Zynex Inc (ZYXI) 2021 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Zynex Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Greg Chodaczek from the Gilmartin Group. Please go ahead.

Thank you, Sarah, and good afternoon, everyone. Earlier today, Zynex released financial results for the fourth quarter of 2021. A copy of the press release is available on the company's website.

Joining me on today's call are Thomas Sandgaard, Chairman, President and Chief Executive Officer; Dan Moorhead, Chief Financial Officer; Anna Lucsok, Chief Operating Officer; and Donald Gregg, Vice President of Zynex Monitoring Solutions.

Before we begin, I'd like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events.

We encourage you to review the company's past and future filings with the SEC, including, without limitation, the company's Form 10-K and subsequent Form 10-Qs, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements.

These factors may include, without limitation, statements regarding product development, product potential, the regulatory environment, sales and marketing strategies, capital resources or operating performance.

With that, I will now turn the call over to Thomas.

Thanks, Greg, and good afternoon, everyone. Thank you for joining us today. We will be reviewing activities in both Zynex business divisions: ZMI, the division for pain management; and CMS, our Monitoring Solutions division.

Over the last 12 months, we have continued to build a profitable company with diversified strategies and pathways that we believe will ultimately drive our top line growth in many years to come.

The fourth quarter represented yet another record of revenue and net income revenue of $40.4 million and net income of $8.9 million, respectively. Our $42.6 million cash position is very substantial, relative to a company of our size, and increased sequentially by $7.2 million or approximately 20% just during the fourth quarter.

We continue to see consistent orders for fourth quarter, figures coming in 8% higher than the same quarter last year and an adjusted EBITDA of $13 million in the quarter. 2021 numbers cemented our financial health. Looking forward, we expect to experience a seventh straight year of profitability.

I will now turn the call over to Anna, our COO, to speak to operations and our revenue-generating Pain Management division.

Thank you, Thomas. The Pain Management and Electrotherapy division remains the primary driver of the company's financial growth, specifically with the next wave for pain relief and post-op rehabilitation. These prescription strength electrotherapy devices provide patients with comparable and even superior results than those obtained using enterprise-level technology in the clinician's office, both with at-home convenience.

We are in the process of populating 800 sales territories throughout the U.S. with a highly productive direct salesforce to promote not only our NexWave device, but also products we distribute such as cervical traction, lower back support, hot and cold therapy and knee braces.

We have filled well over half of those territories and are highly focused on developing the productivity of existing sales reps in addition to adding more, despite the tight labor market.

Our focused sales training program is designed to enable our reps to achieve long-term productivity while maintaining steady EBITDA growth on the bottom line. Increasing the efficiency of existing sales reps while also recruiting high-performing team members, will drive significant sales growth for the company.

As mentioned during our last quarterly earnings call, the employment and labor markets have remained a challenge for recruiting effective sales reps, and while the incoming applicant quality is high, we hope for the increase in quantity as the Omicron wave subsides. Our long-term goal is to populate all 800 territories and continue to improve our annual revenue per sales rep.

While a large portion of our sales team is still in the early stages of ramping up, the market is a unique one, having been developed over many decades with widespread insurance reimbursement, physician acceptance and little-to-no competitive products. We would like to take this opportunity to address changes in insurance provider coverage and to reiterate the durability of Zynex's revenue model regardless of in- or out-of-network status.

The majority of the Zynex' commercial insurance business is through out-of-network coverage, and we process claims through all insurance providers. The contracts we have with in-network national insurance providers, which previously included UnitedHealthcare, do not materially impact revenue collections versus those of out-of-network providers.

Our network status change with UnitedHealthcare will not negatively impact revenue, as about 90% of all UnitedHealthcare plans specifically have out-of-network coverage. We're dedicated to providing access to care for all patients, and we'll continue to process all incoming prescriptions, despite in- or out-of-network status.

The opioid epidemic continues to ravage this country, with tens of thousands dying from prescription drug abuse every year. We've become increasingly aware of the role that Zynex and its prescribing physicians can play throughout the continuum of care and have educated doctors on the benefits of the NexWave technology in managing pain.

Our technology is free from side effects and studies demonstrate that it is as effective in combating acute and chronic pain as other rehabilitation and mitigation options. We continue to see physicians writing prescriptions for NexWave and as consumables earlier in the pain management process, thus avoiding dependence on medication from the outset of treatment.

We plan to make this a central tenet of our salesforce training program and are proud to offer an alternative solution to opioid prescription use.

