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| ZYXI.OB > SEC Filings for ZYXI.OB > Form 10-Q on 14-Aug-2008 | All Recent SEC Filings |
14-Aug-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 Income. Net rental income for the three and six months ended June 30, 2008, was $3,487,496 and $6,077,542 an increase of $2,522,432 and $4,309,416 or 261% and 244% compared to $965,064 and $1,768,126 for the three and six months ended June 30, 2007. The increase in net rental income for the three and six months ended June 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 income are indicated in "Net Sales and Rental Income" below.
Net rental income for the three and six months ended June 30, 2008 made up 69% and 69% of net sales and rental income compared to 64% and 62% for the three and six months ended June 30, 2007. The increase in the percentage of total net sales from rental income was due primarily to increased orders for rentals of products compared to orders for purchases of products and, once rented, continuation of rental revenue while the products are used or until purchased.
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. Approximately 2/3rds of net sales income is derived from surface electrodes sent to existing patients each month and other consumable supplies for our products.
Net Sales Income. Net sales income for the three and six months ended June 30, 2008, were $1,560,139 and $2,711,121 an increase of $1,019,996 and $1,637,309 or 189% and 152% compared to $540,143 and $1,073,812 for the three and six months ended June 30, 2007. The increase in net sales income for the three and six months ended June 30, 2008, compared to the three and six months ended June 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. Other reasons for the increase in net sales income are indicated in "Net Sales and Rental Income" below.
Net sales income for the three and six months ended June 30, 2008 made up 31% and 31% of net sales and rental income compared to 36% and 38% for the three and six months ended June 30, 2007. The decrease in the percentage of total net sales and rental income was due primarily to increased orders for rentals of products compared to orders for purchases of products. The percentage of net sales revenue could increase if we get large orders from resellers.
Net Sales and Rental Income. Net sales and rental income for the three and six months ended June 30, 2008, were $5,047,635 and $8,788,863 an increase of $3,542,428 and $5,946,725 or 235% and 209% compared to $1,505,207 and $2,841,938 for the three and six months ended June 30, 2007. The increase in net sales and rental income for the three and six months ended June 30, 2008, compared to the three and six months ended June 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 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 and six months ended June 30, 2008, were $4,615,068 and $7,889,712 an increase of $3,228,340 and $5,344,207 or 233% and 210% compared to $1,386,728 and $2,545,505 for the three and six months ended June 30, 2007. This increase is in proportion to the increase in net sales.
The amounts deducted from net sales and rental income for bad debts in the three and six months ended June 30, 2008, were $438,096 and $755,908 an increase of $307,054 and $511,787 or 233% and 210% compared to $131,042 and $244,121 for the three and six months ended June 30, 2007. This increase is in proportion to the increase in net sales.
Gross Profit. Gross profit for the three and six months ended June 30, 2008, was $4,769,423 and $8,053,737 or 94.5% and 91.6 % of net revenue. For three and six months ended June 30, 2008, this represents an increase of $3,463,920 and $5,530,183 or 265% and 219% from the gross profit of $1,305,503 or 86.7% and $2,523,554 or 88.8% of net revenue for the three and six months ended June 30, 2007. The increase in gross profit for the three and six months ended June 30, 2008 as compared with the same periods in 2007 is primarily because revenue increased from the prior periods. The increase in gross profit percentage for the three and six months ended June 30, 2008 as compared with the same periods in 2007 is primarily because of an increase in rental income as a percentage of total revenue. Rental revenue has a higher gross profit margin due to the cost of the product being depreciated over its useful life.
Selling, General and Administrative. Selling, general and administrative expenses for the three and six months ended June 30, 2008 were $2,076,900 and $3,633,167 an increase of $1,351,798 and $2,129,478 or 186% and 142%, compared to $725,102 and $1,503,689 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 advertising, marketing and promotion costs, and temporary services. Because we have moved to a new location effective in November 2007, which is described in Note 3 to the consolidated financial statements included in our Annual Report on Form 10-KSB for the year ended December 31, 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.
Interest and other income or expense. Interest and other income or expense for the three and six months ended June 30, 2008 were $19,689 of income and $4,633 of income, compared to $98,553 of expense and $220,636 of expense for the same periods in 2007. The increases resulted primarily from the Company's repayment 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 $860,000 and $1,380,000 for the three and six months ended June 30, 2008 compared to $130,300 of expense and $216,000 of expense for the same periods in 2007. This is primarily due to our having higher income before taxes of $2,712,212 and $4,425,203 for the three and six months ended June 30, 2008 compared to income before taxes of $481,848 and $799,229 for the same periods in 2007.
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. We have begun to see our operations provide enough cash for our current operating requirements. Our planned operations might also provide sufficient cash to implement our business plan. Our business plan requires funds for the purchases of equipment, primarily for rental inventory. However, there can be no assurance that our operations will provide enough cash in the future for current operating requirements or for additional purchases of equipment. For this reason we may raise additional capital through debt or equity financing in 2008 or 2009. We are actively pursuing a commercial line of credit. There can be no assurance that we will be able to raise such 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 provided by operating activities was $430,897 for the six months ended June 30, 2008 compared to $185,380 of cash provided by operating activities for the six months ended June 30, 2007. The primary reasons for the increase in cash flow was the increase to net income in 2008 compared to 2007, an increase in non-cash expenses including provision for losses on accounts receivable, provisions for payment provider discounts and income taxes payable, offset by an increase in accounts receivable due to the increase in gross revenue.
Cash used in investing activities for the six months ended June 30, 2008 was $499,597 compared to cash used in investing activities of $185,191 for the six months ended June 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 $258,320 for the six months ended June 30, 2008 compared with cash used in financing activities of $244,332 for the six months ended June 30, 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 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 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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