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Zynex, Inc (ZYXI 3.42%)
Q3 2019 Earnings Call
Oct 29, 2019, 4:15 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Zynex Third Quarter 2019 Earnings Conference Call. [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 Form 10-K for the year ended December 31, 2018, as well as Forms 10-Q, 8-K and 8-K/A, press releases on the company's website. Please note this event is being recorded. I would now like to turn the conference over to Thomas Sandgaard, Founder, Chairman, and Chief Executive Officer. Please go ahead.
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
Good afternoon, my name is Thomas Sandgaard, President and CEO of Zynex. Welcome to our Third Quarter 2019 Earnings Call. I'm excited to announce another quarter of revenue growth and positive net income. Our third quarter was our 13th straight quarter with positive net income. Third quarter revenue was $11.8 million, with net income of $0.06 per fully diluted share. Revenue increased 45% compared to the same quarter last year, and we reported positive net income of $2 million. EBITDA in the quarter was just over $2.8 million, and year-over-year revenue increase the last many quarters has been in the 35% range, and our revenue growth has slowly started to accelerate this year, due to an 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 the 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 an 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 continued 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 2019. Currently, we have 53 reps that are independent, those are what we consider pre-2018 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 parted ways with about 47 independent sales reps, mostly non-productive, 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 $11.9 million at the end of Q3, compared to $10.1 million at the end of 2018. 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 proposition to use our prescription-strength technology as the first line of defense when treating pain. Currently, the devastating impact has reached the 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 NeuroMove device for stroke rehabilitation, and the InWave for incontinence treatment. Those put 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.
Daniel J. Moorhead -- Chief Financial Officer
Thanks, Thomas. First, I'll review our 2019 third quarter results. Orders grew 95% year over year, which drove net revenue up 45% to $11.8 million from $8.1 million in 2018. Device revenue increased 47% to $2.7 million, compared to $1.8 million last year. Supplies revenue increased 45% year-over-year to $9.2 million from $6.3 million. 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&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&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 million or $0.06 per diluted share, compared to net income of $2.6 million or $0.08 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 as reconciled in our press release was $2.8 million in the third quarter of 2019.
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 $31.3 million from $22.6 million in 2018. Device revenue increased 37% to $6.9 million, compared to $5.1 million last year. Supplies revenue increased 39% year over year to $24.4 million from $17.5 million. Gross margins were 81% in the first nine months of 2019 and 2018. 2019 net income was $6.5 million or $0.19 per diluted share, compared to net income of $6.9 million last year. Adjusted EBITDA was $8.1 million, up 4% from $7.8 million last year. We generated operating cash flows during the first nine months of 2019 of $4.2 million compared to $6.7 million 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 30, 2019 our cash balance was $11.9 million, up from $10.1 million at year end, and our working capital grew 92% to $14.1 million in Q3, compared to $7.3 million as of December 31, 2018.
I'll now turn the call back over to Thomas.
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
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 our 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 fourth quarter revenue to be between $12.3 million and $12.8 million with adjusted EBITDA between $2.3 million and $2.8 million.
As a reminder, nearly all of our collections from billings come from insurance companies, mostly private insurance, but also government, auto insurance, Workers' Comp and personal insurance 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, 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 are 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've 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 distribution, with more clinical research to support our advertising, staff up the business development side, etc. We are also looking at adding more products throughout this division, including additional product development internally.
Later today, along with our normal quarterly SEC filings, we are filing an 8-K related to a supplement to the S3 we filed a little over half-a-year ago. In short, we are allowing for $50 million of the $100 million active shelf registration to be used as an at-the-market or ATM offering. All it does is give us some flexibility and is 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.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question today comes from Jeffrey Cohen of Ladenburg Thalmann. Please go ahead.
Jeffrey Cohen -- Ladenburg Thalmann -- Analyst
Hi, Thomas and Dan, how are you?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
Hey, Jeff, how are you?
Jeffrey Cohen -- Ladenburg Thalmann -- Analyst
I am just fine, so three or four questions for you, if I may. Firstly, Dan, the tax rate for the quarter, 18.6%. Are the NOLs gone? Should we anticipate that their rate kind of creeps up toward the mid to high 20s, say 26%, 27% ?
Daniel J. Moorhead -- Chief Financial Officer
Yeah the NOLs are gone and they have been gone in 2019. 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 being deductions in the quarter, so that's what drove the rate down from that 26%. I think it's, you know, 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 19% or 20%.
Jeffrey Cohen -- Ladenburg Thalmann -- Analyst
Okay, so for modeling purposes, mid to high 20s would be a good, conservative number over the near term?
