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Edited Transcript of ZYXI earnings conference call or presentation 29-Oct-19 8:15pm GMT

Q3 2019 Zynex Inc Earnings Call

LONE TREE Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Zynex Inc earnings conference call or presentation Tuesday, October 29, 2019 at 8:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel J. Moorhead

Zynex, Inc. - CFO

* Thomas Sandgaard

Zynex, Inc. - Founder, President, CEO & Chairman

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Conference Call Participants

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* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

* Marc Wiesenberger

B. Riley FBR, Inc., Research Division - Associate

* Yi Chen

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Zynex Third Quarter 2019 Earnings Conference Call. (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 on 10-K for the year ended December 31, 2018 as well as Forms 10-Q, 8-K and 8-K/A 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 Sandgaard, Founder, Chairman and Chief Executive Officer. Please go ahead.

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [2]

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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 a 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. Year-over-year revenue increased. The last many quarters, it has been in the 35% range, and our revenue growth has slowly started to accelerate this year due to the 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 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 continue 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 59 -- 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 nonproductive, 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 W-2 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 also 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 has reached the level where tens of thousands die yearly due to opioid abuse. We continue to develop more tours 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 for pain management, our NeuroMove device for stroke rehab, and InWave for incontinence treatment. Those put us in a very strong product position in the rehabilitation market.

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.

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Daniel J. Moorhead, Zynex, Inc. - CFO [3]

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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 expenses 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 head count 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 noncash, stock-based compensation and other income expense and is 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 2 years which utilized our net operating losses and put us in a taxable position.

Now to our 9-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 9 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 flow during the first 9 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.

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [4]

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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 efforts to grow our sales force and clearly justifies the investments in our sales personnel, sales management and in-site 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 2 previous very large competitors. Our increased orders due to our 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 billing come from insurance companies, mostly private insurance but also government, 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 preset in their computers, or negotiated amounts on a patient-by-patient basis. These amounts are then typically discounted by deductible and co-pay deductions, and we end up getting paid much less than our MSRP as a typical -- which is typical throughout the health care industry in the U.S. 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're 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 indicated the beginning of the next phase of developing this division, with more clinical research to support our advertising, staff up the business development side, et cetera. We're also looking at adding more products to add to this division, including additional product development internally.

Later today, along with our normal quarterly SEC filings, we're filing an 8-K related to a supplement to the S3 we filed a little over a half year ago. In short, we're 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 it's 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Jeffrey Cohen of Ladenburg Thalmann.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [2]

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So 3 or 4 questions for you, if I may. Firstly, the tax rate for the quarter, 18.6%. Are the NOLs gone? And should we anticipate that that rate kind of creeps up toward the mid to high 20s, say, 26%, 27%?

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Daniel J. Moorhead, Zynex, Inc. - CFO [3]

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Yes. The NOLs are gone, and they've been gone in '19. It's really discrete items, so no 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%. So I think it's -- I continue to forecast 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%.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [4]

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Okay. So for modeling purposes, mid to high 20s would be a good conservative number over the near term?

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Daniel J. Moorhead, Zynex, Inc. - CFO [5]

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Yes. I think the mid-20s are -- I think 25 or 26 is about right to model at.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [6]

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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 teens versus per quarter turn.

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [7]

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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 all the additions are W-2 or sales reps with base salary plus a less aggressive commission rate. And here, by year-end, we should have about half of all the territories we have identified are populated. And at some point, obviously as I mentioned, we're trying to accelerate how fast we populate them. And at some point, when we get there, we'll 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.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [8]

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Got it. And then talk a little bit about territories. Are you finding that you're adding in smaller, less populated geographies or you're adding seconds and thirds in larger geographies?

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [9]

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No. We have mapped out 400 territories. That all consists of approximately 800,000 people as a round number, and we just keep plucking in into those. So we don't have any territories that will suddenly have 2 people in them. It's all mapped out already.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [10]

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Okay. And then could you reiterate what you're talking about with the progress on the Blood Volume Monitor, please?

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [11]

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Not a whole lot to report. We are doing an additional round of testing with the testing laboratory that the FDA asked us to do. 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're 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're answering. We also have the pilots of some actual clinical studies, [IOP-approved] clinical studies in the works. We're also testing on some things that are for next generation of the product as well.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [12]

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Okay. Do you think we'll see any studies or any podiums from any of the [REBs] in the next year?

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [13]

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It depends on how fast that can get out, as they need to get completed. And obviously, getting them publicized sometimes can be a lengthy process. That's tough to say at this point in time here, so I'd like to wait to comment on that. We're a little further ahead.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [14]

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Okay, got it. Great quarter.

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Operator [15]

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The next question today comes from Marc Wiesenberger of B. Riley FBR.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [16]

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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 a little more commentary there.

