Zynex(ZYXI) - 2023 Q4 - Annual Report

Part I Business Zynex, Inc. primarily designs and markets electrotherapy medical devices through Zynex Medical, while Zynex Monitoring Solutions develops non-invasive patient monitoring systems, with growth focused on sales force expansion Overview of Business Segments Zynex operates through Zynex Medical, its primary revenue generator for electrotherapy devices, and Zynex Monitoring Solutions, which develops non-invasive patient monitoring devices but has not yet generated revenue - ZMI designs, manufactures, and markets medical devices for pain management and rehabilitation, with its primary product being the NexWave device, requiring consumable supplies[15] - ZMS is developing non-invasive patient monitoring devices, including the FDA-cleared CM-1600 wireless fluid monitor and laser-based pulse oximetry products like NiCO™ and HemeOx™[20][26] - Substantially all consolidated revenue in 2023 and 2022 was attributable to ZMI, as ZMS has not yet generated revenue[27][29] Sales and Growth Strategies The company's growth strategy focuses on expanding its direct U.S. sales force, aiming for 600 representatives by end of 2024, with significant recurring revenue from consumable supplies - The company focuses on expanding its sales force to capitalize on an untapped electrotherapy market, especially as large competitors have exited[30] - As of December 31, 2023, Zynex had approximately 500 field sales representatives, aiming for 600 by the end of 2024[30] - A large portion of revenue is recurring, stemming from the sale of consumable electrodes and batteries to existing patients[35] Products and Product Uses Zynex markets its manufactured products like NexWave and NeuroMove, and distributes rehab items, while ZMS develops fluid monitors and pulse oximeters not yet for sale Zynex Product Portfolio | Product Category | Product Name | Description | | :--- | :--- | :--- | | Zynex Medical Products | NexWave | Dual channel, multi-modality IFC, TENS, NMES device | | | NeuroMove | EMG-triggered electrical stimulation device | | | M-Wave | NMES device (cleared by FDA in Feb 2024) | | Distributed Rehab Products | Comfortrac/Saunders | Cervical traction | | | LSO Back Braces | Lumbar support | | ZMS Products (In Development) | CM-1600 | Wireless Fluid Monitoring System (FDA cleared June 2023) | | | NiCO™ | Laser-based Noninvasive CO-Oximeter (Not yet FDA cleared) | | | HemeOx™ | Laser-based Total Hemoglobin Pulse Oximeter (Not yet FDA cleared) | - The primary electrotherapy device, NexWave, is used for pain management as a medication alternative, offering pain relief and increased blood flow[39][41] - The ZMS fluid monitoring systems, including the FDA-cleared wireless CM-1600, are noninvasive devices measuring relative changes in patient fluid volume[46][47] Markets and Competition Zynex competes in the U.S. home electrotherapy and rehabilitation market, estimated at $500 million to $1 billion annually, offering non-opioid pain solutions amidst complex insurance collection cycles - The estimated annual domestic market for home electrotherapy and rehabilitation products is approximately $500 million to $1 billion[52] - Zynex is positioned to offer a significant non-opioid pain management alternative, addressing a market larger than diabetes, heart disease, and cancer combined[52][53] - Key competitors in the electrotherapy market include RS Medical, EMSI, and H-Wave[56] Resources (Manufacturing and Intellectual Property) Zynex employs a hybrid manufacturing strategy with in-house assembly and actively protects its intellectual property, including patents for its fluid monitoring system and a pulse oximetry IP portfolio - The company utilizes contract manufacturers for components and conducts in-house final assembly, testing, and proprietary software/hardware development[59][60] - Zynex holds two U.S. utility patents and a European utility patent for its fluid monitoring system, with an additional IP portfolio for laser-based pulse oximetry from Kestrel Labs acquisition[62] Government Regulation Zynex products are subject to extensive government regulation, including FDA Class II device clearance, international CE marking, and compliance with federal and state healthcare laws like Anti-Kickback Statute and HIPAA - All ZMI products are classified as Class II (Medium Risk) devices by the FDA, requiring 510(k) market clearance, which NexWave, NeuroMove, and InWave have received[64] - The company is pursuing CE marking for several electrotherapy devices and its CM-1600 fluid monitor to gain European Union market access[65] - Zynex is subject to federal and state healthcare laws, including the Anti-Kickback Statute and HIPAA, regulating referrals and patient data privacy[71][72] Human Capital As of December 31, 2023, Zynex employed approximately 1,100 full-time employees, with a human capital strategy focused on attracting and retaining talent through competitive compensation and development programs - As of December 31, 2023, the company had approximately 1,100 full-time employees[78] - Human capital management focuses on competitive pay, training and development opportunities, and employee health and wellness programs[79][80] Risk Factors The company faces diverse risks including economic conditions, regulatory changes, dependence on third-party payers, supply chain issues, reliance on key personnel, cybersecurity threats, and material weaknesses in internal controls - Business & Economic Risks: The business is susceptible to unfavorable global economic conditions, pandemics, and rapid technological changes that could render products obsolete[81][82][84] - Reimbursement & Regulatory Risks: High dependence on third-party payers creates vulnerability