Daniel J. Moorhead -- Chief Financial Officer
Yeah, I think the mid-20s, or I think that 25% or 26% is about right to model at.
Jeffrey Cohen -- Ladenburg Thalmann -- Analyst
Okay, got it. And then Thomas, talk a little bit about the sales channels that are in effect now. It sounds like the vast majority continues to be through the direct channel, which as you stated, you're going to continue to add in the teams.
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
We don't expect to be making any more significant reductions to our independent sales reps. They have their territories that they cover, and they cover them pretty well. And on the additions, the W2 sales reps with a base salary plus a less aggressive commission rate, here by year end we should have about half of all the territories we have identified, populated. At some point, obviously, as I mentioned, we are trying to accelerate how fast we populate them, and at some point when we get there, we will 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 non-productive independent sales reps happened a little earlier than we probably expected. But other than that, it's working just as planned.
Jeffrey Cohen -- Ladenburg Thalmann -- Analyst
Got it. And then talk a little bit about territories. Are you finding that you're adding in smaller, less popular geographies, or you're adding seconds and thirds in larger geographies?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
No, we have mapped out 400 territories that consist of approximately 800,000 people, as a round number. We just keep plugging into those, so we don't have any territories that we suddenly have two people in them. It's all mapped out already.
Jeffrey Cohen -- Ladenburg Thalmann -- Analyst
Okay, and then could you reiterate what you were talking about with the progress on the blood volume monitor, please?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
Not a whole lot to report. We are doing an additional round of testing with a testing laboratory that the FDA asked us to do. We are now testing for environmental testing, vibration and shock and things like that, that you could argue if they're actually necessary or not. Some people argue that they are not, but we made the decision to just go forward and get it done anyway. We should have most of that done in the month of December. A few other questions we are answering, we also have the pilots of some actual clinical studies, IRB-approved clinical studies, in the works. We also are testing on some things that are for our next generation of the product as well.
Jeffrey Cohen -- Ladenburg Thalmann -- Analyst
Okay. Do you think we'll see any studies or any podiums from any of the IRBs in the next year?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
It depends on how fast they can get out there. They need to get completed, and obviously then getting them publicized sometimes can be a lengthy process, That's hard to say at this point in time here, so I'd like to wait to comment on that until we are a little further ahead.
Jeffrey Cohen -- Ladenburg Thalmann -- Analyst
Okay, got it. Great quarter, and thanks for taking the questions.
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
Yes, thank you.
Operator
The next question today comes from Marc Wiesenberger of B. Riley FBR. Please go ahead.
Marc Wiesenberger -- B. Riley FBR -- Analyst
Yeah, 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? Kind of just give us little more commentary there?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
Well, it's a mix. Nearly all of the growth is obviously coming from new reps we've hired here over the past three years. So some reps that got hired maybe a year ago, a year-and-a-half ago, they are breaking into additional clinics, and so we see some new prescribers from those. Obviously all of the new reps, a few of them are actually beginning to send in their first few orders, and that all adds up to the kind of order growth, 95% year over year that we've experienced in the third quarter.
Marc Wiesenberger -- B. Riley FBR -- Analyst
Okay. I know you've got some longer-term targets for reps to generate about $1 million in annual sales, but kind of currently, what is the top rep producing on a quarterly basis, and how has that been trending over the last few quarters?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
I think we can say. We have a few more reps that are beginning 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, etc, they are producing between $1.5 million and $1.8 million, so that's still what we've seen in the past. Of course, we hope to get a decent amount of our sales reps, long term, up in that range, but that's obviously a long-term goal.
Marc Wiesenberger -- B. Riley FBR -- Analyst
Great, very helpful. Can you remind us, is there a standard kind of quantity and cadence of supplies that patients usually receive? And then, piggybacking on that, is there a process for patients to either request more or less supplies? What percentage of patients actually vary from that standard quantity?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
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 those type of things, where patients either need more supplies or less supplies. In terms of if there is a standard, it's really up to the individual insurance company and how they allow, how many supplies they allow for the patients. Some insurance companies have rules in there where we need to check with the patient every three months, and then we can continue if we get a confirmation. So, it's really all regulated by the insurance companies, and they obviously get an initial amount of supplies when we ship the device, and from there on out, it's really what kind of quantities that the insurance company allows. We have a big, big part of our billing department is involved in managing all of that, so that we make sure we ship out as much as insurance allows, but also get it billed properly so we can get paid for it, obviously.
