INITIATING COVERAGE () Zynex, Inc. (OTCQB: ZYXI, Target Price: $4.00) We initiate coverage on Zynex, Inc. (OTCQB: ZYNX, Zynex with a price target of $4.00. Based in Lone Tree, CO, Zynex produces medical devices that utilize electrotherapy to treat pain and rehabilitation. The company s flagship product, NexWave, is an FDA-cleared electrotherapy medical device that offers non-invasive, non-addictive treatment of chronic and acute pain. With a growing active installed base of over 50,000 devices, NexWave provides Zynex with a high margin revenue stream with recurring attributes from supplies and consumables. Beyond NexWave, Zynex offers additional solutions for pain management, neuro-monitoring and stroke recovery. Zynex is in the process of completing an impressive turnaround, and appears well-positioned for growth. Upcoming catalysts include 3Q17 results, and possible 510(k) FDA clearance for the CM1500, a new class 2 device targeting the large unmet need for post-surgery blood monitoring. Moreover, Zynex has announced its intention to uplist shares to a national exchange likely the NYSE American or Nasdaq CM which has the potential to raise its visibility in its industry as well as among institutional investors restricted from investing in OTC companies. INVESTMENT HIGHLIGHTS Zynex executing an impressive turnaround Zynex management has orchestrated an impressive turnaround in recent quarters, bringing the company back from near-bankruptcy to growth and cash flow generation due to a combination of diligent cost controls and a wellexecuted commercialization strategy for its lead product, NexWave. With improving cash flow and more efficient back-office procedures, the company has been able to de-leverage its balance sheet primarily using cash generated from operations, while growing revenues sharply and expanding profit margins. In 2Q17, Zynex revenues were up 53% YoY to surpass $5.0mn, with adjusted EBITDA of $2.0mn and EPS of $0.05. Growth emerging as Zynex executes market strategy Zynex guided for recent momentum at the company to continue into 3Q17. Management guided for double-digit sequential growth in both revenue and adjusted EBITDA. The company s sales execution has benefitted from an improved reimbursement strategy realizing higher revenue per order, an increase in quota-carrying salespeople, and a go-to-market strategy highlighting NexWave as a safe, non-addictive alternative to opioids for pain management. Additionally, Zynex has been able to build high margin revenues from consumable supplies as a result of a growing installed base of devices in use. Management expects this trend to continue as it invests cash flow in expanding its sales team, introduces complementary pain management products, and targets customers and former employees from Empi, a large competitor that has existed the electrotherapy space. Initiate coverage with a price target of $4.00 We initiate coverage of Zynex with a price target of $4.00. We see Zynex as a compelling turnaround that is making the transition from a special situation into a growth company. Shares appear deeply undervalued at the recent price of $1.94 considering upcoming catalysts that include 3Q17 results and an upcoming FDA decision for the CM- 1500, which has the potential to expand Zynex s target market dramatically. The $4.00 target implies a target valuation of 20x annualized 2Q17 earnings of $0.05 per share. Stock Details (10/15/2017) OTCQB Sector / Industry Key Ratios FY16 FY17E FY18E Gross margin (%) 73.6 75.7 73.0 Operating Margin (%) 4.8 29.2 28.0 EBITDA margin (%) 8.1 30.2 28.7 Net margin (%) 0.5 22.5 23.3 P/Revenue (x) 4.7x 3.2x 2.6x P/E (x) 879.2x 14.7x 11.9x EV/Revenue (x) 4.7x 3.3x 2.6x Source: SeeThruEquity Research Share Price Performance ($, LTM) 0.00 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Source: Yahoo! Finance 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 1 P age 3.00 2.50 2.00 1.50 1.00 0.50 ZYXI Price target $4.00 Recent share price $1.94 Shares o/s (mn) 32.1 Market cap (in $mn) 62.2 52-week high/low $2.02/ 0.10 Healthcare / Medical Devices Key Financials ($mn unless specified) FY16 FY17E FY18E Revenues 13,313.0 19,178.0 24,113.1 EBITDA 1,075.0 5,788.0 6,928.3 EBIT 640.0 5,596.0 6,751.7 Net income 69.0 4,317.5 5,628.8 EPS ($) 0.00 0.13 0.16
