Operator:
Good afternoon and welcome to the Zynex Fourth Quarter and Full-Year 2020 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions]. Certain statements in this release are forward-looking, and as such, are subject to numerous risks and uncertainties. Actual results may vary significantly from the results expressed or implied in such statements. Risk factors that could cause actual results to materially differ from forward-looking statements are described in our filings with the Securities and Exchange Commission, including the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2020, as well as Forms 10-Q, 8-K and 8-Ka, press releases in the company's website. Please note this event is being recorded. I would like to turn the conference over to Thomas Sandgaard, Founder, Chairman, and Chief Executive Officer. Please go ahead.
Thomas S
Thomas Sandgaard:
Good afternoon. My name is Thomas Sandgaard, President and CEO of Zynex. Welcome to our 2020 fourth quarter and full-year earnings call. I'm excited to announce yet another quarter of revenue growth and positive net income. Our fourth quarter revenue of $25.6 million increased 81% compared to the same quarter last year. It was also the highest quarterly revenue in the history of the company. It was our 18th straight quarter with positive net income and fully diluted earnings per share was $0.05. Adjusted EBITDA for the fourth quarter was $3.4 million as we continue to invest in growing our salesforce. We continue to see good order flow as we push through obstacles related to COVID-19 pandemic. Fourth quarter orders came in 117% higher than the fourth quarter of last year, and 45% sequentially compared to Q3. For the full year, orders grew 96% compared to 2019, a solid result in the middle of a pandemic. The continued strength in orders and growth of those orders speaks volumes to the relationships that our salesforce has with many prescribers and the need for them to prescribe non-opioid, non-addictive prescription strength solutions for the patients in pain. As selling gets back to normal, later in 2021, we see an upside in sales order growth as the over 300 sales reps we added net during 2020. They haven't been able to get access to many of the clinics in the territories due to COVID restrictions. As a reminder, the majority of cash and revenue related to an order comes in over the year following the receipt of the order as the patient uses the device and related supplies, which should lead to expanding revenue and profitability in the second half of 2021 and beyond. In Q4, we continue to aggressively add sales reps and exceeded 500 total reps by the end of the fourth quarter. Our recruiting efforts continue to be supported by a surge in candidates due to increased unemployment rates related to COVID-19. We expect these new hires to provide significant productivity increases in 2021 and beyond. We expect to have over 600 sales reps by year-end. I should also mention that our operations continued without any issues, and our supply chains remain uninterrupted. It's our practice to keep several months of finished products on the shelf and four months of components on hand for internal assembly and 12 to 18 months of orders placed with our vendors on top of the in-house materials. During 2020, we took an even more conservative approach in response to COVID and any possible supply chain issues, which resulted in an increased inventory of approximately $3 million higher than our normal levels. We should be back to a more normal inventory level when we get to Q2 and Q3. The opioid epidemic continues to be a serious issue in this country and we are increasingly working to get patients off opioids and for physicians to use our prescription strength technology as the first line of defense when treating pain. Currently, the devastating impacts have reached the level where tens of thousands die yearly due to opioid abuse. We continue to develop more tools to make physicians aware of our technology that literally has no side effects. Our products for pain management and rehabilitation still stand out as some of the best products in the industry, the NexWave for pain management, our NeuroMove device for stroke rehabilitation and InWave for incontinence treatment, puts us in a very strong product position in the rehabilitation markets. We continue to see great potential in both our product division, our existing revenue generating area for pain management, as well as a huge unmet potential for blood volume monitor. As most of you probably already know, we managed to get the FDA clearance for our CM-1500 blood and fluid monitor nearly a year ago. The CM-1500 is a non-invasive monitor intended to monitor patients' fluid balance in hospitals and surgical centers. We expect to initially target ORs and surgeries that typically display substantial blood loss as well as recovery rooms in ICUs where internal bleeding today are common and difficult to detect until the point where serious complications occur. We believe this product will lead to safer surgeries, fewer complications and less mortality, one of the biggest unmet needs in hospitals today. We're still recruiting to add more personnel to this division. We're seeing good solid preliminary results from a clinical study at Wake Forest, and we're preparing to commence more studies on the device shortly. We're seeing interest in purchasing the device from hospitals that have now had the device on demo and our engineering team are well underway with building prototypes of our next generation CM-1600 device that will be easier to use in surgical settings. Recently, I filed a patent application for a technology that is somewhat similar in nature but will be used for non-invasively, early detecting sepsis, another huge unmet problem in hospitals today. I will now turn the call over to Dan Morehead, our CFO.