Marc Wiesenberger -- B. Riley FBR -- Analyst
Understood. A few more from me here. When a doctor prescribes the device, is there any indication of what modality they are specifically recommending for the patient? Would that potentially impact insurance reimbursements? I mean, I know the inferential current is potentially 40 times more powerful than the 10, so I mean, does that have any impact?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
It is one of those things that, again, depending on the insurance company, how they have it listed in their computers and how we get paid for it. Sometimes there is a neuromuscular electrical stimulation code that can be applied, if the doctor prescribed, 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, literally the ailment that we are treating, and the information we get on file, and also, what insurance companies allow. Obviously, between the three different modalities in the NexWave, there are different allowable amounts. Sometimes it's all the same, so it's really on a case-by-case basis.
Marc Wiesenberger -- B. Riley FBR -- Analyst
Sure. Have you seen any change in the duration of insurance reimbursements? I think previously you said most patients kind of use it for six to nine months. Is that still the time period that the insurance is providing coverage?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
Yeah, that's the average. Obviously, there are certain more chronic conditions where insurance companies tend to cover it for a very long time, and then there is 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 8 and 10 months is the average in all of that. And obviously, we have some patients that don't get covered at all, and they obviously drag down the averages, dollar wise and time wise.
Marc Wiesenberger -- B. Riley FBR -- Analyst
Sure. A final one from me, and I will 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? Was there anything that was found in violation?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
The last time we had a government audit, that would have been in the spring of this year. The FDA came out on one of their surprise audits. They left two days early, and we had no major and no minor observations.
Marc Wiesenberger -- B. Riley FBR -- Analyst
Great, thank you very much. That's it from me.
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
Thank you.
Operator
The next question today comes from Yi Chen of HC Wainwright, please go ahead.
Yi Chen -- HC Wainwright -- Analyst
Thank you for taking my questions. My first question is, how long do you expect a newly hired sales rep to realize his full potential?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
For their full potential, it can often take up toward 18 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 can keep producing a high amount of orders. But on the average, we are going to be at 12 months before we kind of know what plateau or where they would probably plateau. And again like many other things in this industry, the default, I wouldn't call it all over the map, but there are so many different scenarios.
Obviously, as we keep growing the sales force, eventually, more and more of our focus will be directed toward 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. Then the initial training where we bring sales reps into the office here and spend two-and-a-half days on training them. 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 YellowPages. I hope that answers your question.
Yi Chen -- HC Wainwright -- Analyst
Right. And also, I mean, just to follow up, at your expected level of sales for a sales rep, what would be the ratio of the annual sales generated by that sales rep, compared to the cost of that sales rep?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
The cost of a sales rep versus -- maybe we should look at it as a percentage of revenue.
Yi Chen -- HC Wainwright -- Analyst
Sure.
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
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 in base salaries, health insurance, car loans, sales commission, obviously, which is going to be the biggest part of it. That's the kind of numbers we are looking at, which is not too different from other companies in the medical device industry.
Yi Chen -- HC Wainwright -- Analyst
Got it, got it. Also, additionally, is the company currently implementing any additional strategy or policy to further improve the reimbursement that you receive from insurance companies? Particularly from those insurance companies who have not historically paid for the NexWave device and supplies?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
Yes, that's a good question. Obviously, one of the things we are dealing with is, as far as I've seen over the past 24 years in this industry, the main change I've seen would be the name of the insurance company that's the most difficult this month keeps changing. What that also means is that there are certain areas that some of the larger HMOs or commercial insurers, that sometimes either slow down payments 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 negotiating. [Technical Issues].
Yi Chen -- HC Wainwright -- Analyst
Hello?
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
Yeah, can you hear us?
Yi Chen -- HC Wainwright -- Analyst
Yeah, now I can hear you.
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
Okay. So, it really ebbs and flows all the time, what type of insurance pay better. It's been the same kind of fluctuations over the past 24 years. When we, in the past, didn't collect as well as we do now, it 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, all in very different dollar amounts. We are better 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, and the better people we hire, we have that can recognize patterns, and also the people in the billing department that are good at negotiating, that combination has really helped in the past four or five years on our financials. So there is really nothing that looks like it's going to change dramatically. It has been fairly consistent over the past 24 years.
Yi Chen -- HC Wainwright -- Analyst
Okay, thank you.
Operator
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 -- Founder, Chairman, and Chief Executive Officer.
I hope today's earnings call has been informative for everyone. I appreciate the interest in Zynex and listening in to this call. Thank you, and a great day to all of you.
Operator
[Operator Closing Remarks]
Duration: 31 minutes
Call participants:
Thomas Sandgaard -- Founder, Chairman, and Chief Executive Officer.
Daniel J. Moorhead -- Chief Financial Officer
Jeffrey Cohen -- Ladenburg Thalmann -- Analyst
Marc Wiesenberger -- B. Riley FBR -- Analyst
Yi Chen -- HC Wainwright -- Analyst