SUMMARY TABLE Figure 1. Summary Table (Pricing data as of October 15, 2017) Share data 2Q17 Balance Sheet data Key personnel: Recent price: $1.94 Total assets: 3.5mn CEO & President Thomas Sandgaard Price target: $4.00 Total debt*: 0.7mn CFO Dan Moorhead 52-week range: 2.02-0.10 Equity: (1.7mn) VP Marketing Robert Bird Average volume:* 56,070 W/C: (1.7mn) VP, Sales Michael Frabotta Market cap*: $62.2mn ROE: N/A Book value/share: ($0.05) ROA: 170.9% Cash/share $0.00 Current ratio: 0.6 Dividend yield: 0.00% Asset turnover: 1.4 Risk profile: High / Speculative Debt/Cap: N/A * three month average volume (number of shares) Estimates Valuation FY December Rev ($mn) EBITDA ($mn) EPS ($) P/Rev (x) EV/Rev (x) P/E (x) 2015 11,641.0 (2,057.0) (0.09) 5.4x 5.3x NM 2016 13,313.0 1,075.0 0.00 4.7x 4.7x 879.2x 1Q17A 3,436.0 554.0 0.01 4.6x 4.5x 43.2x 2Q17A 5,042.0 1,975.0 0.05 3.1x 3.1x 10.3x 3Q17E 5,600.0 1,996.0 0.05 2.8x 2.8x 9.4x 4Q17E 5,100.0 1,263.0 0.02 3.1x 3.0x 22.3x 2017E 19,178.0 5,788.0 0.13 3.3x 3.2x 14.7x 2018E 24,113.1 6,928.3 0.16 2.6x 2.6x 11.9x 2019E 28,344.3 4,942.1 0.10 2.2x 2.2x 20.0x Source: Company Data, SeeThruEquity Research INVESTMENT THESIS We initiate coverage on Zynex, Inc. (OTCQB: ZYNX, Zynex with a price target of $4.00. Based in Lone Tree, CO, Zynex produces medical devices that utilize electrotherapy for treat pain treatment and rehabilitation. The company s flagship product is NexWave, an FDA-cleared electrotherapy medical device for at-home or inclinic management of chronic and acute pain. With an active installed base of over 50,000 devices, NexWave provides Zynex with a high margin revenue stream with recurring attributes from supplies and consumables. Zynex also appears to be benefitting from positioning NexWave as a safe and non-invasive alternative to opioids for pain management. Beyond NexWave, Zynex offers solutions for neuro-monitoring and stroke recovery, and the company is awaiting 510(k) FDA clearance for a new class 2 device, the CM1500, which has been developed for blood monitoring in operating and recovery rooms to detect blood loss and internal bleeding. Management believes that CM1500 addresses a massive unmet need post-surgical care, and estimates that the annual market for the CM1500 is approximately $3 billion. The company has submitted its 510(k) application and expects to initiate commercial activities over the next twelve months, pending FDA clearance. 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 2 P age
Zynex a compelling turnaround situation offering attractive value We see Zynex as a compelling turnaround special situation in the healthcare industry, which offers growing cash flows at an attractive valuation with several upcoming catalysts. Led by CEO Thomas Sandgaard, who is also the company s Chairman and majority shareholder, Zynex has executed a dramatic turnaround in its business over the last two years. The company has emerged from steep losses in the 2013 2015 period, culminating in a near bankruptcy, to reporting four consecutive quarters of net profitability over the last year and significant free cash flows in 1H17. Indeed, in 2Q17 Zynex paid off a majority of its financial debt including retiring a revolving credit facility with Triumph Healthcare Finance that had been in default since 2014. It also grew revenues by over 50% YoY, while generating adjusted EBITDA of $2mn and EPS of $0.05. Reflecting these improvements, Zynex shares have been among the top performers in the last year, rising by 800%+ over the trailing 12 months. Nevertheless, we believe the majority of this appreciation was due to a re-rating of the company from the brink of bankruptcy to a self-funding business. We still see compelling value and substantial potential for upside to Zynex shares if the company continues to execute. At the recent price $1.94 per share, Zynex trades at just 14.7x our 2017E earnings estimate of $0.13 per share and 11.9x our 2018E estimate of $0.17 per share. Potential catalysts on the horizon for Zynex include 3Q17 results and plans to uplist shares to a major exchange, such as the Nasdaq CM or NYSE American. A national listing should increase Zynex s standing in its industry, and would add potential for the company to attract interest from institutional investors prohibited from investing in OTC shares. NexWav leads electrotherapy pain portfolio Zynex s core product portfolio offers electrotherapy for pain and rehabilitation. The company s flagship offering is its NexWave line of electrotherapy pain management devices and associated consumables. NexWave is FDA-cleared and CE-marked, and is intended as a noninvasive, non-addictive treatment for both acute and chronic pain. The device, pictured herein, supports healing and reduces swelling through the increased blood circulation that is caused by the use of electrical currents to stimulate nerves and muscles. Features of NexWave include prescription-strength electrical stimulation, and the ability to offer three technologies in one device: IFC, TENS, and NMES, which are defined in the following table. NexWave Therapies TENS NMES IFC Description Transcutaneous electrical nerve stimulation: administers electric current to stimulate nerves for therapeutic purposes NeuroMuscular electrical stimulation: uses electrical pulses to stimulate impaired and/or paralyzed muscles Interferential stimulation: low