Management's Discussion of Results of Operations (Excerpts)
For purposes of readability, Zenith attempts to strip out all tables in excerpts from the Management Discussion. That information is contained elsewhere in our articles. The idea of this summary is simply to review how well we believe Management does its reporting. Also, this highlights what Management believes is important.
In our Decision Matrix at the end of each article, a company with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."
On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 4.
General Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado. We operate one primary business segment, medical devices which include Electrotherapy and Pain Management Products. As of March 31, 2020, the Company’s only active subsidiary is Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) through which the Company conducts most of its operations. One other subsidiary, Zynex Europe, ApS (“ZEU,” a wholly-owned Denmark corporation), did not generate material revenues during the three months ended March 31, 2020 and 2019 from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume monitoring device which was approved by the U.S. Food and Drug Administration (“FDA”) in February 2020 and is awaiting approval by the CE Marking in Europe, therefore, ZMS has achieved no revenues to date. RESULTS OF OPERATIONS Summary Net revenue was $15.2 million and $9.2 million for the three months ended March 31, 2020 and 2019, respectively. Net revenue increased 66% for the three-month period ended March 31, 2020. Net income increased 25% to $2.9 million during the three months ended March 31, 2020 from $2.4 million during the three months ended March 31, 2019. We generated cash flows from operating activities of $0.6 million during the three months ended March 31, 2020. Working capital at March 31, 2020 was $19.9 million, an increase of 14% from $17.4 million as of December 31, 2019. Net Revenue Net revenues are comprised of device and supply sales, constrained by estimated third-party payor reimbursement deductions and estimated uncollectible amounts. Product device revenue is primarily comprised of sales and rentals of our electrotherapy products and also includes our cervical traction, lumbar support and hot/cold therapy products. Supplies revenue is primarily comprised of sales of our consumable supplies to patients using our electrotherapy products, consisting primarily of surface electrodes and batteries. Revenue related to both devices and supplies is reported net, after adjustments for estimated third-party payor reimbursement deductions and estimated uncollectible amounts. Estimates for third-party payor reimbursement deductions and uncollectible accounts are adjusted on an ongoing basis in conjunction with the processing of third-party payor insurance claims and other customer collection history. Billing allowance adjustments are common in our industry whereby third-party payors unilaterally reduce the amount they reimburse for our products as compared to the sales price charged by us. These deductions from gross revenue take into account the estimated denials, net of resubmitted billings of claims for products placed with patients which may affect collectability. We occasionally receive, and expect to continue to receive, refund requests from insurance providers relating to specific patients and dates of service. Billing and reimbursement disputes are very common in our industry. These requests are sometimes related to a few patients and other times include a significant number of refund claims in a single request. We review and evaluate these requests and determine if any refund is appropriate. We also review claims that have been resubmitted or where we are pursuing additional reimbursement from that insurance provider. We frequently have significant offsets against such refund requests which may result in amounts that are due to us in excess of the amounts of refunds requested by the insurance providers. Therefore, at the time of receipt of such refund requests we are generally unable to determine if a refund request is valid. Net revenue increased $6.0 million or 66% to $15.2 million for the three months ended March 31, 2020, from $9.2 million for the same period in 2019. The growth in net revenue is primarily related to the 126% growth in device orders which led to an increased customer base and drove higher sales of consumable supplies. Device Revenue Device revenue is related to the sale or lease of our products. Device revenue increased $1.4 million or 74% to $3.4 million for the three months ended March 31, 2020, from $2.0 million for the same period in 2019. The increase in device revenue is primarily related to growth in orders which is attributable to our increased sales force. Supplies Revenue Supplies revenue is related to the sale of supplies, primarily electrodes and batteries, for our products. Supplies revenue increased $4.6 million or 63% to $11.8 million for the three months ended March 31, 2020, from $7.2 million for the same period in 2019. The increase in supplies revenue is primarily related to an increased customer base from increased device sales in 2019 and 2020, plus improvements in our billing and collection procedures. Operating Expenses Cost of Revenue – Device and Supply Cost of Revenue – device and supply consist primarily of device and supply costs, operations labor and overhead, shipping and depreciation. Cost of revenue for the three months ended March 31, 2020 increased 91% to $3.4 million from $1.8 million for the three months ended March 31, 2019. The increase in cost of revenue is primarily due to an increase of 126% in device orders. As a percentage of revenue, cost of revenue –device and supply increased to 22% for the three months ended March 31, 2020 from 19% for the same period in 2019. The increase as a percentage of revenue is due to lower collections from certain commercial insurance payors. Sales and Marketing Expense Sales and marketing expenses primarily consist of employee related costs, including commissions and other direct costs associated with these personnel including travel expenses and marketing campaign and related expenses. Sales and marketing expense for the three months ended March 31, 2020 increased 111% to $5.2 million from $2.5 million for the three months ended March 31, 2019. The increase in sales and marketing expense is primarily due to the expansion of our sales force including adding 117 new sales representatives and the related costs associated with increased headcount. As a percentage of revenue, sales and marketing expense