Feb 27, 2020
Operator
Good afternoon, and welcome to the Zynex 2019 Q4 and Full Year Earnings Conference Call. All participants will be in listen-only mode.
[Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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, 2019, as well as forms 10-Q, 8-K and 8-Ka, press releases in 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, sir.
Thomas Sandgaard
Good afternoon. My name is Thomas Sandgaard, President and CEO of Zynex.
Welcome to our fourth quarter and full year 2019 earnings call. I'm excited to announce another quarter of revenue growth and positive net income.
Our fourth quarter revenue of $14.2 million, 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 14th straight quarter with positive net income as we reported $0.09 per fully diluted share. Adjusted EBITDA for the fourth quarter was also an all time high at $4.1 million, an increase of 30% compared to the fourth quarter of 2019.
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-K will report 176 total sales reps. That included 134 direct Zynex-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 for production during the first 90 days has more than doubled during 2019.
We'll continue to refine our training program as it's critical for our reps to get off to a good and fast start. We also continue to improve in 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 built for many months and years after the prescription is received. So to put them 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 21% and 27% in the second half of 2018 compared to the year before, while revenue only grew between 15% and 19%.
Then in the first quarter 2019, orders grew 28% and revenue grew 34%. So there was a little catch-up from prior periods there.
In the second quarter of 2019, orders grew 65%, as we have reported, while revenue grew 36% year-over-year. In the third quarter of 2019, orders grew 95%, while revenue now had increased up to a growth rate of 45%.
In the fourth quarter last year, orders grew 129%, to 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 2/3 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 days from prescriptions are received to revenue recognition. I'm very pleased to see our gross profit margin remain at 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're increasingly working to get patients off opioids and propositions 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 NeuroMove 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 CM-1500 is a noninvasive monitor intended to monitor patient's fluid balance in hospitals and surgical centers.
We expect to initially target ORs and surgeries that typically display substantial blood loss as well as recovery rooms and ICUs where internal links today are common and difficult to take to detect until serious complications occur. We believe the product will lead to safer surgeries, pure complications and less mortality, one of the biggest unmet needs in a hospital 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 to go 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 will 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, et cetera.
I will now turn the call over to Dan Moorhead, our CFO.
Dan Moorhead
Thanks, Thomas. First, I'll review our 2019 fourth quarter results.
Orders grew 129% year-over-year, which drove net revenue up 52% to $14.2 million from $9.3 million in 2018. Device revenue increased to 117% to $3.8 million compared to $1.8 million last year.
Supplies revenue increased 37% year-over-year to $10.4 million from $7.6 million. Gross margins were 80% in the fourth quarter of 2019 and 2018.
Beginning in 2019, we began breaking out sales and marketing expense from G&A. This breakout provides greater clarity related to our sales growth initiative and the overall financial statement impact.
Sales and marketing expenses increased to 110% year-over-year as we continue to grow our salesforce. G&A expense grew 25% year-over-year, much of the increase was related to the increased head count in our billing and patient support functions related to our order growth.
Fourth quarter net income was $2.9 million or $0.09 per diluted share compared to net income of $2.6 million or $0.08 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 is reconciled in our press release, increased 30% to $4.1 million in the fourth quarter of 2019.
We have increased income tax expense year-over-year due to our profitability over the last two years, which utilize 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 $45.5 million from $31.9 million in 2018. Device revenue increased 57% to $10.7 million compared to $6.8 million last year.
Supplies revenue increased 39% year-over-year to $34.8 million from $25.1 million. Gross margins were 81% for the years 2019 and 2018.
2019 net income was $9.5 million or $0.28 per diluted share compared to net income of $9.6 million last year. 2019 net income was impacted by an additional $1.8 million in tax expenses we utilized our NOL during 2018.