frequency stimulation therapy administered to nerves NexWave devices and supplies currently account for approximately 90% of Zynex s revenues, and have been growing due to improvements in the company s back-office reimbursement and billing processes, increasing the average revenue realized per device. Additionally, Zynex has benefitted from the exit of a major competitor, EMPI, which closed its electrotherapy business in the beginning of 2016. According to SEC filings Zynex has hired as many of 70 former EMPI sales representatives and other employees as it seeks to capture the opportunity created from EMPI s exits. Zynex management indicated that EMPI s electrotherapy revenues peaked at approximately $250mn, and that the company will invest free cash flows in growing its sales team and targeting accounts previously serviced by EMPI. 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 3 P age
Zynex positioning NexWav as alternative to opioids for post-surgical pain Zynex has also been seeking to accelerate the market penetration of NexWave by positioning it as a safe and effective method of pain management amid an opioid crisis. The company notes that NexWave has numerous advantages as a first line of defense against pain versus opioid prescriptions, including fewer side effects and no risk of addition, as illustrated in the following graphic. Figure 2. Zynex Comparison of NexWave versus Opioid Pain Medication Source: Company Sales Materials We expect NexWave to be the core driver of results over the next 12 18 months; however, Zynex is also in the process of expanding sales efforts for other pain and rehabilitation products. In September 2017, Zynex announced a line of complementary new products, which include: JetStream Hot/Cold Therapy, Aspen LSO Backbracing and Comfortrac cervical traction. All of the products are targeted at treating acute and chronic pain without side-effects, and should help support its outlook for future growth in the pain management space. Additionally, now that Zynex has begun to generate recurring free cash flows, management expects to invest resources in growing sales of its NeuroMove electrotherapy device, which designed to help retrain muscles and increase range of motion as part of stroke / spinal cord rehabilitation. NeuroMove is FDA-cleared and CE-marked, and has therapeutic applications spinal cord and traumatic brain injuries. 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 4 P age
New CM-1500 Blood Monitor targets new multi-billion dollar market While Zynex believes it can generate sustainable double-digit growth from increasing penetration of its electrotherapy products alone, the company has the potential to accelerate growth dramatically with the introduction of the CM-1500 blood monitor. The CM-1500 is a non-invasive blood volume monitor, which will be sold into the hospital market to be used in operating rooms and post-op recovery rooms to detect blood loss and internal bleeding. Zynex believes the CM-1500 will be the first device to provide an indication of fluid balance and blood loss in the operating room or potential post-surgical internal bleeding in recovery. The device monitors five variables linked to internal bleeding from readings in sensors applied to the patients skin, including: increased heart rate, decreased peripheral blood flow, changes in skin temperature, changes in skin humidity, and reduced bioimpedance. Management stated that the company has completed development of the CM-1500, and the company is awaiting clearance from the FDA from its 510(K) class 2 device application. The company has estimated the total available market opportunity for the CM-1500 at $3 billion, and notes that the most widely used current method for identifying internal bleeding is the trained eye of experienced nurses. As of its 2Q17 earnings release, Zynex is hoping to initiate commercialization of the CM-1500 within the next year, pending FDA clearance. 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 5 P age
COMPETITIVE LANDSCAPE Zynex operates in the market medical device sector of the Healthcare industry. This represents a large and competitive market, and is also one subject to extensive regulation. Zynex is focused on the electrotherapy segment of the medical device market, and particularly the home electrotherapy market, with products based on its IFC, TENS, and NMES devices and consumable suppliers. Management estimated the opportunity for its line electrotherapy solutions to be approximately $500mn per year in its September 2017 investor materials. With the planned launch of CM-1500 for Blood Volume Monitoring in 2018, pending FDA clearance, Zynex plans to increase its available market considerably. The CM-1500 is designed to be sold into the hospital market for use in operating and recovery rooms, which management