Dan Moorhead:
Thanks, Thomas. First I'll review our 2020 fourth quarter results. Orders grew 117% year-over-year and net revenue grew at 81% to $25.6 million from $14.2 million in 2019. Device revenue increased 118% to $8.2 million compared to $3.8 million last year. Supplies revenue increased 67% year-over-year to $17.4 million from $10.4 million. Gross margins were 78% in the fourth quarter. Sales and marketing expenses increased 156% year-over-year as we continued to aggressively grow our sales force and G&A expense grew 91% year-over-year. Much of the increase was related to increased headcount and our reimbursement and patient support functions related to our order growth. Fourth quarter net income was $1.8 million or $.05 per diluted share. Adjusted EBITDA, which is a standard EBITDA calculation, plus an exclusion of non-cash, stock-based compensation and other income expense and is reconciled in our press release, was $3.4 million in the fourth quarter of 2020. I'll now review the 2020 full year results. Orders grew 96% year-over-year, which increased net revenue 76% to $80.1 million from $45.5 million in 2019. Device revenue increased 99% to $21.3 million compared to $10.7 million last year. Supplies revenue increased 69% year-over-year to $58.9 million from $34.8 million. Gross margins were 78%. Sales and marketing expenses increased 130% year-over-year and G&A expense grew 71% year-over-year. 2020 net income was $9.1 million or $0.26 per diluted share compared to net income of $9.5 million or $0.28 per diluted share in 2019. Adjusted EBITDA increased 13% to $13.7 million in 2020. On the balance sheet, as of December 31 2020, our cash balance was $39.2 million, up from $14 million at year-end. As many of you know, we completed an equity transaction during July which added $25 million to the balance sheet. Cash was down slightly from Q3 as we increased our inventory to protect against any supply chain issues. Our working capital grew 205% to $52.9 million at December 31 compared to $17.4 million as of December 31, 2019. With that, I'll turn the call back over to Tom.
Thomas Sandgaard:
Thank you, Dan. I'm pleased with our full year-over-year growth in orders of 96% and our revenue growth of 76% in the midst of a COVID-19 pandemic. It's a huge testament to our efforts to grow our sales force and clearly justifies the investments in our sales personnel, sales management, and inside support functions. Our focus for 2021 is on increasing sales for productivity as selling resumes to its normal course, continuing to leverage investments we have made within sales and also G&A to improve profitability and, most importantly, help our patients in pain. We will continue to grow our salesforce during 2021, except it'll be at a much slower pace than last year. We have made the investments in growing our salesforce primarily in the second half of last year. This investment is showing all the right signs as Q4 orders grew an impressive 117% year-over-year. January of this year grew 98% over last January and February is currently trending above 120%, while March looks like a growth well over 150% at this point. Eventually, over the next year or two, these orders will turn into revenue and, therefore, we expect to return to a healthier relationship between top line revenue and sales expenses as we get into the third and fourth quarters of 2021. As always, with the beginning of the year, we see insurance deductibles impacting revenue. So, this seasonality that we see every year means a flat or slightly lower revenue in the first quarter compared to the fourth quarter of the previous year. That's been the case for many years. We estimate our first quarter revenue to come in between $23 million and $24.5 million with an adjusted EBITDA loss between $0.5 million and $1.5 million. As a reminder, first quarter revenue is historically affected by health insurance deductibles not being met in the beginning of the year. This revenue seasonality, along with the salesforce investments we made in the second half of 2020, is causing a small loss in Q1. With our current order growth, we expect revenue and profitability to ramp up significantly throughout the year. The Q1 revenue range is 51% to 61% higher than in 2020 and full-year 2021 revenue is estimated to come in between $135 million and $150 million, with adjusted EBITDA between $15 million and $25 million. The full-year revenue estimate is approximately 68% to 87% above 2020 revenue of $80.1 million. My goal for our elective therapy and rehab division is to continue to grow our share of the huge market for prescription pain management