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| ZYXI.OB > SEC Filings for ZYXI.OB > Form 10-Q on 19-Nov-2008 | All Recent SEC Filings |
19-Nov-2008
Quarterly Report
The following information should be read in conjunction with the Company's condensed consolidated financial statements and related footnotes contained in this report.
Results of Operations
Net Rental Revenue. Net rental revenue for the three and nine months ended September 30, 2008, was $3,044,875 and $9,112,417 an increase of $1,687,011 and $5,996,427or 124% and 192% compared to $1,357,864 and $3,125,990 for the three and nine months ended September 30, 2007. The increase in net rental revenue for the three and nine months ended September 30, 2008 was due primarily to an increase in prescriptions (orders) for rentals of the Company's electrotherapy products. Other reasons for the increase in net rental revenue are indicated in "Net Sales and Rental Revenue" below. The rate of increase in rental revenue slowed in the third quarter of 2008 because we did not recognize revenues (approximately $1,075,000) from the rental of certain devices to insureds of Anthem Blue Cross Blue Shield during the quarter due to a refund claim of Anthem which was settled in November 2008. See Note 9 to the Condensed Consolidated Financial Statements in this Report.
Net rental revenue for the three and nine months ended September 30, 2008 made up 67% and 69% of net sales and rental revenue compared to 65% and 63% for the three and nine months ended September 30, 2007. The increase in the percentage of total net sales and rental revenue from rental revenue during the first nine months of 2008 was due primarily to increased orders for rentals of products compared to orders for sales of products and, once rented, continuation of rental revenue while the products are used or until sold. The level of net rental revenue for the third quarter of 2008 was affected by the refund claim mentioned above.
Our products may be rented on a monthly basis or purchased. Renters and purchasers are primarily patients and healthcare providers; there are also purchases by dealers. If the patient is covered by health insurance, the third-party payer typically determines whether the patient will rent or purchase a unit depending on the anticipated time period for its use. If contractually arranged, a rental continues until an amount equal to the purchase price is paid when we transfer ownership of the product to the patient and cease rental charges.
Net Sales Revenue. Net sales revenue for the three and nine months ended September 30, 2008, were $1,467,713 and $4,178,835 an increase of $721,131 and $2,358,441 or 97% and 130% compared to $746,582 and $1,820,394 for the three and nine months ended September 30, 2007. The increase in net sales revenue for the three and nine months ended September 30, 2008, compared to the three and nine months ended September 30, 2007 was due primarily to more products in use generating sales of consumable supplies to users of the Company's products as well as higher levels of products sold. The majority of net sales revenue is derived from surface electrodes sent to existing patients each month and other consumable supplies for our products. Other reasons for the increase in net sales revenue are indicated in "Net Sales and Rental Revenue" below.
Net sales revenue for the three and nine months ended September 30, 2008 made up 33% and 31% of net sales and rental revenue compared to 35% and 37% for the three and nine months ended September 30, 2007. The decrease in the percentage of total net sales and rental revenue during the first nine months of 2008 was due primarily to increased orders for rentals of products compared to orders for purchases of products. The rental revenue as a percentage of net revenues for the third quarter of 2008 decreased because of the refund claim described above.
Provider Settlement Provision. As mentioned above, in November 2008 the Company settled a refund claim with Anthem Blue Cross Blue Shield. As part of the settlement the Company agreed to pay Anthem $679,930 and forego unpaid claims in existence at June 30, 2008 of $329,664. Substantially all of the $1,009,594 relates to net rental revenue; if this amount had been a direct reduction to net rental revenue it would not allow the comparison of net rental revenue for the three months ended September 30, 2008.
The Company records its normal provision for provider discounts as direct reductions of rental and sales revenues; however, because of the size and retrospective nature of the Anthem settlement, the Company has treated it as a change in estimate and displayed the additional provision needed of $1,009,594 as a separate line reducing total revenue in the Condensed Consolidated Statement of Operations.