estimates could be a $3 billion annual market opportunity. As a small growth company in the medical device market, Zynex is faced with industry factors including extensive regulation, as well as competition from large corporations that have more established sales distribution, research and development facilities, and financial resources. The company s performance is affected by unpredictable collection cycles from insurance carriers, as well as adjustments and discounts from third party payors 65% of the company s revenue in 2016 was from commercial insurers. Zynex must also manage the challenges of operating in a highly regulated industry. While Zynex does not face as significant regulatory barriers as pharmaceutical companies, its products must be cleared by the FDA, typically through a 510(k) market clearance process. Zynex s current products, including NexWave are currently classified as Class II (medium risk) medical devices by the FDA. Zynex seeks to compete in the market for at-home electrotherapy through segment focus and differentiation. The company believes that its flagship product, NexWave is differentiated by being a prescription strength electrotherapy solution that combines IFC, TENS, and NMES in one device. The company has stated that its primary competitor is International Rehabilitative Sciences (RS Medical), and that it also faces a range of regional market participants in the electrotherapy space. Zynex s largest competitor, EMPI (a division of DJO Global) closed its electrotherapy division in at the end of 2015 / early 2016, creating an opportunity for companies in the space to gain market share. According to Zynex SEC filings, EMPI previously held a large share of the electrotherapy market with $250mn in annual revenues. Zynex has sought to capture as this market by hiring as many as 70 former EMPI representatives as employees or contractors. 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 6 P age
FINANCIALS AND FUTURE OUTLOOK Recent Results Revenue climbs in 2Q17 and 1H17. Zynex reported strong 2Q17 results on August 14, 2017. Revenues grew by 53% YoY to reach $5.0mn, versus $3.3mn in the year-ago period. For the first half of the year, revenues came in at $8.5mn versus $6.8mn in the first half of 2016. Zynex management attributed the top line growth to suppliers for a larger installed base of devices as well as improved sales and billing efforts. Margins expand. Zynex also reported powerful margins, with gross margins of 79.8% up 670 basis points sequentially. Operating margins also expanded dramatically to 38.4% from 14.1% in 1Q17, as the company benefitted from leverage and controlled SG&A spending. Management-defined Adjusted EBITDA was $2.0mn in the period, or 39% of revenues. EPS came in at $0.05, much improved from $0.01 in 1Q17 and a loss of ($0.01) in 2Q16. Outlook Importantly, Zynex management issued a positive outlook for the company in 3Q17, implying marked growth both sequentially and on a YoY basis. In its earnings release, Zynex management guided for 3Q17E revenues to be in a range of $5.4mn to $5.8mn. The mid-point of this range, $5.6mn, implies double-digit sequential revenue growth over 2Q17. Zynex also guided to continued strong Adjusted EBITDA. Management expects adjusted EBITDA to be in a range of $2.0mn to $2.4mn, implying 10% sequential growth over 2Q17. Longer term, the company sees growth coming not only from further commercial penetration of its existing products but also the upcoming launch of CM-1500 Blood Volume Monitoring products into the hospital market as a non-invasive method for detecting blood loss and internal bleeding, pending regulatory clearance. Key Assumptions Core Growth in near term to come from NexWave. A core growth assumption for Zynex is its belief that its flagship NexWave electrotherapy solution for pain management has the potential to fill the large void left by the exit of its largest competitor, EMPI. EMPI previously held a large share of the electrotherapy market, with nearly $250mn in annual revenue. Zynex CEO Thomas Sandgaard notes that EMPI s share has not yet been filled by a national competitor, leaving a significant growth opportunity for Zynex. To take advantage of this, Zynex has been targeting accounts previously serviced by EMPI and recruiting former EMPI representatives opportunistically, which management believes has contributed to the sharp increase in orders. Zynex has also recently emerged from a cash crunch, and the company is expected to increase its investments in sales while also launching complementary new electrotherapy products. Reflecting this focus, our model forecasts Zynex revenues to grow to from $13.3mn in 2016 to $19.2mn in 2017E, and $24.1mn in 2018E. We forecast annual revenues from the NexWave line to rise at low-to-mid double-digit growth rates through 2025E as