to changes in reimbursement policies, billing audits, and healthcare reform, with critical compliance to laws like Anti-Kickback Statute and HIPAA[89][96][123] - Operational & Supply Chain Risks: Dependence on limited suppliers for key components, including semiconductor chips, and high reliance on founder and CEO Thomas Sandgaard pose significant risks[135][139][146] - Internal Control & Cybersecurity Risks: Two material weaknesses in internal controls over financial reporting were identified as of December 31, 2023, related to IT general controls and accounts receivable valuation, alongside risks from cyber-attacks[160][163] - Financial & Stock Risks: Conversion of outstanding convertible senior notes could dilute ownership, and significant share sales by the CEO, who owns approximately 50% of the stock, could adversely affect market price[182][186] Unresolved Staff Comments The company reports no unresolved staff comments - None[187] Cybersecurity Zynex integrates cybersecurity into its risk management framework, overseeing third-party providers, and reports no material impact from cyber threats on operations or financial standing - Cybersecurity risk management is integrated into the company's broader risk management framework[190] - The company has processes to oversee third-party risk, including security assessments and monitoring of SOC reports[191] - The company reports no cybersecurity threats have materially impacted its operations or financial condition[192] Properties Zynex leases all its properties, including a 110,754 sq. ft. corporate headquarters, a 50,488 sq. ft. warehouse, and a 41,427 sq. ft. ZMS office, all in Englewood, CO - The company leases its corporate headquarters in Englewood, Colorado, approximately 110,754 square feet, with the lease through April 2028[194] - A new ZMS office space of approximately 41,427 square feet in Englewood, Colorado, commenced July 1, 2023, with lease through December 31, 2028[193] - A warehouse and production facility of approximately 50,488 square feet is leased through June 2026, with an option to extend[194] Legal Proceedings The company is not a party to any material pending legal proceedings - The company is not a party to any material pending legal proceedings[196] Mine Safety Disclosures This item is not applicable to the company - Not applicable[197] Executive Officers of the Registrant The company's executive officers include Thomas Sandgaard (President and CEO), Daniel Moorhead (CFO), and Anna Lucsok (COO) Executive Officers | Name | Age | Title | | :--- | :--- | :--- | | Thomas Sandgaard | 65 | President and Chief Executive Officer | | Daniel Moorhead | 51 | Chief Financial Officer | | Anna Lucsok | 38 | Chief Operating Officer | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Zynex common stock trades on Nasdaq (ZYXI), with 32.17 million shares outstanding as of February 28, 2024, and the company actively repurchased stock in 2023 through two programs - The company's common stock trades on The Nasdaq Capital Market under the ticker symbol ZYXI[201] - The Board approved two stock repurchase programs in H2 2023: $10.0 million in September and $20.0 million in November[203][204] Common Stock Repurchases in Q4 2023 | Period | Total Shares Purchased | Average Price Paid Per Share | Total Value (Approx.) | | :--- | :--- | :--- | :--- | | Oct 2023 | 536,715 | $8.23 | $4.4M | | Nov 2023 | 524,200 | $9.20 | $4.8M | | Dec 2023 | 488,000 | $9.75 | $4.8M | | Q4 Total | 1,548,915 | $9.04 | $14.0M | - A special cash dividend of $0.10 per share was paid in January 2022, with future payments at the Board's discretion[208] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, Zynex's net revenue grew 17% to $184.3 million, driven by 43% device order growth, though net income decreased due to rising expenses, while operating cash flow improved and liquidity remained strong 2023 Highlights For 2023, Zynex achieved 43% order growth and 17% revenue growth, marking its 8th profitable year with $9.7 million net income, while repurchasing $37.9 million in stock and advancing its ZMS pipeline - Achieved 43% order growth, 17% revenue growth, and a 29% increase in operating cash flows compared to 2022[214] - Recorded net income of $9.7 million, marking the 8th consecutive profitable year[214] - Repurchased approximately $37.9 million worth of the Company's common stock[220] Results of Operations In fiscal year 2023, net revenue increased 17% to $184.3 million, driven by device and supplies growth, but income from operations and net income decreased due to higher sales, marketing, and G&A expenses Consolidated Statement of Income Summary (in thousands) | Metric | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Net Revenue | $184,322 | $158,167 | $26,155 | 17% | | - Devices | $58,822 | $43,497 | $15,325 | 35% | | - Supplies | $125,500 | $114,670 | $10,830 | 9% | | Income from Operations | $10,780 | $22,938 | ($12,158) | -53% | | Net Income | $9,732 | $17,048 | ($7,316) | -43% | | Diluted EPS | $0.27 | $0.44 | ($0.17) | -39% | - Net revenue growth was primarily due to 43% growth in device orders, though a $6.2 million allowance on uncollectible receivables in Q4 2023 reduced net revenue[229] - Sales and marketing expense increased by 29% due to sales force expansion and higher compensation, while G&A expense increased 34% due to headcount growth and professional fees[233][234] Financial Condition, Liquidity and Capital Resources As of December 31, 2023, Zynex maintained strong liquidity with $69.3 million working capital and $44.6 million cash, bolstered by a $57.0 million convertible note issuance and improved operating cash flow, despite significant stock repurchases Key Financial Condition Metrics (in