Net Sales and Rental Revenue. Net sales and rental revenue for the three and nine months ended September 30, 2008, were $3,502,994 and $12,291,658 an increase of $1,398,548 and $7,345,274 or 66% and 148% compared to $2,104,446 and $4,946,384 for the three and nine months ended September 30, 2007. The increase in net sales and rental revenue for the three and nine months ended September 30, 2008, compared to the three and nine months ended September 30, 2007 was due primarily to an increase in prescriptions (orders) for rentals and purchases of the Company's electrotherapy products. The increase resulted from the expansion of the sales force as discussed in the Company's Form 10-KSB/A filed April 16, 2008; greater awareness of the Company's products by end users and physicians resulting from marketing investments in 2007 and 2006; growing market penetration; and increased rental revenue from the greater number of Zynex products placed in use during prior periods. The claim mentioned above offset in part the increase. We continue to add outside sales representatives with a small increase to the total number of such representatives since December 31, 2007.
Our sales and rental revenue is reported net, after deductions for bad debt and estimated insurance company reimbursement deductions. The deductions are known throughout the health care industry as "contractual adjustments" and describe the process whereby the healthcare insurers unilaterally reduce the amount they reimburse for our products as compared to the rental rates and sales prices charged by us. See Note 2 to the Condensed Consolidated Financial Statements in this Report.
Gross Profit. Gross profit for the three and nine months ended September 30, 2008, was $3,049,396 and $11,103,134 67.6% and 83.5 % of net sales and rental revenue. For three and nine months ended September 30, 2008, this represents an increase of $1,138,962 and $6,669,146 or 60% and 150% from the gross profit of $1,910,434 or 90.8% and $4,433,988 or 89.6% of net revenue for the three and nine months ended September 30, 2007. The increase in gross profit for the three and nine months ended September 30, 2008 as compared with the same periods in 2007 is primarily because revenue increased from the prior periods. The decrease in gross profit percentage for the three and nine months ended September 30, 2008 as compared with the same periods in 2007 is primarily from not recognizing revenue from the rental of certain devices to insureds of Anthem during the third quarter of 2008 and the provider settlement provision which reduced net sales and rental revenue in the third quarter of 2008.
The Company does not plan to request many of Anthems insureds to return the devices subject to the settlement before use is completed. Since most of the devices were rentals and not sales, there was nominal effect on cost of rentals since most of such cost was depreciation of the cost of the devices.
Selling, General and Administrative. Selling, general and administrative expenses for the three and nine months ended September 30, 2008 were $2,636,228 and $6,269,396 an increase of $1,581,938 and $3,711,417 or 150% and 145%, compared to $1,054,290 and $2,557,979 for the same periods in 2007. The increase was primarily due to increases in sales representative commissions, payroll, public company expenses, legal expenses, accounting services and office expenses. The increases were in part offset by lower marketing and promotion costs, and temporary services.
The three and nine months ended September 30, 2008 include expenses for commissions earned by sales representatives in the third quarter on primarily rentals and sales of certain devices to the insureds of Anthem which the Company will not bill to Anthem. The Company decided that the settlement with Anthem discussed in Note 9 to the accompanying Condensed Consolidated Financial Statements should not affect the compensation of its sales representatives.
Interest and other income or expense. Interest and other income or expense for the three and nine months ended September 30, 2008 were $2,331 of expense and $2,302 of income, compared to $14,679 of expense and $235,315 of expense for the same periods in 2007. We anticipate increases in the interest expense level because of our borrowing under the line of credit established in September 2008. The decrease in interest expense resulted primarily from the Company's repayment in 2007 of the note issued to Ascendiant Capital in June of 2007, and the Company's repayment of the loans payable to Silicon Valley Bank in February 2008, which is described in Note 7 to the Condensed Consolidated Financial Statements in this Report. The Company also recorded other income of $27,201 in the quarter ended June 30, 2008 resulting from the disposal of leased equipment which had been treated as a capital lease.