the company benefits from a growing installed base and increased sales and marketing. Additional upside potential from new pain products, CM-1500 Blood Monitor. While we expect NexWave to be the core driver of results over the next 12 18 months, Zynex is also in the process of expanding sales efforts to include new products. In September, Zynex announced new products including JetStream Hot/Cold Therapy, Aspen LSO Backbracing and Comfortrac cervical traction, which are all products targeted at treating acute as well as chronic pain without side-effects. These products are complementary to Zynex s core business, and should help to support our forecast for strong and steady growth in the pain management space. In our view, Zynex s core portfolio of pain management products alone has the potential to drive value, however, we are intrigued by the company s upcoming CM-1500 blood volume monitor. Management has estimated that the CM-1500 has the potential to expand its market dramatically, with CM-1500 representing a 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 7 P age
$3 billion annual market opportunity. We note that Zynex is awaiting clearance for the CM-1500, and is anticipating a commercial launch, pending clearance by the end of 2018, with 2019 being the first full year of commercialization. We have assumed that Zynex increases its sales and marketing spending relative to recent periods to drive growth in the NexWave and support the launch of the CM-1500. Figure 4. Zynex Performance Indicators thru FY2018E 30,000 7,500.0 25,000 20,000 15,000 10,000 5,000 5,000.0 2,500.0 0.0 (2,500.0) 0 FY15 FY16 FY17E FY18E (5,000.0) Revenue Net Income Source: Company filings, SeeThruEquity Research Balance Sheet & Financial Liquidity Zynex reduced its debt significantly in 1Q17, using the $1.9mn of cash generated from operations in 1H17 to pay off its credit facility, which had been in default since 2014. Nevertheless, we see the balance sheet as a key item to watch for Zynex given that the company has only recently begun to emerge from this burden, and also due to the unpredictability of the payment cycle from customers in its industry. At the end of 2Q17, Zynex had cash on hand of $0.14mn. The company had negative working capital, with current assets of $2.95mn and current liabilities of $4.62mn. Zynex s audited financial statements included a going concern qualification in 2016, which management anticipates may be evaluated if it continues to generate cash in the second half of 2017. 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 8 P age
VALUATION We valued Zynex using both the peer valuation method and a discounted cash flow ( DCF ) method. The target price, which is primarily derived from the DCF valuation, is $4.00 per share. If achieved, the target of $4.00 per share represents potential upside of 106.2% from the recent price of $1.94, as of October 15, 2017. DCF Having completed a turnaround and de-leveraging of its business, Zynex is currently investing excess free cash flow to grow its sales presence and introduce new products. These include complementary products to its presence in pain treatment, as well as the new CM-1500 Blood Monitor, which is expected to launch within 12 months, pending FDA 510(k) clearance as a Class 2 device. Zynex has already experienced a sharp increase in NexWave revenues in 1H17, and management expects this trend to continue now that the company has resources available to improve its reimbursement / billing efficiency. As outlined in more detail in the Financials and Future Outlook portion of this report, we have broadly assumed strong growth from the core NexWave device and supply revenues, augmented by the launch of the CM-1500 in 2019. We discounted cash flows at a weighted average cost of capital of 15.0% and assumed a terminal growth rate of 5% at the end of FY2026E to arrive at an equity value of $130.4mn, as shown in the table below. We then considered 32.1mn shares outstanding and arrived at a fair value of $4.07 per share, or 20.3x annualized 2Q17 earnings per share. $ 000 FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY26E NexWave Commercial Commercial Commercial Commercial Commercial Commercial Commercial Commercial Commercial Commercial CM-1500 Clinical FDA Commercial Commercial Commercial Commercial Commercial Commercial Commercial Commercial Revenue 19,178 24,113 28,344 33,727 44,201 56,135 69,243 82,795 96,055 109,633 EBIT 5,596 6,752 4,677 7,184 13,702 20,489 25,966 31,462 37,462 43,853 Less: Tax 399 1,072 1,315 2,307 4,808 7,191 9,119 11,056 13,173 15,430 NOPLAT 5,197 5,680 3,362 4,877 8,894 13,299 16,848 20,406 24,289 28,423 Changes in working capital Depreciation & Amortization (98) (408) (877) (323) (256) (26) (24) (618) (159) (175) 192 177 265 345 449 580 737 918 1,117 1,333 Capex (85) (603) (709) (742) (972) (1,235) (1,523) (1,821) (2,113) (2,412) FCFF 5,206 4,845 2,041 4,157 8,115 12,618 16,038 18,885 23,134 27,169 Discount factor 1.0 0.8 0.7 0.6 0.6 0.5 0.4 0.4 0.3 0.3 PV of FCFE 5,051 4,088 1,498 2,652 4,502 6,087 6,727 6,888 7,337 7,493 Sum of PV of FCFE Terminal cash flow 285,273 PV of terminal cash flow Enterprise value 130,997 Less: Debt & Preferred Stock Add: Cash 140 Equity value 130,426 Shares Outstanding Fair value per share ($) 52,321 78,676 711 32,050 4.07 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 9 P age