increased to 34% for the three months ended March 31, 2020 from 27% for the same period in 2019. The increase as a percentage of revenue is primarily due to the increase aforementioned expenses, partially offset by the increase in revenue during the period. General and Administrative Expense General and administrative expenses primarily consist of employee related costs, and other direct costs associated with these personnel including facilities and travel expenses and professional fees, depreciation and amortization. General and administrative expense for the three months ended March 31, 2020 increased 55% to $4.2 million from $2.7 million for the three months ended March 31, 2019. The increase in general and administrative expense is primarily due to increased compensation and benefit expense related to headcount growth, an increase in non-cash stock-based compensation expense as a result of several key hires during the second half of 2019 and increases in rent and facilities expense as we expanded our corporate headquarters during June 2019 and March 2020. As a percentage of revenue, general and administrative expense decreased to 27% for the three months ended March 31, 2020 from 29% for the same period in 2019. The decrease as a percentage of revenue is primarily due to the increase in revenue during the period, partially offset by the aforementioned expenses. Income Taxes The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s effective income tax rate was (19)% for the three months ended March 31, 2020. Discrete items, primarily related to excess tax benefits on stock option exercises, of $1.1 million and $18,000 were recognized as a benefit against income tax expense for the three months ended March 31, 2020 and 2019, respectively. For the three months ended March 31, 2020 the company has an income tax benefit of approximately $0.5 million. For the three months ended March 31, 2019 the company had an income tax expense of approximately $0.8 million. LIQUIDITY AND CAPITAL RESOURCES We have historically financed operations through cash flows from operations, debt and equity transactions. At March 31, 2020, our principal source of liquidity was $14.6 million in cash and $6.5 million in accounts receivable. Net cash provided by operating activities for the three months ended March 31, 2020 and 2019 was $0.6 million and $1.8 million, respectively. The decrease in cash provided by operating activities for the three months ended March 31, 2020 was primarily due to the significant increase in inventory in 2020. The increase in inventory is related to our order growth plus excess stockpiles in anticipation of possible supply chain shortages related to the COVID-19 virus. Net cash used in investing activities for the three months ended March 31, 2020 and 2019 was $0.3 million and $46,000, respectively. Cash used in investing activities for both the three months ended March 31, 2020 and 2019 was primarily related to office furniture and equipment and leasehold improvements at our corporate headquarters. Net cash provided by financing activities for the three months ended March 31, 2020 was $0.2 million compared with net cash used in financing activities of $2.4 million for the same period in 2019. The cash provided by financing activities for the three months ended March 31, 2020 was primarily due to proceeds from the issuance of common stock upon exercises of stock options. Cash used in financing activities for the three months ended March 31, 2019 was primarily due to the payment of a dividend of $2.3 million to stockholders of record on January 2, 2019 and re-purchases of our common stock of $0.2 million. We believe our cash and cash equivalents, together with anticipated cash flow from operations will be sufficient to meet our working capital, and capital expenditure requirements for at least the next twelve months. In making this assessment, we considered the following: · Our cash and cash equivalents balance at March 31, 2020 of $14.6 million; · Our working capital balance of $19.9 million; · Our profitability during the last 15 quarters; and · Our projected income and cash flows for the next 12 months. OFF BALANCE SHEET ARRANGEMENTS The Company had no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders. RISKS AND UNCERTAINTIES In December 2019, a novel Coronavirus disease (“COVID-19”) was reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. While the Company did not incur significant disruptions to its operations during the first quarter of 2020 from COVID-19, it is unable at this time to predict the impact that COVID-19 will have on its business, financial position and operating results in future periods due to numerous uncertainties. The Company has been and continues to closely monitor the impact of the pandemic on all aspects of its business. See also the risk factor relating to COVID-19 disclosed in Item 1A of Part II, below. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the ordinary course of business, we are exposed to certain market risks, including changes in interest rates. Uncertainties that are either non-financial or non-quantifiable such as political, economic, tax, other regulatory, or credit risks are not included in the following assessment of market risks. LEGAL PROCEEDINGS We are not a party to any material pending legal proceedings. RISK FACTORS We face risks related to health pandemics, particularly the recent outbreak of COVID-19, which could adversely affect our business and results of operations. Our business could be materially adversely affected by a widespread outbreak of contagious disease, including the recent outbreak of the novel coronavirus, known as COVID-19, which has spread to many countries throughout the world, including the United States. The effects of this outbreak on our business have included and could continue to include temporary closures of our providers and clinics and suspensions of elective surgical procedures. This has and could continue to impact our interactions and relationships with our customers. In addition to temporary closures of the providers and clinics that we serve, we could also experience temporary closures of the facilities of our suppliers, contract manufacturers, or other vendors in our supply chain, which could impact our business, interactions and relationships with our third-party suppliers and contractors, and results of operations. The extent to which the COVID-19 outbreak will impact business and the economy is highly uncertain and cannot be predicted. Accordingly, we cannot predict the extent to which our financial condition and results of operations will be affected.