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [17]

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Well, it's a mix. Nearly all of the growth is obviously coming from new reps we've hired here over the past 2 years. So some reps that got hired maybe 1 year ago, 1.5 years ago, they're breaking into additional clinics. So we see some new prescribers from those. And obviously, all the new reps, a few of them are actually beginning to send in the first few orders, and that all adds up to the kind of order growth, 95% year-over-year, that we've experienced in the said quarter.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [18]

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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?

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [19]

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I think we can see -- we have a few more reps that are beginning to creep up into what we call top reps, but those people up there, the top 5, 6, 7, they have -- depending on the mix of orders, et cetera, they're producing between 15 and 18. 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.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [20]

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Great. Very helpful. Can you remind us, is there a standard kind of quantity and cadence of supplies patients usually receive? And then kind of piggybacking on that, is there a process for patients to either request more or less supplies? And what percentage of patients actually kind of vary from that kind of standard quantity?

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [21]

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Well, in terms of requesting more or less supplies, that is what our call center, I believe, will probably have. Twelve people there, and a big chunk of their phone calls are all about -- are about those type of things where patients need -- they need more suppliers or less supplies.

In terms of if there's 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 company has rules in there where we need to check with the patient every 3 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 thereon out, it's really what kind of quantities that the insurance company allows. So we have a big part of that. Our billing department is involved in managing all that, so that we make sure we ship out as much as insurance allows but also get it billed for us, so we can get paid for it obviously.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [22]

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Understood. A few more for me here. When a doctor prescribes the device, is there any indication of what modality they're specifically recommending for the patient, and would that potentially impact insurance reimbursements? I mean I know the inferential (sic) [interferential] current is potentially 40x more powerful than the TENS. So I mean, does that impact -- does that have any impact to you?

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [23]

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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 it's 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. And obviously, between the 3 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.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [24]

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Sure. Have you seen any change in the duration of insurance reimbursements? I think previously you said, most patients kind of use it for 6 to 9 months. Is that still the time period that insurance are providing coverage?

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [25]

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Yes. 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's the more acute, for instance after orthopedic surgery, that sometimes it's 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 drive down the averages, dollar-wise and time-wise.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [26]

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Sure. And final one for me, and I'll 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 and was there anything found in violation?

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [27]

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The last time we had a government audit, that would have been in the spring of this year. The FDA came out in one of their surprise audits. They left 2 days early, and we had no major and no minor observations.

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Operator [28]

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The next question today comes from Yi Chen of H.C. Wainwright.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [29]

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My first question is, how long do you expect a newly hired sales rep to realize his full potential?

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [30]

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For the full potential, it can often take up to -- towards 18 months. Once they are 3 to 4 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 3 or 4 months and typically, you can -- you keep producing a high amount of orders. But on the average, we've got to be well away at 12 months before we kind of know what plateau they -- where they would probably plateau. And again, like many other things in this industry, they default. I wouldn't call it all over the map, but there are so many different scenarios. And obviously, as we keep growing the sales force, eventually more and more of our focus will be directed towards making them more productive than they currently are versus right now, the majority of the focus is on recruiting, that obviously is going really well. Then the initial training where we bring the sales reps into the office here and spend 2.5 days on training them, and 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 their local yellow pages. I hope that answers your question.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [31]

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Right. And also, I mean just to follow up, at your expected level of sales for a single sales rep, what would be the ratio of the annual sales generated by that sales rep compared to the cost of that sales rep?

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [32]

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The cost of the sales rep versus -- maybe we should look at it as a percentage of revenue.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [33]

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Sure.

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [34]

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I think long term, we're looking at, now I'm just guessing, 10% to 15% of the revenue is what we pay sales reps in base salaries, health insurance, car allowance, 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.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [35]

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Got it. Got it. And 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 NexWave device and supplies?

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [36]

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Yes. That's a good question. Obviously, one of those -- one of the things we're dealing with is, as far as I've seen over the past 24 years in this industry, the main change I've seen is -- would be -- the name of the insurance company, that's the most difficult this month. It keeps changing. And what that also means, there are certain areas -- 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.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [37]

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Hello?

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [38]

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Yes, can you hear us?

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [39]

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Yes. Now, I can hear you.

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [40]

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Okay. So it's really -- it ebbs and flows all the time, what type of insurances 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 and all in very different dollar amounts. And we're better at catching 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 have that can break those patterns, and also people in the billing department that are good at negotiating, that combination has really helped the past 4, 5 years in our financials. So that's -- there's really nothing that looks like it's going to change dramatically on us. It's been fairly consistent over the past 24 years.

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Operator [41]

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This concludes our question-and-answer session. I would like to turn the conference back over to Thomas Sandgaard for any closing remarks.

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Thomas Sandgaard, Zynex, Inc. - Founder, President, CEO & Chairman [42]

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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 and a great day to all.

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Operator [43]

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