Zynex(ZYXI) - 2021 Q4 - Annual Report

Part I Business Zynex, Inc. designs and markets electrotherapy medical devices for pain management and rehabilitation, with a focus on expanding sales and diversifying product offerings History and Subsidiaries - Zynex, Inc. was founded in 1996 and operates primarily through its wholly-owned subsidiary, Zynex Medical, Inc. (ZMI), which accounts for substantially all consolidated revenue[14][17] - In December 2021, the Company acquired Kestrel Labs, Inc., a noninvasive patient monitoring technology company. Kestrel's products are not yet FDA-cleared and are managed under the Zynex Monitoring Solutions (ZMS) subsidiary[15] - Zynex Monitoring Solutions (ZMS) has developed the CM-1500 fluid monitoring system (FDA cleared in Feb 2020) and filed a 510K for its next-generation wireless system, the CM-1600, in December 2021. ZMS has not generated any revenue to date[16][23] Sales and Growth Strategies - The company's primary growth strategy is expanding its direct sales force, which grew to approximately 400 field sales representatives by the end of 2021, with a goal of reaching 500-600 by the end of 2022[29] - Zynex is diversifying its revenue streams by adding complementary products to its sales channel, including hot/cold therapy, cervical traction, knee braces, and a full catalog of physical therapy products[31] - A significant portion of revenue is recurring, derived from the monthly sale of consumable supplies like electrodes and batteries to existing patients[34] Products Zynex Product Portfolio Overview | Category | Product Name | Description | | :--- | :--- | :--- | | Zynex Medical (ZMI) | NexWave | Dual channel, multi-modality IFC, TENS, NMES device for pain management | | | NeuroMove | EMG-triggered electrical stimulation for stroke/SCI rehabilitation | | | InWave | Electrical stimulation for female urinary incontinence | | Distributed Products | Various | Includes cervical traction, hot/cold therapy, LSO back braces, and knee braces | | Zynex Monitoring (ZMS) | CM-1500 / CM-1600 | Noninvasive fluid monitoring systems. CM-1500 is FDA cleared; CM-1600 is pending | | | NiCO / HemeOx | Laser-based noninvasive oximeters (acquired from Kestrel, not yet FDA cleared) | Markets - ZMI primarily competes in the U.S. home electrotherapy market for pain management, estimated to be approximately $500 million annually[52] - The company positions its electrotherapy products as a non-pharmacological alternative to opioids for treating chronic and acute pain, capitalizing on the national focus on the opioid epidemic[52] - ZMS is focused on the non-invasive patient-monitoring market with its fluid monitoring, sepsis monitor, and pulse oximetry products, but has not yet generated revenue or identified specific competitors[54] Government Regulation - All ZMI products are classified as Class II medical devices by the FDA and require 510(k) market clearance. Key products like NexWave, NeuroMove, and InWave have received this clearance[63] - The company is pursuing international expansion and is in the process of applying for CE Marking for several electrotherapy devices and the CM-1500 fluid monitor to market them in the European Union[64] - Zynex has received ISO 13485:2016 certification, which is crucial for international expansion as it demonstrates compliance with international quality management standards for medical devices[66] Human Capital - As of December 31, 2021, Zynex employed 774 full-time employees, with approximately 400 of them being direct sales representatives[71] - The company's human capital strategy focuses on attracting and retaining talent through competitive pay, training and development programs (including tuition reimbursement), and health and wellness initiatives[72][75] Risk Factors The company faces significant risks from third-party payer dependence, supply chain vulnerabilities, competition, regulatory challenges, and reliance on key personnel Risks Related to Our Business - The business is highly dependent on reimbursement from third-party payers. Changes in their policies, delays in payment, or refund requests could significantly impact revenue and cash flow[79] - There is a concentration of credit risk, with one third-party payer accounting for 22% of accounts receivable at year-end 2021 and another accounting for 26% at year-end 2020[83] - The company faces risks from reliance on third-party manufacturers and sole suppliers, particularly for semiconductor chips, which are experiencing a global shortage. This could lead to production delays and increased costs[94][98][99] - The company's success is significantly dependent on its founder and CEO, Thomas Sandgaard, who beneficially owns approximately 38% of the outstanding stock. The loss of his services could have a material adverse effect[104] Risks Relating to Our Common Stock - Significant stock sales by CEO Thomas Sandgaard could adversely affect the market price of the common stock[130] - Future capital needs may require issuing additional equity, which could result in dilution for existing shareholders[131] Properties Zynex leases all its properties, including a new 110,754 square foot corporate headquarters and a 50,488 square foot warehouse - In April 2021, the company signed a sublease for a new corporate headquarters in Englewood, CO, spanning approximately 110,754 square feet with a term through April 2028[136] - The company also leases a warehouse and production facility of approximately 50,488 square feet, with the lease running through June 2026[136] Legal Proceedings The company is not currently a party to any material pending legal proceedings - As of the report date, Zynex is not a party to any material pending legal proceedings[138] Part II Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Zynex's common stock trades on Nasdaq under 'ZYXI', with the company declaring special cash and stock dividends in Q4 2021 - The company's common stock trades on The Nasdaq Capital Market under the ticker symbol "ZYXI"[141] - In Q4 2021, the Board declared a one-time special cash dividend of $0.10 per share and a 10% stock dividend, which were paid and issued in January 