1. zyxi (26 dec 2018)

16/01/2019 Zynex (ZYXI) - Page 2 - Healthcare Sector - MicroCapClub.com
https://microcapclub.com/forums/index.php?/topic/192-zynex-zyxi/&page=2&tab=comments#comment-51257 11/21
MicroSmall
MCC Member
Members
67
187 posts
Profession: Institutional
Investor
Location: United States
Posted September 7, 2018 Report post
Caught their presentation at the Rodman conference- the CEO said two
competitors had regulatory issues and closed up . That accounts for the
recent strong growth they've seen. Didn't have a chance to ask if they'll
eventually face the same fate...
Quote
dennisczy
MCC Newbie
Members
17
8 posts
Profession: Private Investor
Location: singapore
Posted December 26, 2018 Report post
Zynex Inc (ZYXI)
Basic /Fully Diluted Shares: 32.3 M/ 33.1 M Stock Price: $2.69
Insider Ownership: 53.91%
Market Cap: 86.83 M
Enterprise Value: 92.96 M
Thesis:
Zynex Inc. is a medical equipment company with two main divisions. The
rst division, Zynex medical
focuses on manufacturing and marketing medical devices that treat chronic
and acute pain. The second division Zynex monitoring solutions focuses on
developing and marketing medical devices for non-invasive cardiac
monitoring. The FDA has yet to clear the company’s initial monitor but once
cleared, it will no doubt add to the company's top and bottom line. It would
also be the rst product that can indicate loss of blood during surgery and
internal bleeding during recovery.
2
Paci cBeachPartners and MikeDDKing reacted to this
I uploaded the copy taken from the forum instead
of the original because there is a timestamp to
prove that I wrote it before the recent appreciation
in stock prices.
Date of publish: Dec 26 2018

Zynex has a lot of the characteristics that are indicative of a favorable risk to
reward; expanding gross margins, cash ow positive, share buy-back
program, explosive growth on both the top line and bottom line, no debt, and
selling at cheap valuation multiples. Revenue grew by almost 76% from
2016 to 2017, and the year on year revenue for 2018 Q3 has increased by
20%. The reason for this explosive growth is due to the 2015 Q4 closure of
Empi, Zynex's primary competitor, which left a $250 million market void that
ZYXI is lling. The business itself is hugely pro table with gross margins of
81%. Currently, there are also industry tailwinds as the opioid crisis has led
to an increase in demand for alternative means of pain relief that does not
depend on opioids, and ZYXI is likely to bene t from it.
TENS industry background:
The majority of ZYXI’s revenues currently come from the sale of TENS
devices and supplies. TENS devices are medical devices that use
electrotherapy to reduce pain. To understand how it works you can watch
this video:
https://www.zynex.com/nwinstructions/
The TENS industry is currently bene tting from an industry tailwind due to
the opioid crisis and consumers are seeing electrotherapy as an excellent
alternative to using pain medication. The electrotherapy market is expected
to grow at a CAGR of 4.2% and is expected to reach 1.2 billion USD by 2023.
Currently, North America is the largest market in the world, and this trend is
likely to continue as consumers turn away from conventional painkillers and
drugs due to their side effects.
Why does this opportunity exist: (I would move this section above the
TENS industry background section)
1. OTCQB - The company is currently trading on the OTCQB, which doesn't
allow most funds to invest in them. The management has plans to uplist the
company to a national stock exchange.
2. Market’s distrust due to its history of operating losses and previous
defaults. Though the company has been pro table for the past two years, it
has a long history of operating losses, and I believe that the exit of Empi, the
company's main competitor, played a large part in the company achieving
pro tability. It was also in default of a credit line in 2016, which has already
been fully paid off.
Management team:
I believe that the quality of management is high and they are opportunistic.
For example, the management team immediately hired Empi’s past sales
representatives after Empi’s closure back in 2015. According to
management, Empi’s closure created a market void of $250 million. In
addition, Glassdoor reviews are strong and approval for the CEO is around
78%, which is a very high review score. The CEO Thomas Sandgaard, started

the company from scratch and owns around 53% of the company. We know
that his interests are aligned with the outside minority passive investors.
Also, the CFO Daniel Moorhead has been buying shares recently.
High quality of business:
TENS devices have a razor and blade business model, where the supplies
are incredibly pro table. The increase in margins, revenues, and income are
likely due to the factors stated below.
Purchase habits of doctors:
The quality of revenue is high because they are selling the products directly
to doctors who then prescribe the devices to patients, so in a sense, the real
customers are the doctors. From my conversations with doctors/therapists
and people who work in the industry, I understand that doctors generally do
not change the brand of medical devices that they are familiar with and this
includes the TENS devices that they are currently prescribing which results
in customer lock-in. However, for big hospitals, both the doctors and a
purchase committee make the purchase decisions.
Insurance covered:
The products are covered by insurance and my understanding of TENS
users is that if the TENS unit is working, they are unlikely to switch the
device. This is especially true since patients tend to trust the doctor's
prescription and they are unlikely to change for no reason.
Outsourced manufacturing:
The company outsources the components manufacturing process for the
products to external manufacturers, and then assemble the units in-house
which translates to lower operating expense and higher gross margins.
Strong nancial position and nancial metrics
ZYXI is in a strong nancial position and has very attractive nancial
characteristics. It has no debt and has been using it’s ample cash ow to
repurchase shares. They recently announced a $0.07/share special dividend
. TTM ROE and ROA ratios are around 112%, 78.2% respectively. I believe
that these metrics will be sustained for a few years before they start to
normalize as it captures more of the market.
Valuation:

