are expected to add during the rest of the year?

Speaker 1

We yes, this is Thomas. We have added 40 reps so far, 16 in January, 24 in February, and we're looking to increase that number substantially here in March. And before the end of the year, we expect to be up to a full coverage of 400 sales reps.

Speaker 3

For the blood volume monitor, how large of a sales force do you consider to launch?

Speaker 1

Yeah. Technically, you could say that we have already launched now. We have the ability to sell. I expect that we will start adding some business development people that can start working with key opinion leaders and potentially also start selling direct to some hospitals here initially. But that's something that's probably going to develop slowly.

But it's happening separate from our existing sales force and separate from the rest of the organization. We're already looking for additional space just for that separate division.

Speaker 3

And what is the estimated timeframe for the launch of Blood Volume Monitor? And how many hospitals would you like to target in the initial phase?

Speaker 1

We don't have a specific number of hospitals we'll be targeting right off. We still have a month or two, I believe, of getting settled with the whole sales and marketing and business development of that division.

Speaker 3

And with regards to the price level, what's the approximate price level and maybe you can talk about the gross margin of the device. And then how many units would you like to or do you expect to deliver in 2020?

Speaker 1

We don't have a number on how many units we expect to deliver, but we expect the MSRP to be $30,000 or right around that level, both here in The U. S. And later, more or less the same price level in Europe. There's going to be an element of consumables that go with the product, and we are still to settle on the pricing of those. But they'll obviously the consumables will add to the revenue stream as well long term.

Speaker 3

Okay. That's it from me. Congrats again.

Speaker 1

Thank you very much.

Speaker 0

The next question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Speaker 4

Hi, Thomas and Dan. How are you?

Speaker 1

We're doing great. How are you doing, Jeff?

Speaker 4

Awesome. Okay. Just a couple of questions. Firstly, on DVM, can you talk a little bit about your physical facility there with the four floors? How many folks may be in and how many square feet?

Sounds like you're gonna do all the assembly there and final manufacturing. Then could you talk about perhaps from Dan's side, how you're planning on reporting it out as far as when it gets to 10%, will you be reporting it separately or not?

Speaker 2

Once it gets to that level, we'll definitely report it separately. Obviously, initially, it's going to be less than that. So when it becomes material, it will be a segment that we report.

Speaker 1

Yes. And we're looking for somewhere between 30,000 square feet initially for that group, but in a setup where we can be pretty agile in terms of growing out the space. So we obviously have a pretty good experience with building these devices. It's not that different from building our next wave and neuromove and in wave devices. And that shouldn't be that sort of the production won't be the bottleneck.

Speaker 4

Will it be in your same building or same campus?

Speaker 1

We hope to keep things here in the same campus. It's a good question. Obviously, the production part of it can stay here at least initially in the same building.

Speaker 4

Okay. And then big picture on what you're talking about on guidance Q1 and the year. I mean, that's pretty dramatic and significant growth rate off of what we're currently forecasting. So based on the continued trajectory as far as the orders and the revenue, I would assume that you would expect those rates to continue to move north on arguably both sides, both orders and revenues. Is that all right?

Speaker 1

Yes. Obviously, the first quarter this year, we're two months into it. Unless the bottom falls out of March, which obviously with the increase in sales reps and how productive new reps from last year are quickly becoming, we have an expectation of growing even faster in the first quarter than we did in the first quarter, yes.

Speaker 4

Okay. And then as far as the numbers you threw out on the guidance side, on the EBITDA side, the 2,300,000,000.0 to 2.8 off the 14,000,000,000 to 14,500,000,000.0 for Q1 and the 15,000,000,000 to 18,000,000,000 off the 75,000,000,000 to $80,000,000,000 for the year. Your 2019 EBITDA, oh lord, 12.1 over 45, 47, 26.6%. So I guess what you're showing is 17.5 for the first quarter and then 21.2. Could you talk about maybe the 26 going to 22 as far as where that money is being spent?

Is it more on personnel or is it more in equipment or is just the dramatic increase as far as the sales organization?

Speaker 1

Obviously, we'll have to keep increasing our personnel to just keep up with the orders and processing them to get paid. And then there are all the support functions that needs to grow with the increase in personnel. But dollar wise, for the next quarter or two from here, we will definitely see a steep increase in the sales expenses, base salaries. And obviously, the commissions sales commissions as orders continue to grow. So that's where you're going to see the most.

We hope at all times to keep the G and A portion of the expenses below the well below the top line growth. But for a short while, we'll still see the growth in sales expenses to be higher than the revenue growth. We got to we're investing in the sales force basically.

Speaker 4

Okay. And then remind us of now or current total FTEs and square footage on your facility, all the floors, all four?

Speaker 1

I believe we have 85 or 86 square feet. 1,000 square feet by now.

Speaker 2

Correct. In the building, we have 160 employees, somewhere in that range.

Speaker 0

And that's about what percent of total?

Speaker 2

Say that again?

Speaker 4

What's the total total employees?

Speaker 2

Well, you just have to add the sales on top of that. About 300.

Speaker 4

Yes,

Speaker 1

three thirty or something like that.

Speaker 2

I guess, yes, that is.

Speaker 4

And then, Thomas, you've talked about in the past the previous TAMs when you've talked about this BVM with me. So, how do we think about this? There's 4,000, 5,000, 6,000 hospitals of which units could be highly utilized in a number of departments?

Speaker 1

Right. So ideally, would like to eventually have sold up towards 20 of our devices to an average hospital or surgical center. And that if that all comes through and it's all at a $30,000 price point, we're obviously talking about $3,000,000,000 That would be an ideal scenario. We'll see how it works out.