As mentioned in previous quarters, we have not experienced any supply chain issues during COVID, and we do not foresee any materializing during 2022. We've diversified our list of suppliers to include up to 3 sources of manufacturing components, and we preemptively ramped up our purchasing in anticipation of increased business levels.

I will now turn the call back to Thomas.

Thank you, Anna. I believe it's important to remind everyone that for decades, our business model in the Pain Management division has been to accept prescriptions for all patients, and therefore, [bill] all insurance plan whether we are in network or not.

In fact, we are only in network with less than 1/3 of all commercial insurance plans, and yet we consistently collect revenue for our products, as our financial results repeatedly show.

While the company's primary revenue driver is currently based on the Pain Management division, we've increased focus in our Monitoring Solution division throughout 2021. We're excited to realize even further potential in the patient monitoring market with our recent acquisition of Kestrel Labs.

I'd like to welcome Don Gregg, VP of Monitoring Solutions, to speak to the long-term strategy and vision of this division.

Thank you, Thomas. Our patient monitoring products include hemodynamic monitoring, laser-based pulse oximetry and sepsis monitoring, which represent a market of over $3.7 billion annually. Ultimately, we believe that a central vital sign monitoring platform that incorporates our growing product line, will deliver hospitals and physicians the most efficient system of patient monitoring care available.

Pulse oximetry sales to hospitals and clinics alone accounts for over $600 million of serviceable market in the U.S., and it is growing at about a 7.4% CAGR. The Kestrel Labs acquisition provides Zynex with leading-edge, laser-based pulse oximetry technology that solves unmet clinical challenges and market demand.

The NiCO device, which is a noninvasive co-oximeter, uses laser technology to measure 4 crucial species of hemoglobin with a high level of accuracy, regardless of skin pigmentation. NiCO is a direct replacement for the conventional monitors on the market. The monitors primarily measure SpO2, and they fail to capture accurate reflections of patient condition.

Kestrel's second device, the HemeOx monitor, is a total hemoglobin pulse oximeter, which replaces invasive fingerstick venous blood draws for continuous monitoring of hematocrit oxygen content and oxygen saturation.

LED technology being used in virtually all hospital settings today is approximately over 35 years old, a glaring outdated standard of care that is ripe for disruption. The antiquated science can lead to inaccurate diagnosis that cost facilities and insurance providers millions of dollars every year, let alone pose a risk for patient health.

While this shift towards laser-based technology won't happen overnight, we expect that the inherent value will be supported by data collected in clinical trials. Armed with this technology and data, Zynex is in a position to compete and ultimately, seize market share from incumbent players.

We don't anticipate revenues from the Monitoring division in 2022, but we look forward to incorporating the Kestrel technology into our current product portfolio and bringing the outdated pulse ox standard of care into the 21st century.

Additionally, we are looking forward to working with the FDA on our recent submission of the CM-1600. This next-generation wireless device allows for ease of use in hospital settings and helps physicians monitor patient fluid balance. The CM-1600 can serve as an early warning sign to identify deteriorating patient conditions from hemorrhagic shock, hypervolemia and hypovolemia.

The CM-1500, which was Zynex's first-generation monitor, received FDA clearance in 2020 and completed multiple informative clinical trials for perioperative use of our proprietary Relative Index algorithm. The CM-1600 was submitted to the FDA at the end of 2021. We expect the typical 180-day clearance cycle and look forward to commercializing the product later this year.

Our initial targets will include hospitals and surgery centers, where substantial blood loss and internal bleeding are difficult to detect until serious complications present.

More patients die postoperatively than intraoperatively, largely due to hemodynamic instability. The noninvasive CM-1600 provides more comprehensive insight into patient conditions. In the second quarter, we'll add ahead of sales and marketing to the Monitoring division and be prepared to mobilize manufacturing as soon as the FDA clearance is achieved.

We have multiple studies planned and are enrolling patients for clinical research throughout the upcoming year and plan to commercialize the wireless CM-1600 device over pursuing a go-to-market strategy with the wired CM-1500.

With that, I will now turn over the call to Dan Moorhead, Chief Financial Officer, to discuss our operating results.

Thanks, Don. Please refer to our press release, issued earlier today, for a summary of our financial results for the fourth quarter and full year 2021. After commenting on our financial results, Thomas will review our financial guidance for 2022.