Income tax expense. We reported expenses for income taxes in the amount of $205,000 and $1,585,000 for the three and nine months ended September 30, 2008 compared to $227,000 of expense and $443,000 of expense for the same periods in 2007. This is primarily due to our having higher income before taxes of $4,836,040 for the nine months ended September 30, 2008 compared to income before taxes of $1,640,694 for the same period in 2007.
Liquidity and Capital Resources.
Line of Credit
Please see Note 7 of the Condensed Consolidated Financial Statements in this Report for information on a line of credit established with Marquette Healthcare Finance in September 2008.
Limited Liquidity
We have limited liquidity. Our limited liquidity is primarily a result of (a) the required high levels of consignment inventory that are standard in the electrotherapy industry, (b) the payment of commissions to salespersons based on sales or rentals prior to reimbursement for such transaction, (c) the high level of outstanding accounts receivable because of the deferred payment practices of third-party health payors, and (d) the need for improvements to the Company's internal billing processes and (e) delayed cost recovery inherent in rental transactions. Our growth results in higher cash needs.
Our business plan continues to contemplate growth in revenues and thus to require, among other things, funds for the purchases of equipment, primarily for rental inventory, and the payment of commissions to sales representatives.
We expect that our available cash, projected cash flows from operating activities and borrowing available under the Marquette line of credit will fund our cash requirements for the 12 months ending September 30, 2009. This expectation depends on completion of discussions with Marquette regarding the waiver of any events of default relating to the Anthem claim and the renegotiation of one of the financial covenants in the Marquette line of credit.
There is no assurance that our operations and available borrowings will provide enough cash for operating requirements or for the additional purchases of equipment. For this reason or to lower expenses, we may seek to raise additional capital through debt or equity financings in 2008 or 2009. We have no arrangements for any additional external financing of debt or equity, and we are not certain whether any such financing would be available on acceptable terms.
Our limited liquidity and dependence on operating cash flow means that risks involved in our business can significantly affect our liquidity. Contingencies such as unanticipated shortfalls in revenues or increases in expenses could affect our projected revenue, cash flows from operations and liquidity.
Cash provided by operating activities was $65,239 for the nine months ended September 30, 2008 compared to $437,602 of cash provided by operating activities for the nine months ended September 30, 2007. The primary reasons for the decrease in cash flow was the increase to accounts receivable and inventory in 2008 compared to 2007, offset by an increase in non-cash expenses including provision for losses on accounts receivable, provisions for payment provider discounts and income taxes payable.
Cash used in investing activities for the nine months ended September 30, 2008 was $832,188 compared to cash used in investing activities of $432,433 for the nine months ended September 30, 2007. Cash used in investing activities primarily represents the purchase and in-house production of rental products as well as some purchases of capital equipment.
Cash provided by financing activities was $766,949 for the nine months ended September 30, 2008 compared with cash used in financing activities of $266,827 for the nine months ended September 30, 2007. The primary financing source of cash in 2008 were from proceeds from borrowings under the Marquette line of credit and the sales of common stock partially offset by payments on notes payable including the notes payable to Silicon Valley Bank. The primary financing uses of cash in 2007 were payments on notes payable partially offset by proceeds of loans issued to a stockholder.
Recently issued accounting pronouncement:
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities: ("SFAS No. 161"). SFAS No. 161 amends and expands the disclosure requirements for FASB Statement No. 133, "Derivative Instruments and Hedging Activities" ("SFAS No. 133"). It requires enhanced disclosure about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments and related hedge items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for the Company as of January 1, 2009. The Company is currently assessing the impact of SFAS 161 on its financial position and results of operations.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain information included in this quarterly report contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities, as well as other capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks include the need for external capital in order to grow our business, our dependence on the reimbursement from insurance companies for products sold or rented to our customers, acceptance of our products by health insurance providers for reimbursement, acceptance of our products by hospitals and clinicians, larger competitors with greater financial resources, the need to keep pace with technological changes, our dependence on third-party manufacturers to produce our goods on time and to our specifications, implementation of our sales strategy including a strong direct sales force and other risks described below and in our 10-KSB/A Report for the year ended December 31, 2007.
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