Speaker 4

Excellent. Thanks for taking the questions.

Speaker 1

Yeah, thanks, Jeff.

Speaker 0

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

Speaker 5

Yep, thank you. I dialed in a little late, so I apologize if maybe you addressed any of this in your remarks. But how many new territories did you expand into in the fourth quarter? And then maybe how many new territories you're looking to expand into for the full year 2020?

Speaker 1

Yes. The 2020 question is obviously pretty easy because we have a little less than 200 open territories right now. And so that's what we expect to expand into between now and the end of the year. In the fourth quarter, we had a quite a mix of quite a few additions, but we also had quite a bit of cleanup in our sales force in the month of December. That's why we on the payroll, we're a little below 200 at year end.

But right now, we are well above 200 because we added 47 reps in January and February, 16 in January, 24 in February, and it looks like we'll be hiring well more than that in March.

Speaker 5

Understood. Can you provide some updates on the productivity of new reps on an absolute basis and maybe relative to the cohorts kind of from the fourth quarter in twenty eighteen and the first quarter in twenty nineteen? Kind of how quickly are they getting their first orders? How long till breakeven, that kind of thing?

Speaker 1

Yes. If you look at our gross profit margins and the base salaries of close to $50,000 a year and the commission rates, we still breakeven on a rep when they exceed three or four orders. So that's pretty good because all because of the high gross profit margins. Then if you look at how well our training is playing out right now, we are well over double in the first ninety days of a new reps order production compared to, as you said a year ago. So things are getting better in terms of a better productivity.

And that also speaks for that we should have less retention in our new sales force going forward compared to what we had last year.

Speaker 5

Sure. As you're scaling the business, can you talk about some of the initiatives that you put in place with regards to maybe automating some more processes to help scale up and quantify either the time or the monetary benefit you're getting from that?

Speaker 1

Oh, we have so many initiatives going on all the time. But one of them a while back was that, like I mentioned, new files would take us with our billing system would take us up to twenty minutes to get set up correctly in the system after order entry and all that, and eventually be able to bill an insurance company after we ship the device. We've automated that in a manner where it's just a matter of seconds now after everything is all the boxes are checked, etcetera. So if you can imagine that we will it won't be long before we'll be smelling 10,000 orders a month and what kind of bottleneck that would be if we were to take twenty minutes on the average order before we could even bill it and the amount of people that would take to process. So that's a significant improvement.

Speaker 5

Understood. With the growth that you're seeing, is there a reason that you are not deploying capital at a faster rate to capture additional business? I mean, you consider maybe taking on some debt to add leverage and fuel the growth even further? Or kind of how should we think about your kind of capital allocation strategy for supercharging?

Speaker 1

Yes. Of how cash flow positive we are we can grow faster by adding more cash. We have 14 at the end of last year, we have $14,000,000 in the bank and continue to grow our cash balance at that rate or better, I should say, because we don't have those items that are nonoperational, such as dividends and stock buybacks, etcetera. So even at a rate where we are growing as fast as we possibly can, still keep adding to our cash balance. I'd say unless we run into an acquisition where we would need more money than would be healthy for our cash balance or therefore the new division will be expenses that would tap unreasonably into their cash balance, then we could potentially look at it.

But it's there's absolutely no urgency in raising money here on the contrary.

Speaker 5

Okay. Can you talk about progress that reps are making selling additional products beyond the next wave?

Speaker 1

We carry products from other manufacturers. Cervical traction is one of them, low back support devices, another one cold therapy, primarily used after orthopedic surgery, products like that. And we have begun promoting those products a little bit here recently and have seen a good response from the clinics at our sales force service in terms of that. So we're getting a little bit of diversification on that end and that's obviously helpful from a strategic point of view.

Speaker 5

Do you expect that to kind of accelerate throughout the year or kind of stay status quo or?

Speaker 1

I would pick a point in between, not necessarily accelerate, but continue to be we'll continue to see more and more of it, yes.

Speaker 5

Okay, understood. Have you changed anything with the amount of consumables being shipped to patients? And maybe can you remind us the quantity the average patient receives on a monthly basis and kind of how that flexes up and down?

Speaker 1

It is so individual by patient, by insurance company, even within the same insurance company, they tend to approve different quantities of supplies and all that. So I couldn't really give you a number on that. But obviously, we report supplies and devices separately. And as you've noticed that there's a little bit of bump in device revenue in the last quarter here. That was because we saw a significant increase in orders, and that's obviously where you would see more device revenue as the supplies revenue will be coming in the following months and years after that

Speaker 0

Understood. Depending on insurance

Speaker 5

And one final one for me. Tom, you've been at this for a while. Maybe could you just share what you learned from your competitors exiting the market? And maybe more importantly, what specific things have you put in place to prevent what happened from them to happening from Zynix?

Speaker 1

Number one is, obviously, we try to at all times stay ahead of issues that are compliance related and also our quality systems. We try to stay ahead of the game. So that's definitely one. Then I would say that we could see compared to the kind of financial performance they those competitors showed that our investments in high quality, smart and with good negotiating skills employees throughout the organization, but it's primarily something that has benefited our billing part of the organization, has really paid off well. Good quality employees have gone a long way.

And I believe we also are smarter than maybe we have seen other companies in the industry when it comes to negotiating contracts, etcetera, with insurance companies. So it's really an overall thing that makes all this click, but our improved financial performance really started five years ago when we started, putting an emphasis on hiring better quality employees. And it's really paying off. I'd say that is 99% the reason why we're doing so well today is good quality employees.

Speaker 5

Great. Thank you very much.

Speaker 0

Ladies and gentlemen, 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

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

Speaker 0

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