First, I'll review the fourth quarter of 2021. Orders grew 18% year-over-year and net revenue grew 58% to $40.4 million from $25.6 million in 2020. Q4 revenue increased 16% sequentially, compared to Q3. Device revenue increased 62% to $13.3 million, compared to $8.2 million last year. Supplies revenue increased 56% year-over-year to $27 million from $17.4 million.

Gross margins were 82% for the fourth quarter, compared to 80% in Q3. We've previously stated, we expected margins to be between 75% and 80%, and we're pleased to outperform those expectations. Sales and marketing expenses were $13.6 million in the fourth quarter of 2021, compared to $12.3 million in the same period in 2020.

G&A expense grew to $7.8 million in the fourth quarter of 2021, compared to $5.3 million in the same period in 2020 and $6.8 million in Q3. The increase was mainly due to facilities, increased headcount related to order growth and our growth in Zynex Monitoring.

And finally, net income grew 398% year-over-year to $8.9 million and produced $0.23 per diluted share in the fourth quarter of 2021, and adjusted EBITDA grew 276% to $13 million. Keep in mind that our 10% stock dividend, which was distributed during January 2022, was accounted for retrospectively to all prior periods and decreased our earnings per share by 10% for 2021 and all prior periods.

We ended the quarter with $42.6 million in cash, up 20% from the end of Q3. For full year 2021 results, orders grew 89% year-over-year, which increased net revenue 63% to $130.3 million from $80.1 million in 2020. Device revenue increased 72% to $36.6 million, compared to $21.3 million last year. Supplies revenue increased 59% year-over-year to $93.7 million from $58.9 million. Gross margins for the full year were 79%.

Sales and marketing expenses increased 59% year-over-year, and G&A expense grew 44% year-over-year. 2021 net income was $17.1 million or $0.44 per diluted share, compared to net income of $9.1 million or $0.24 per diluted share in 2020. We previously reported $0.26 for 2020, but the amount was adjusted by the 10% stock dividend.

Adjusted EBITDA increased 95% to $26.7 million in 2021, and on the balance sheet, as of December 31, our cash balance was $42.6 million, up from $39.2 million at the end of 2020.

Our working capital grew 13% to $59.8 million at December 31 compared to $52.9 million as of December 31, 2020. That growth was net of our stock buyback, cash dividend and debt added related to the Kestrel Labs transaction.

In December, we completed the acquisition of Kestrel Labs for $31 million, which included $15 million in stock and $16 million was financed through Bank of America at 2.8% over 3 years.

With that, I'll turn the call back over to Thomas.

Thanks, Dan. So now turning to the outlook for 2022. We expect total revenue to be in the range of $150 million to $170 million, representing growth of 15% to 30% over the previous year. Adjusted EBITDA for 2022 is expected to come in between $25 million and $35 million.

For the first quarter of 2022, we estimate revenue to come in between $29 million and $32 million, with an adjusted EBITDA between $3 million and $4.5 million. This reflects our most recent assessment of the current labor environment and continued uncertainty related to the evolving impact of the COVID-19 pandemic.

We look forward to maintaining our financial health as a key differentiator among our other micro-cap peers, and we anticipate high growth and profitability in the upcoming quarters.

With that, we can now open up for questions.

(Operator Instructions)

Our first question comes from Matthew O'Brien with Piper Sandler.

I guess, let's just start with UNH, since that's kind of the 800-pound gorilla here in the room. So why would they want to move from in-network to out-of-network? Or why would you both want that to happen? And then how -- what percentage of sales is UNH -- sorry, what percentage is UNH of sales and then EBITDA?

Yes. Matt, this is Thomas. Well, first of all, it was definitely a mutual decision. Second, you called it the big gorilla in the room, this is a nonevent. Changes in relationships with insurance companies, that happens all the time, and certainly, something that won't have an impact on our revenue. And in terms of the percentage of revenues, Dan, do you have...

We've looked at it -- Anna and I have looked at it, and it varies because we are estimating collections, but it's -- we have talked about -- they did change some supply during the middle of the year. And so towards the end of the year, I think they were between 10% and 15% of our overall revenue, somewhere in that range. And we would expect that percentage to stay fairly flat going forward.

Dan, is it about the same amount on the EBITDA side, too? Or is it disproportionately levered to...

No, it's in proportion to everything else. So they're not, more or less, profitable, in general. We always talk about payer mix and those types of things, but again, the commercial guys are, kind of, in the middle.