Summary conclusions Key assumptions DCF FV ($ per share) 4.07 Beta 2.0 Recent price ($ per share) 1.91 Cost of equity 15.0% Upside (downside) 113.1% Cost of debt (post tax) 10.9% WACC 15.0% Terminal Growth Rate 5.0% Source: SeeThruEquity Research Figure 5. Sensitivity of Valuation WACC vs. Terminal Growth Rate WACC (%) Terminal growth rate (%) 4.07 14.0% 14.5% 15.0% 15.5% 16.0% 4.00% 4.33 4.07 3.83 3.61 3.41 4.50% 4.48 4.20 3.94 3.71 3.50 5.00% 4.65 4.34 4.07 3.82 3.60 5.50% 4.84 4.51 4.21 3.95 3.71 6.00% 5.05 4.69 4.37 4.08 3.83 6.50% 5.29 4.89 4.54 4.23 3.96 Source: SeeThruEquity Research 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 10 P age
Peer Group Analysis We also analyzed Zynex in relation to industry peers in the medical device space. Given that there are few publicly traded perfect comparable companies for Zynex, we compared the company to a selection of small cap companies in the medical device sector. The peer group includes TransEnterix (TXRC), Misonix (MSON), CRH Medical (CRHM), and Corindus Vascular (CVRS), among others. As illustrated below, we examined the peer group on the basis of average revenue and earnings multiples. We note that there is a wide range of multiples in this peer group, and that many of the companies in the group are not yet profitable. The target price of $4.00 for Zynex assumes a valuation multiple of 5.3x EV / 2018E revenues of $24.1mn and 25x 2018E EPS of $0.16, which seems reasonable, in our view. Figure 6. Comparable Valuation * Company Mkt cap P/ Revenue EV/Revenue P/ Revenue EV/Revenue P/E ($ mn) TY TY NY NY NY TransEnterix 218 27.6x 25.5x 9.7x 8.9x NM Neovasc 128 24.7x 22.4x 11.7x 10.6x NM Senseonics 404 69.3x 66.3x 11.8x 11.3x NM IRadimed 107 4.7x 3.7x 4.1x 3.2x 43.9x Misonix 91 NM NM NM NM NM CRH Medical 193 2.0x 2.4x 1.9x 2.2x 37.1x Corindus Vascular Robotics 268 19.8x 17.3x 10.0x 8.7x NM InVivo Therapeutics 50 NM NM NM NM NM Average 24.7x 22.9x 8.2x 8.4x 40.5x Zynex 61 3.2x 3.2x 2.5x 2.6x 11.7x Premium (discount) (87.1%) (86.0%) (69.0%) (69.3%) (71.1%) Source: Bloomberg, SeeThruEquity Research, data as of October 12, 2017 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 11 P age
RISK CONSIDERATIONS Financial liquidity Zynex has recently emerged from an extended period of financial stress. The company had a going concern qualification in its 2016 financial statements and material weaknesses in its financial reporting processes. While the company has paid down debt and generated cash flow in the first half of 2017, its window for error remains small. Consequently, we see the balance sheet as a key risk for Zynex given that the company has only recently begun to emerge from this burden, and also due to the unpredictability of the payment cycle from customers in its industry. At the end of 2Q17, Zynex had cash on hand of $0.14mn. The company had negative working capital, with current assets of $2.95mn and current liabilities of $4.62mn. Uncertainty of new products This analysis assumes that Zynex is successful in gaining FDA clearance for the new CM-1500 blood monitor. It also assumes that Zynex is able to initiate commercialization on this product by the end of 2018, with 2019 being the first full year of revenues. Zynex believes there is a substantial unmet need addressed by the CM- 1500, however, there is considerable uncertainty related to estimating pricing, margins, and sales from new products. This uncertainty makes it difficult to project future results. Regulatory risks Zynex operates in the highly regulated healthcare industry. Its products must be cleared for sale by the FDA, typically through a 510(k) market clearance process. Zynex s products are currently classified as Class II (Medium Risk) medical devices by the FDA. Zynex is also regulated by the FDA s GMP and QSR (Quality Systems Regulation). The company s lead product, NexWave received FDA 510(k) clearance in September 2011. Zynex is also exposed to changes to the healthcare system that affect reimbursement and payment procedures and billing practices and terms for insurers. The process of determining what products will be reimbursed by third-party payors and the amounts that they will reimburse is complex and depends on a variety of conditions and procedures that may change and also vary among providers. Competition Zynex operates in the medical device sector of the Healthcare industry. This represents a large and competitive market, and one subject to extensive regulation. Zynex is focused on the electrotherapy market, with current solutions based on IFC, TENS, and NMES devices and consumable supplies. As a small growth company in the medical device market, Zynex is faced with industry factors including extensive regulation, as well as competition from large corporations that have more established sales distribution, research and development facilities, and extensive financial resources. In its regulatory filings Zynex cites its primary competitor as International Rehabilitative Sciences, Inc. d/b/a RS Medical. 