A big chunk of the year is already gone, and I generally try not to annualize
quarterly statements to predict revenue run rate as it may be misleading, but
in this case, in order to show how cheap ZYXI is selling for, I valued the
company using both the FY 2017 values and the 2018 TTM values (adjusted
for Q3 nancials).
Further upside
Blood monitoring device:
According to management, if approved by the FDA, the blood monitoring
device will be the rst product that can indicate loss of blood during surgery
and internal bleeding during recovery. They recently obtained a US patent in
October for the product and is preparing for launch. Currently, the only way
to detect blood loss is by visually monitoring a patient which is very
inaccurate. Thus, the device, if approved, is likely to meet a currently unmet
need. According to management, the worldwide market for the monitor is
around 3 billion dollars. They also stated that for the full blown launch, they
might consider outside capital, but the management is not yet in a position
to give guidance on the capital needed.
Comparable analysis
Public comp:
After the closure of EMPI, DYNT is the only public comp available. It is
trading at an EV/EBITDA of 39x, EV/sales of 0.64x, with a market cap of
around $ 20 million on the NASDAQ. They are still in the red, in terms of net
income and slightly operating cash ow positive with $0.76 million OCF for
FY 2018. Gross margin has averaged around 31% for the past 5 years. The
company has been losing money every year since 2012 and debt to equity is
around 0.85x. However, DYNT’s product line focuses more on physical
therapy medical supplies such as braces and slings and to a smaller
proportion, TENS units. Though the revenue for FY 2018 was $64.4 million, I
believe that the sale of TENS units only contributed to a very small

percentage of revenue. Thus, comparing it to ZYXI may be seen as
comparing apples to oranges.
Other Competition:
International Rehabilitative Sciences (doing business as RS medical) is
ZYXI’s primary competitor in the TENS space. RS medical is a private
company, so information is hard to get a hold of. According to Owler, it has
an annual revenue of $ 20.4 million (USD) with an estimated employee count
of 47. ZYXI has a TTM revenue of 30.7 million and 109 employees. It is
worth mentioning that ZYXI’s hiring strategy would make it hard for RS
medical to gain a signi cant foothold in the industry. In the 2018 Q3
conference call, ZYXI’s CEO said that there are targeting cities where they do
not have a signi cant sales presence. Their goal is to blanket the entire
country with high quality sales reps to make it di cult for competition to
break in, and given ZYXI’s larger scale, this should provide barriers to entry
of competitors. Beyond RS Medical, there are some smaller competitors, but
they do not have as much scale.
Conservative expectation for 2019 (base case)
Though I think that it is likely for the monitoring device to be approved by the
FDA in 2019, I am not adding it in my valuation as it is somewhat
speculative. It is likely that the TENS device sales will be funneled down to
product supply sales as it has for the last few years. Since revenue for
product devices in the fourth quarter tends to be much stronger than the
rest of the year, I assumed that for FY 2018 and 2019, device revenue would
at least stay constant at 8.8 million, even though 2018 annual revenue run
rate is likely to surpass that. This means that revenue from product supplies
is expected to increase by at least 7 to 10 million per year. Also, I assumed
SG&A to be constant 9.7 million as it has stayed relatively stable for the past
few years even amidst the company’s expansion.
Given the quick increase in revenue and margin expansion and lack of large
competitors, I believe that there is room for multiple expansion as the
market starts to take notice of this company. The table below shows the
different scenarios if this happens. Assuming that net cash stays at 8
million (according to the most recent quarter) and assuming diluted shares
outstanding stays at 33.1 million, my conservative base case price target at
an EV/EBIT of 8X is around $4.6/share, which offers around 71% upside at
time of writing. Even in the bear case, which assumes the stock stays at the
current EV/EBIT multiple of 6.15X, there is a 30% upside from the current

stock price of $2.69. But I believe that this is a great business, so time is its
ally and the compounding effect is likely to take place as time progresses
which could result in multiple expansion well beyond my conservative
projections.
Risks
Patents and competition: The company does not have any patent for the
products that are currently generating revenue. However, this is more of a
long-term risk: if they managed to get the FDA approval for the blood
monitoring device this risk would be much less signi cant.
Mitigant: From my conversation with doctors and people working with
doctors I don't see why a competitor would want to manufacture a TENS
unit that has precisely the same functionality as ZYXI, even if they nd the
market to be attractive.
Insurance redemption risk: The company was in poor nancial shape after
Medicare stopped covering TENS for chronic low back pain, as Medicare
deemed that it was not necessary for the treatment of low back pain. Even
though the company is in much better shape right now as compared to
before, I believe that this poses as a rather signi cant risk to the thesis.
Management risk: The management team was involved in a lawsuit a while
back where they allegedly in ated stock prices between March 2008 and
March 2009. The lawsuit was settled by paying around $2.5 million in cash.
This case re ects poorly on the management.
Catalysts
1. FDA approval of blood monitor.
2. Organic growth of TENS device continues.
3. Uplisting to a major stock exchange
nal pitch.pdf
Quote Edit
Ian Cassel
Administrator
Posted January 3 Report post
Congrats @dennisczy , welcome to MicroCapClub.

1. zyxi (26 dec 2018)

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