They're pretty much all the same, whether it's in Aetna, United or some of the smaller insurance -- on the average, is pretty much end up collecting the same for the average file.

Okay. And why would you want them to go out of network? What benefit does that provide to you guys?

Certainly, less headache. We typically have less going back and forth, in terms of, certainly, the -- they have a number of tools in the toolbox. Some of them -- certainly, they have a year -- an entire year. Everything is on prepayment review, and that means that we provide additional documentation to insurance companies like that for a long period and then it goes off. Suddenly you see a big influx of money, et cetera. It's more cumbersome.

It's actually more straightforward, in general, to be dealing with commercial health insurances out-of-network with. There's a lot of work on a case-by-case basis. They often, call it, forget to pay for one date of service but remember to pay maybe the half the amount for the next date of service and sometimes the device, sometimes it's supplies and all that.

There's so much housekeeping going on, on each file, whether we are in network or out of network. But it's generally slightly more -- remember, when we -- some years back, opted out of Aetna, I believe the year following that, we -- our collections from Aetna increased 10% for the average file. So I wouldn't be surprised, if we see something similar or at least the same collections, for the average file from United.

Okay. Very helpful. And then, I don't think I heard a salesforce number, maybe the end of last year. And then, what your plans are for this year?

And I'll just kind of wrap the question that I really have around that. Q4, you did about $40 million of sales in total. You're guiding to about $160 million. So no real kind of growth off of that exit rate. And I'm just wondering if it's salesforce related or if there's something else to really keep an eye on?

Yes, it's very much salesforce related. And it's -- at this point, it might be wishful thinking that the impacts of COVID on the labor market will be gone tomorrow, and we can start hiring new reps at a higher rate without slacking on the quality of the reps we add into the salesforce.

So worst case -- that's also why we have a range, in terms of the revenue estimate, between $150 million and $170 million. It's a worst-case scenario, if we only hire at the rate we have, right now. Then we expect we might be in the low end of that range. If we see the job market open up more, as it relates to quality candidates applying for sales positions, then we could potentially do a little better in the later part of the year and catch up that way.

But I -- realistically, for this year, it's going to be hard to grow a whole lot more than that. We got to be real about the job market, and we saw in the later part of 2020 that trying to force that in a situation where the supply of labor is fairly limited, it's not worth it, trying to push it any further.

Okay. And actual numbers of sales reps, how many did you end last year with? And how many are you hoping to end this year with?

We had about 400 at the end of the year, and the current forecast shows us around 500, so adding about 100 net. And obviously, we'd like to do better than that. But as of right now, like Thomas said, with the labor market, that's just a tough number to forecast.

Our next question comes from Jeffrey Cohen with Ladenburg Thalmann.

This is actually Destiny on for Jeff this afternoon. Following on the theme of the labor market. I'm curious, and maybe this is a question for Anna, how has your strategy changed? Are you focusing specifically on geographic areas that are underserved? Or are you really more focused on qualified reps, even if they're in similar or somewhat filled areas? Has that changed at all, given the current labor market, or no?

Well, our strategy hasn't necessarily changed. We have implemented a number of initiatives to increase the number of candidates that we're attracting and put some additional filters in place to ensure that the candidates that we're pushing through, are quality candidates.

But overall, our goal is to get to 800 sales reps, still. And we're focusing on all areas, recruiting quality candidates throughout the country.

Okay. Got it. And then maybe, could you just talk a little bit about the timing of some of the Kestrel products, in terms of regulatory submissions and then potential commercial launches?

Yes. This is Don Gregg. I can speak to those. So we acquired Kestrel, and we've integrated the acquisition. We're currently working on the productization of the products and the submission we're planning in about 18 months. So that's about mid-2023. And that will be for the noninvasive co-oximeter, that's the NiCO product.

Okay. And then, Dan, better margins than expected. I'm just curious, if there's anything specific you wanted to call out or that you could call out or if it was strictly a function of higher revenues this quarter?

Yes. No, I'd say, it was -- some of it was a function of the higher revenues. We've continued to work our vendor relationships and those types of things. So for the year, we were still at 79%. So we still think that 75% to 80% is a good range, going forward, but we were happy with the result in Q4, for sure.

Our next question comes from Marc Wiesenberger with B. Riley Securities.

This is actually Aman jumping in for Mark. I wanted to ask, can you provide a little bit more color on maybe prior payer customers that went from in-network to out-of-network? Maybe quantify the impact on revenue per prescription as well as quantity and reimbursements for consumables?