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 12 P age
Management Team Thomas Sandgaard, Chairman, President and Chief Executive Officer Thomas Sandgaard has been the Chairman of the Board, President and Chief Executive Officer of Zynex, Inc. since founding the company in 1996. He has previously held management positions with companies such as ITT, Siemens, GN Danavox, Dataco and Philips. Most of his work has been in the areas of international sales and distribution, technology transfers, mergers and marketing management in the semiconductor, telecommunications, data communications and medical equipment industries. Mr. Sandgaard has a degree in electronics engineering from Denmark s Odense University of Engineering and an MBA from Copenhagen Business School. Mr. Sandgaard has an in-depth knowledge of the industry and is the driving force of the Company strategies. Dan Moorhead, Chief Financial Officer Dan Moorhead is the Chief Financial Officer and responsible for all finance and accounting functions. Prior to joining Zynex, Mr. Moorhead was Chief Financial Officer of Evolving Systems, Inc. (Nasdaq: EVOL) from January 2016 until June 2017, after having served as Vice President of Finance & Administration from December 2011 through December 2015 and in other financial management roles from 2002-2005 and 2008-2011. Mr. Moorhead is a CPA and holds a B.B.A. in Accounting from the University of Northern Colorado. Robert Bird, VP, Marketing Robert Bird is the VP of Marketing responsible for all marketing, in-side sales and compounding products within the rehabilitation and pain management markets for the Zynex Medical division of Zynex. Mr. Bird has over 20 years of sales and management experience and holds a B.S. Degree in Business Administration from California State University, Hayward. Michael Frabotta, VP, Sales Michael Frabotta the VP of sales and is responsible for Zynex Medical s sales organization promoting electrotherapy and compound pharmacy products throughout the United States. Mr. Frabotta has over 14 years of successful sales and management experience with RS Medical and ERMI, Inc. At RS Medical a once national competitor in the electrotherapy arena he successfully served as a Director of Sales, National Director of Payor Contracting, Regional Manager, and Sales Representative. Mr. Frabotta received a Bachelor of Science in Nursing from the University of Pittsburgh where he specialized in Orthopaedics. 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 13 P age
FINANCIAL SUMMARY Figure 7. Income Statement Figures in $000 unless specified FY15 FY16 FY17E FY18E FY19E Revenue 11,641.0 13,313.0 19,178.0 24,113.1 28,344.3 YoY growth - 14.4% 44.1% 25.7% 17.5% Cost of sales 4,937.0 3,517.0 4,664.0 6,510.5 8,078.1 Gross Profit 6,704.0 9,796.0 14,514.0 17,602.6 20,266.2 Margin 57.6% 73.6% 75.7% 73.0% 71.5% Operating expenses 9,185.0 9,156.0 8,918.0 10,850.9 15,589.4 EBIT (2,481.0) 640.0 5,596.0 6,751.7 4,676.8 Margin (21.3%) 4.8% 29.2% 28.0% 16.5% EBITDA (2,057.0) 1,075.0 5,788.0 6,928.3 4,942.1 Margin (17.7%) 8.1% 30.2% 28.7% 17.4% Other income/ (expense) (510.0) (556.0) (879.4) (50.7) 18.6 Profit before tax (2,991.0) 84.0 4,716.6 6,700.9 4,695.4 Tax (57.0) 15.0 399.1 1,072.2 1,314.7 Net income to Common (2,911.0) 69.0 4,317.5 5,628.8 3,380.7 Margin (25.0%) 0.5% 22.5% 23.3% 11.9% EPS (per share) (0.09) 0.00 0.13 0.16 0.10 Source: SeeThruEquity Research. Figure 8. Balance Sheet Figures in $000, unless specified FY15A FY16A FY17E FY18E FY19E Current assets 2,766.0 3,422.0 5,610.5 11,631.4 14,834.5 Other assets 930.0 669.0 533.0 960.3 1,847.5 Total assets 3,696.0 4,091.0 6,143.5 12,591.7 16,682.0 Current liabilities 7,539.0 7,745.0 4,746.0 5,488.4 6,119.4 Other liabilities 228.0 148.0 551.0 551.0 551.0 Shareholders equity (4,071.0) (3,802.0) 846.5 6,552.3 10,011.6 Total liab and shareholder equity 3,696.0 4,091.0 6,143.5 12,591.7 16,682.0 Source: SeeThruEquity Research Figure 9. Cash Flow Statement Figures in $000, unless specified FY15A FY16A FY17E FY18E FY19E Cash from operating activities 341.0 1,769.0 4,372.5 5,474.2 2,847.1 Cash from investing activities 108.0 (226.0) (85.0) (602.8) (708.6) Cash from financing activities (504.0) (1,304.0) (1,952.0) 0.0 0.0 Net inc/(dec) in cash (55.0) 239.0 2,335.5 4,871.4 2,138.5 Cash at beginning of the year 146.1 91.1 330.1 2,665.6 7,537.0 Cash at the end of the year 91.1 330.1 2,665.6 7,537.0 9,675.5 Source: SeeThruEquity Research 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 14 P age