millions) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $44.6 | $20.1 | | Working Capital | $69.3 | $48.5 | | Accounts Receivable, net | $26.8 | $35.1 | | Total Assets | $136.9 | $116.5 | | Total Liabilities | $90.8 | $50.1 | - In May 2023, the company issued $60.0 million in 5.00% Convertible Senior Notes due 2026, yielding net proceeds of $57.0 million[240][247] - Net cash from operating activities increased to $17.8 million in 2023 from $13.7 million in 2022, primarily due to improved collections[245] - Net cash from financing activities was $7.6 million in 2023, driven by convertible note issuance, offset by $37.9 million in treasury stock purchases and $10.7 million in debt payments[247] Critical Accounting Estimates Critical accounting estimates include revenue recognition and accounts receivable, which saw a $6.2 million reduction in Q4 2023 due to a change in estimate, alongside stock-based compensation, business combinations, asset impairment, and income taxes - Revenue recognition involves significant estimates of variable consideration based on historical collection rates from different payer types, subject to risk and revision[263] - In Q4 2023, a change in the estimate of uncollectible receivables resulted in a $6.2 million reduction to net revenue ($4.6 million net of tax)[265] - Other critical estimates include stock-based compensation, income taxes, business combinations accounting, impairment of goodwill and long-lived assets, and fair value of contingent consideration[254][266][267][270][271][272] Quantitative and Qualitative Disclosures About Market Risk As a "Smaller Reporting Company," this disclosure is not required - Not required[273] Financial Statements and Supplementary Data This section includes consolidated financial statements, notes, and the report from independent registered public accounting firm Marcum LLP, starting on page F-2 - The consolidated financial statements and the report of independent registered public accounting firm, Marcum LLP, are included starting on page F-2[274] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[275] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2023, due to material weaknesses in IT General Controls and accounts receivable valuation, though no material misstatements occurred - Management concluded disclosure controls and procedures were not effective as of December 31, 2023, due to material weaknesses in internal control over financial reporting[276][277] - A material weakness was identified in IT General Controls (ITGCs) due to inadequate segregation of duties for program changes and insufficient monitoring of data access[278][311] - A second material weakness was identified in the design and operating effectiveness of controls over the valuation of certain accounts receivables[278][311] - Management is developing and implementing a remediation plan to address these weaknesses[281] Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q4 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the three months ended December 31, 2023[284] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[285] Part III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance practices is incorporated by reference from the company's 2024 definitive proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2024 annual meeting of stockholders[288] Executive Compensation Information detailing executive compensation is incorporated by reference from the company's 2024 definitive proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2024 annual meeting of stockholders[289] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of December 31, 2023, 3.389 million securities remained available for issuance under equity compensation plans, with further security ownership information incorporated by reference from the 2024 proxy statement Equity Compensation Plan Information as of December 31, 2023 (in thousands) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | 2005 Stock Option Plan | 2 | $0.39 | — | | Warrants | 80 | $2.43 | — | | 2017 Stock Option Plan | 347 | $1.83 | 3,389 | | Total | 429 | $1.94 | 3,389 | - Additional required information is incorporated by reference from the definitive proxy statement for the 2024 annual meeting of stockholders[292] Certain Relationships and Related Transactions, and Director Independence The Audit Committee members (Messrs. Cress, Disbrow, and Michaels) are deemed independent under NASDAQ rules, with further information on related party transactions and director independence incorporated by reference - The Audit Committee members (Messrs. Cress, Disbrow, and Michaels) have been determined to be independent directors by the Board[295] - Information is incorporated by reference from the definitive proxy statement for the 2024 annual meeting of stockholders[294] Principal Accountant Fees and Services Information concerning fees paid to and services provided by the principal accountant is incorporated by reference from the company's 2024 definitive proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2024 annual meeting of stockholders[296] Part IV Exhibits, Financial Statement Schedules This section lists consolidated financial statements and all exhibits filed with the Form 10-K, including articles of incorporation, stock incentive plans, convertible notes indenture, and CEO/CFO certifications - This section provides a list of all financial statements, schedules, and exhibits filed as part of the annual report[299] - Key exhibits include the Indenture for the 5.00% Convertible Senior Notes (4.3), the 2017 Stock Incentive Plan (4.1), various lease and loan agreements, and CEO/CFO certifications[299][301][302] Form 10-K Summary The company reports no Form 10-K summary - None[303]