2022[144] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, Zynex achieved significant revenue and net income growth, driven by increased device orders and an expanded sales force Highlights - ZMI achieved 89% order growth, 63% revenue growth, and 88% net income growth in 2021 compared to 2020[151] - Acquired Kestrel Labs, Inc. on December 22, 2021, for approximately $30.5 million, consisting of $16.1 million in cash and $14.4 million in Zynex common stock[157] - Filed for FDA approval of the CM-1600, a laser-based fluid monitoring system[157] Results of Operations Consolidated Statement of Operations Summary (in thousands) | Metric | 2021 (in thousands) | 2020 (in thousands) | $ Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Net Revenue | $130,301 | $80,122 | $50,179 | 62.6% | | Device Revenue | $36,613 | $21,269 | $15,344 | 72.1% | | Supplies Revenue | $93,688 | $58,853 | $34,835 | 59.2% | | Income from Operations | $22,366 | $10,249 | $12,117 | 118.2% | | Net Income | $17,103 | $9,074 | $8,029 | 88.5% | | Diluted EPS | $0.44 | $0.24 | $0.20 | 83.3% | - The 63% increase in net revenue was primarily driven by an 89% growth in device orders, which expanded the customer base and increased sales of consumable supplies[163] - Operating expenses as a percentage of revenue decreased from 87% in 2020 to 83% in 2021, reflecting improved operational leverage despite absolute increases in costs[158] Financial Condition, Liquidity and Capital Resources Key Financial Position and Cash Flow Data (in millions) | Metric | Dec 31, 2021 (in millions) | Dec 31, 2020 (in millions) | | :--- | :--- | :--- | | Cash | $42.6 | $39.2 | | Accounts Receivable, net | $28.6 | $13.8 | | Working Capital | $59.8 | $52.9 | | Net Cash from Operations | $6.9 | $0.8 | - To finance the Kestrel acquisition, the company entered into a credit facility with Bank of America, including a $16.0 million fixed-rate term loan and a $4.0 million line of credit[176] - Net cash from financing activities was $13.1 million in 2021, primarily from the new debt, offset by $2.7 million in treasury stock purchases. This compares to $25.3 million in 2020, which was driven by a $25.2 million equity offering[181][182] Critical Accounting Policies - Revenue recognition is a critical policy, involving significant estimates of variable consideration from third-party payers. The company uses a portfolio approach based on historical collection rates to determine the transaction price[190][197] - The accounting for business combinations, such as the Kestrel acquisition, requires management to make significant estimates regarding the fair value of acquired assets, assumed liabilities, and contingent consideration[203] - Contingent consideration liabilities are classified as Level 3 fair value measurements and are estimated using a Monte Carlo simulation, reflecting unobservable inputs[205] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2021 and 2020, with the auditor's report highlighting critical audit matters Key Financial Data (in thousands) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Balance Sheet | | | | Total Assets | $133,274 | $72,175 | | Total Liabilities | $59,349 | $15,320 | | Total Stockholders' Equity | $73,925 | $56,855 | | Income Statement | | | | Total Net Revenue | $130,301 | $80,122 | | Net Income | $17,103 | $9,074 | | Cash Flow | | | | Net Cash from Operations | $6,949 | $818 | - The independent auditor's report highlights two critical audit matters: 1) Estimation of transaction price and variable consideration for revenue recognition, and 2) Valuation of intangible assets and contingent consideration related to the Kestrel business combination[244][245][249] - The acquisition of Kestrel Labs on December 22, 2021, for total consideration of $30.5 million resulted in the recognition of $20.4 million in goodwill and $10.0 million in identifiable intangible assets (patents)[310][315] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[211] - Based on an evaluation using the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[213][214] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2022 proxy statement - Information for this section is incorporated by reference from the forthcoming Proxy Statement for the 2022 annual meeting of shareholders[220] Executive Compensation Information regarding executive compensation is incorporated by reference from the forthcoming 2022 proxy statement - Information for this section is incorporated by reference from the forthcoming Proxy Statement for the 2022 annual meeting of shareholders[221] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans, including outstanding options and securities available for future issuance, with further details in the proxy statement Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Securities to be Issued Upon Exercise (thousands) | Weighted-Average Exercise Price | Securities Remaining for Future Issuance (thousands) | | :--- | :--- | :--- | :--- | | 2017 Stock Option Plan | 867 | $1.09 | 3,937 | | Other Plans (2005 Plan, Warrants, etc.) | 452 | $0.68 | 0 | | Total | 1,319 | $0.97 | 3,937 | Certain Relationships and Related Transactions, and Director Independence The Board has determined that all Audit Committee members are independent directors, with additional information incorporated by reference from the proxy statement - The Board has determined that all members of the Audit Committee (Messrs. Cress, Disbrow, and Michaels) are independent directors under NASDAQ rules[227] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the forthcoming 2022 proxy statement - Information for this section is incorporated by reference from the forthcoming Proxy Statement for the 2022 annual meeting of shareholders[228] Part IV Exhibits, Financial Statement Schedules This section lists all consolidated financial statements and exhibits filed with the Form 10-K, including key agreements and certifications - This section contains a list of all financial statements, schedules, and exhibits filed with the 10-K report[230] - Key filed exhibits include the Stock Purchase Agreement for the Kestrel Labs acquisition (Exhibit 10.11) and the Loan Agreement with Bank of America (Exhibit 10.12)[232]