Adjusted EBITDA was $12.1 million, up 11% from $10.9 million last year. We generated operating cash flows during 2019 of $6.3 million compared to $9.4 million 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 31, 2019, our cash balance was $14 million, up from $10.1 million at year end and net of the $2.3 million dividend, which was paid in the first quarter.
Our working capital grew 137% to $17.4 million at year end compared to $7.3 million as of December 31, 2018. With that, I'll now turn the call back over to Thomas.
Thomas Sandgaard
Thank you, Dan. I'm especially excited about our year-over-year growth in orders of 129% and our revenue growth of 52%.
And 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 million and $14.5 million, with adjusted EBITDA between $2.3 million and $2.8 million.
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 million and $80 million and adjusted EBITDA in the range of $15 million to $18 million.
As a reminder, nearly all of our collections from billing comes from insurance companies, mostly private insurers, but also government, auto insurance, workers' comp and personal injury attorneys. Payments from those are either dictated by contractual amounts well established, liable 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 health care 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 complying 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 or complementary technologies.
The latest news, as you have heard, is that the FDA just now decided to clear our CM-1500 noninvasive Blood Volume Monitor for sale in the U.S. We have already obtained patent protection across the U.S.
and Europe. And while we have obtained FDA trends in the U.S., we are still working with the European notified body to obtain CE mark.
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.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] And the first question today will come from Yi Chen with HC Wainwright. Please go ahead.
Boobalan Pachaiyappan
Hi, this is Boobalan calling in for Yi Chen. And congratulations on the strong quarter.
So I wanted to talk a little bit about the NexWave. So how many sales reps have been – have you guys added so far in 1Q 2020 for the marketing needs of NexWave?
And how many additional reps are expected to add during the rest of the year?
Thomas Sandgaard
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 in March.
And before the end of the year, we expect to be up to – for full coverage of 400 sales reps.
Boobalan Pachaiyappan
For the Blood Volume Monitor, how large of a sales force do you consider to launch?
Thomas Sandgaard
Yes. 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 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.
Unidentified Analyst
And what is the estimated time frame for the launch of the Blood Volume Monitor? And how many hospitals would you like to target in the initial phase?
Thomas Sandgaard
We don't have a specific number of hospitals there 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.
Unidentified Analyst
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?
Thomas Sandgaard
We don't have a number on 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 too to settle on the pricing of those.
But obviously, the consumables will add to the revenue stream as well long term.
Unidentified Analyst
Okay, that’s it from me and congrats again.
Thomas Sandgaard
Thank you very much.
Operator
The next question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.
Jeffrey Cohen
Hi, Tom, [indiscernible] and Dan, how are you?
Dan Moorhead
We’re doing great. How are you doing there?
Jeffrey Cohen
Awesome. Okay.
Just a couple of questions. Firstly, on BVM, could 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 can do all the assembly there and final manufacturing? And maybe could you talk about perhaps from Dan's side, how you're planning on reporting it out far as – the 10%, will you be reporting it separately or not?
Dan Moorhead
Once we get 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.
Thomas Sandgaard
Yes. And we're looking for between 10,000 and 20,000 square feet initiative for that group but in a setup where we can be pretty agile in terms of growing up the space.
We obviously have a pretty good experience with building these devices. It's not that different from building our NexWave and NeuroMove and InWave devices.
And that shouldn't be that – so the production will be the bottom line.
Jeffrey Cohen
But will it be in your same building or same campus?
Thomas Sandgaard
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.
Jeffrey Cohen
Okay. And then big picture of 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 right?
Thomas Sandgaard
Yes. Obviously, the first quarter of this year, we are 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 fourth quarter, yes.
Jeffrey Cohen
Okay. Okay.
And then as far as the numbers you threw out on the guidance side, on the EBITDA side, the 2.3 to 2.8 of the 14 to 14.5 for Q1 and the 15 to 18 off the 75 to 80 for the year. Your 2019 EBITDA of 12.1 over 45, 47, 26.6% so because 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?