Yes, this is Thomas. We have -- we've seen that quite often go positively -- marginally positive. In the case of Aetna, (inaudible) was a 10% increase. Of course, numbers fluctuate all the time between all insurance companies, and we go in and out of network on many of them. Sometimes it's beneficial in some cases, where it's very hard to squeeze anything out of an insurance company for a long period of time.

We find ways to then get in-network, get paid a little better that way. So it's something that goes on in our billing department on a constant basis, but the numbers, especially when it comes to commercial insurance plans, are pretty constant.

And it's not really -- it's not something we really think about on a daily basis whether we're in network or out of network. So most of these plans for out-of-network benefits -- the inclination of benefits just flow a little differently.

Anna, I don't know if you have anything to...

I would also add that typically, when we're out of the network, we see higher allowables because we're not restricted to our contracted price. It's typically lower when you are in network with the payer. So we're anticipating that to -- allowables to go up, once we're out of network with United.

Got it. That's helpful. And some reports have indicated, Zynex has shipped outside number of consumables to patients on a monthly basis. Can you talk about the particles you have in place to safeguard against any unusual activity? Can you provide an average number of consumable shifts to patients? And what factor is going to determining the monthly quantity of consumables?

Well, obviously, everything is nearly to the point of being dictated by the insurance companies. They have allowable quantities as well as allowable dollar amounts. Let's say, sometimes it even varies patient by patient, but it's -- for the most, something that's dictated by the insurance companies, and obviously, we try to comply with that. Sometimes it takes a month or two before we certainly learn about new allowable quantities. So it's -- on a high level, that's really dictated by the insurance company. That's not -- Anna, you may take in more detail.

We also look at the number of treatment areas that the patient is treating, the different variables to go into, the need for quantities of supplies, and as Thomas mentioned, most of it is driven by the insurance company and what they're allowing.

But if the patient needs more or less, they can also -- we would reach out to them to follow up and get confirmation, and then they're able to reach out to us and adjust or increase or decrease the quantities if they're no longer treating as frequently as needed.

Our next question comes from Yi Chen with H.C. Wainwright.

Could you give us a rough percentage estimate of the revenue that's covered by the commercial insurance and also the percentage covered by out-of-network coverage?

Well, overall, we are in network with less than 1/3 of our commercial insurance plans. And revenue-wise, it's -- we collect more or less the same, on the average, through -- between all the commercial insurance plans. So it's very evenly split.

Okay. And could you tell us the current status of the clinical trial of CM-1500?

Yes. We have several trials that we have currently in the pipeline. We've announced several of them in our press releases as well. We're running a trial at DaVita at the moment. We're also running trials at Vitalant on specifically characterization of the device in apheresis-type procedures.

At DaVita, of course, it is kidney dialysis, and we just finished what we call a lower body negative pressure study, which is -- it takes about 1,500 ml of blood from your core down to your extremities to your legs. And we see it simulates hemorrhagic shock, and we completed that trial here, currently, at a large institution on the East Coast, Yale.

And we are in the process of analyzing all of this data that's coming through these trials to make changes and characterizations of our Relative Index, an algorithm in our device. And so there's highly-promising results that are coming out of these, and they're growing very well, overall.

Do you expect all the trials to report results by the end of this year?

We have trials that will be mostly completed by the end of this year. We have a few others that we're working on with other large institutions. Similar -- these are university trials, and they may go into next -- early next year, but most all will complete by the end of this year.

Okay. Is the timing -- does the timing of the reporting -- trials results reporting affect your -- the timing of your commercial launch of CM-1600?

It doesn't. We are using the trials to ensure the performance of the device, of course. We are waiting for a response from the FDA. We submitted at the end of December 2021, and we're expecting a response end of March and that is what will really dictate our commercialization.

We will have the trial data for the commercialization, and that's been part of the plan all along with the clinical trials and our commercialization date.

This concludes our question-and-answer session. I'd like to turn the conference back over to Thomas Sandgaard for any closing remarks.

Okay. Yes. Thank you. We're very excited about our progress this quarter and remain very optimistic that we'll continue to generate growth from our strategic initiatives. We ended 2021 with a flurry of activity and announcement and we'll keep leveraging that momentum into the new year.

We expect 2022 to see some significant milestones for the company and a period of inflection for our expansion. We hope today's earnings call has been informative, and I appreciate your interest in Zynex. Have a great evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.