Form 10QSB for ZYNEX MEDICAL HOLDINGS INC
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21-May-2008
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Sales and Rental Income. Net sales and rental income for the three months ended March 31, 2008, were $3,741,028 an increase of $2,404,297 or 180% compared to $1,336,731 for the three months ended March 31, 2007. The increase in net sales and rental income for the three months ended March 31, 2008, compared to the three months ended March 31, 2007was 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 income from the greater number of Zynex products placed in use during prior periods. 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 income 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. The amounts deducted from net sales and rental income for these charges in the three months ended March 31, 2008, were $3,592,457 an increase of $2,431,711 or 209% compared to $1,160,746 for the three months ended March 31, 2007. This increase is higher in proportion to the increase in net sales because we increased the expected deductions based upon experience.
Gross Profit. Gross profit for the three months ended March 31, 2008, was $3,341,213 or 89.3% of net revenue. For three months ended March 31, 2008, this represents an increase of $2,104,117 or 170% from the gross profit of $1,237,096 or 92.5% of net revenue for the three months ended March 31, 2007. The increase in gross profit for the three months ended March 31, 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 months ended March 31, 2008 as compared with the same periods in 2007 is primarily because of an increase in expected deductions for contractual adjustments as described above.
Selling, General and Administrative. Selling, general and administrative expenses for the three months ended March 31, 2008 were $1,541,526 an increase of $773,732 or 100.8%, compared to $767,794 for the same period in 2007. The increase was primarily due to increases in sales representative commissions, payroll, public company expenses, accounting services and office expenses. The increases were in part offset by lower legal and travel costs. Because we have moved to new space effective in November 2007, and we have not yet subleased our previous location, we may incur an increase to selling, general and administrative expenses of approximately $20,000 per quarter.
Depreciation. Depreciation expense for the three months ended March 31, 2008 was $71,640 an increase of $41,802 or 140.1%, compared to $29,838 for the same period in 2007. Depreciation expense increased primarily because of more equipment out on rental, which is considered property and equipment.
Interest and other expense. Interest and other expense for the three months ended March 31, 2008 were $15,917 a decrease of $106,166 or 89.1%, compared to $122,083 for the same period in 2007. The decreases resulted primarily from the Company's decrease in commercial bank debt, the note issued to Ascendiant Capital paid off in 2007 as well as payments on loans from its majority stockholder, which is described in Note 3 to the consolidated financial statements in our Annual Report on Form 10-KSB for the year ended December 31, 2007 and in Notes 5 and 7 to the Condensed Consolidated Financial Statements in this Report.
Income tax expense. We reported income tax expense in the amount of $520,000 for the three months ended March 31, 2008 an increase of $434,300 or 506.8%, compared to $85,700 for the same periods in 2007. This is primarily due to our having an income before taxes of $1,712,991 compared to $317,381 for the same period in 2007. We expect we will have to pay taxes on income going forward. Deferred tax assets have increased due to the effects of temporary differences primarily attributable to an increase in the allowance for doubtful accounts receivable.
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Liquidity and Capital Resources. We have limited liquidity.
Our cash requirements increase as our operations expand for the reasons indicated below for our limited liquidity. Except for billing delays in January 2008 which affected collections on our accounts receivable in the quarter, we have seen our operations provide enough cash for our current operating activities. See the Consolidated Statements of Cash Flows for the quarter ended March 31, 2008 in this Report. Our business plan contemplates continued growth in product orders and revenues and thus requires funds for the purchases of equipment, primarily rental inventory. We may need external financing, through debt or equity, in 2008 and 2009 for at least such purchases of equipment. There can be no assurance that we will be able to raise any additional financing or do so on terms that are acceptable to the Company.
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 payers, and (d) the delayed cost recovery inherent in rental transactions. Our growth results in higher cash needs.
Contingencies such as unanticipated shortfalls in revenues or increases in expenses could affect our projected revenue, cash flows from operations and liquidity.
Cash used by operating activities was $78,990 for the three months ended March 31, 2008 compared to $76,962 for the three months ended March 31, 2007. The primary reasons for the decrease in cash flow was the increase to net income in 2008 compared to 2007, an increase in non-cash expenses including provision for loss on accounts receivable, offset by an increase in accounts receivable due to the increase in gross revenue.
Inventory increased as the Company anticipates continued growth in the business. Accrued liabilities increased primarily for commissions earned by sales reps which are scheduled to be paid in April and May as well as increases in customer deposits
Cash used in investing activities for the three months ended March 31, 2008 was $146,202 compared to cash used in investing activities of $86,156 for the same period in 2007. Cash used in investing activities primarily represents the purchase and in-house production of rental products as well as some purchases of computers.
Cash provided by financing activities was $270,479 for the three months ended March 31, 2008 compared with cash used in financing activities of $64,568 for the three months ended March 31, 2007. The primary financing source of cash in 2008 were from proceeds from 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.
Recently adopted accounting pronouncements:
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS 159"). SFAS 159 allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value ("fair value option"). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, SFAS 159 specifies that unrealized gains and losses for that instrument be reported in earnings at each subsequent reporting date. SFAS 159 was effective for the Company on January 1, 2008. The Company did not apply the fair value option to any of its outstanding instruments and therefore, SFAS 159 did not have an impact on the Company's consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 was effective for the Company on January 1, 2008 for all financial assets and liabilities. For all nonfinancial assets and liabilities, SFAS 157 is effective for the Company on January 1, 2009. As it relates to the Company's financial assets and liabilities, the adoption of SFAS 157 did not have a material impact on the Company's consolidated financial statements. The Company is in the process of evaluating the impact that SFAS 157 will have on its nonfinancial assets and liabilities..
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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 to obtain additional capital in order to grow our business, larger competitors with greater financial resources, the need to keep pace with technological changes, our dependence on the reimbursement from insurance companies for products sold or rented to our customers, our dependence on third party manufacturers to produce our goods on time and to our specifications, the acceptance of our products by hospitals and clinicians, implementation of our sales strategy including a strong direct sales force and other risks described in our 10-KSB/A Report for the year ended December 31, 2007.
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