Thomas Sandgaard
Obviously, personnel, we'll have to keep increasing our personnel to just keep up with the orders and processing them to get paid and then 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, the 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&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're investing in the sales force basically.
Jeffrey Cohen
Okay. And then remind us of now or current total FTEs and square footage on your facility, all the floors, all four?
Thomas Sandgaard
We have 85 or 86 square feet, 1,000 square feet by now.
Dan Moorhead
Correct. But we have – in the building, we have 160 employees, somewhere in that range.
Jeffrey Cohen
Okay and that’s about what percent of the total?
Dan Moorhead
Say that again.
Jeffrey Cohen
What's the total employees?
Dan Moorhead
Well, you just have to add the sales on top of that, so about 300.
Jeffrey Cohen
Okay, got it.
Thomas Sandgaard
Yes 330 is something like that.
Thomas Sandgaard
Yes.
Jeffrey Cohen
Perfect. Okay.
And then, Tom, as you've talked about in the past, previous TAMs when you've talked about this BVM with me. So how do we think about this, there's 4,000, 5,000, 6000 hospitals, of which units could be higher utilized in a number of departments?
Thomas Sandgaard
Right. So ideally, I 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 billion.
That would be an ideal scenario. We'll see how it works out.
Jeffrey Cohen
Excellent. Thanks for taking the questions.
Dan Moorhead
Yes, thanks Jeff.
Operator
And our next question comes from Marc Wiesenberger with B. Riley FBR.
Please go ahead.
Marc Wiesenberger
Yes, 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?
Thomas Sandgaard
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 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 were a little below 200 at year-end.
But right now, we are well above 200 because we added 40 sales reps in January and February, 16 in January, 24 in February, and it looks like we'll be well more than that here in March.
Marc Wiesenberger
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 2018 and the first quarter in 2019?
Kind of how quickly are they getting their first orders, how long until breakeven, that kind of thing?
Thomas Sandgaard
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 break even on a – when they exceed three or four orders.
So that's very good 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 90 days of the new reps order production compared to, as you said, a year ago.
So things are getting better in terms of 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.
Marc Wiesenberger
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?
Thomas Sandgaard
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 that our billing system would take us up to 20 minutes to get set up directly 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 – all the purchase are checked, et cetera.
So if you can imagine that 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 20 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.
Marc Wiesenberger
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, would 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?
Thomas Sandgaard
Yes, because of how cash flow positive, we are – we can grow faster by adding more cash. We have – or at the end of last year, we had $14 million 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, et cetera.
So even at a rate where we're growing as fast as we possibly can, we still keep adding to our cash balance. So I'd say, unless we run into an acquisition where we would need more money than would be healthy for our cash balance or for the new division will be expenses that would tap unreasonably into that cash balance.
Then we could potentially get it. But there's absolutely no urgency in raising money here on the contrary.
Marc Wiesenberger
Okay. Can you talk about progress that reps are making selling additional products beyond the NexWave?
Thomas Sandgaard
We carry products from other manufacturers. Cervical traction is one of them, low back support devices, another one, cold therapy that's primarily used after orthopedic surgery, products like that.
And we've 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 a strategic point of view.
Marc Wiesenberger
Do you expect that to kind of accelerate throughout the year or kind of stay status quo?
Thomas Sandgaard
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.
Marc Wiesenberger
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?
Thomas Sandgaard
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, 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 depending on insurance coverage.
Marc Wiesenberger
Sure. Understood.
And one final one for me. Thomas, 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 Zynex?
Thomas Sandgaard
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 that 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 in.
I believe we're also smarter than maybe we have seen other companies in the industry when it comes to negotiating contracts, et cetera, 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% is the reason why we're doing so well today is good quality employees.
Marc Wiesenberger
Great thank you very much.
Operator
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.
Thomas Sandgaard
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 all, and have a great day.
Operator
Thank you, sir. The conference has now concluded.
Thank you for attending today's presentation. You may now disconnect.