About Zynex, Inc. Zynex, founded in 1996, markets and sells its own design of electrotherapy medical devices used for pain management and rehabilitation; and the company's proprietary NeuroMove device designed to help recovery of stroke and spinal cord injury patients. Zynex is also developing a new blood volume monitor for use in hospitals and surgery centers. Zynex.com. 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 15 P age
Contact Ajay Tandon SeeThruEquity www.seethruequity.com (646) 495-0939 info@seethruequity.com Disclosure This research report has been prepared and distributed by SeeThruEquity, LLC ( SeeThruEquity ) for informational purposes only and does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any transaction. This report is based solely on publicly-available information about the company featured in this report which SeeThruEquity considers reliable, but SeeThruEquity does not represent it is accurate or complete, and it should not be relied upon as such. All information contained in this report is subject to change without notice. This report does not constitute a personal trading recommendation or take into account the particular investment objectives, financial situation or needs of an individual reader of this report, and does not provide all of the key elements for any reader to make an investment decision. Readers should consider whether any information in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, many of which are beyond the company s control. Actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain industry, economic, regulatory or other factors. SeeThruEquity is not a FINRA registered broker-dealer or investment adviser and does not provide investment banking services. SeeThruEquity does not accept or receive fees or other compensation for preparing its research reports. SeeThruEquity has not been retained or hired by the company featured herein or by any other party to prepare this report. In some but not in all instances, SeeThruEquity and/or its officers, directors or affiliates may receive compensation from companies featured in its reports for non report-related services which may include charges for presenting at SeeThruEquity investor conferences, distributing press releases and performing certain other ancillary services. The company featured in this report paid SeeThruEquity its standard fee described below for distributing a press release on this report. Such compensation is received on the basis of a fixed fee and made without regard to the opinions and conclusions in its research reports. The fee to present at SeeThruEquity conferences is no more than seven thousand dollars, and the fee for distributing press releases is no more than fifteen hundred dollars. The fees for performing certain other ancillary services vary depending on the company and service provided but generally do not exceed five thousand dollars. In no event is a company on which SeeThruEquity has issued a report required to engage it with respect to these non report-related services. SeeThruEquity and/or its affiliates may have a long equity position with respect to a non-controlling interest in the publicly traded shares of companies featured in its reports, and follows customary internal trading restrictions pending the release of its reports. SeeThruEquity s professionals may provide verbal or written market commentary that reflects opinions that are contrary to the opinions expressed in this report. This report and any such commentary belong to SeeThruEquity and are not attributable to the company featured in its reports or other communications. The price and value of a company s shares referred to in this report may fluctuate. Past performance by one company is not indicative of future results by that company or of any other company covered by a report prepared by SeeThruEquity. This report is being disseminated primarily electronically and, in some cases, in printed form. An electronic report is made simultaneously available to all recipients. The information contained in this report is not incorporated into the contents of our website and should be read independently thereof. Please refer to the Disclosures section of our website for additional details. Copyright 2011-2017 SeeThruEquity, LLC. No part of this material may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of SeeThruEquity, LLC. 2011-2017 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 16 P age