and to take advantage of the huge void in the market after the disappearance of our main competitors. This includes growing our domestic salesforce, as well as potential acquisitions of complementary technologies. The very large expense line in our financials is therefore part of a very deliberate effort to grow our top line revenue long term and, therefore, leverage the healthy margins in our industry to maximize long-term profitability and earnings per share. We will see the effects of that in the third quarter of this year and going forward. In the meantime, our revenue is still impacted by the slowdown in orders in Q2 last year due to COVID and our bottom line impacted by adding a net of 300 sales reps during last year, primarily during the second half. Our long-term goal is still to fill all 800 territories in the US and get sales reps fully productive. We see that it takes up to about two years to make a sales rep fully productive. In summary, we announced yet another great quarter with strong growth in orders, growth in revenue and profit. We will now answer questions from our listeners.
Operator:
[Operator Instructions]. We'll take our first question today from Yi Chen with H.C. Wainwright.
Yi Chen:
My first question is, how much impact from COVID-19 have you incorporated into the 2021 revenue guidance?
Thomas Sandgaard:
Relatively little. The biggest impact came from a significant dip in orders in April and May, to some degree the first half of June of last year. So, we saw a significant dip in orders in that second quarter. That impacted revenue in the third and fourth quarter of last year. So, we came out a little less than what else we could have. We definitely still see the impact of that dip in orders here in this first quarter. There'll be a little bit in the second. I think once we get to the third quarter of this year, the impact from that dip is very little. All of our reps are, obviously, not having full access or the same type of access that they used to have before COVID. But the fact that we have added so many sales reps, that has more than mitigated those marginal difficulties we've received for the individual rep. So, therefore, we still see order growth in the range of at least double over last year, except for that second quarter of last year. And eventually, we'll see revenue growth catching up to that kind of order growth.
Yi Chen:
Second question, does your revenue projection include any potential revenue from blood volume monitor? And if not, can we still expect the device to be commercialized sometime later this year?
Thomas Sandgaard:
Well, it's definitely commercialized. It's already sitting at a few hospitals. People are looking at it, testing it and have indicated that they're certainly interested in acquiring it. We have not put any of those numbers in the forecast for this year. We have so much growth in the pain management division alone that it wasn't necessary to put that in. So, that buys us a little or puts some of the pressure, take some of the pressure off in terms of certainly the public markets and the perception of how much revenue should come this year. But there might be a little that'll trickle in before the end of the year. Most of the activity is obviously on getting more clinical data, but we do have some sales efforts.
Yi Chen:
Currently, you do not have a dedicated sales team for the blood volume monitor yet. Is that correct?
Thomas Sandgaard:
We do have one person. The title is business development β Director of Business Development. But we might expand with more people to basically undertake a sales effort than just one person.
Yi Chen:
Finally, can you provide an update on the development of the sepsis monitor?
Thomas Sandgaard:
We are still in the very early stages of figuring out the prototyping of that device. So, there's not a whole lot yet, other than the concept is there, the patent has been filed and β well, the patent application has been filed. And we're looking at how we can develop a prototype for it. We just added one more engineer to the engineering team. So, we should have the resources to take that on as soon as he starts.
Operator:
We'll take our next question from Jeffrey Cohen with Ladenburg Thalmann,
Jeffrey Cohen:
Few questions. Firstly, can you remind us, on the sepsis monitor, what you anticipate the input is?
Thomas Sandgaard:
Well, the principle is the same, which is multiple parameters that have a correlation with the onset of sepsis. Individually, that don't mean much, but when you put them together in an index, then it becomes a very strong indication, just like the blood volume monitor. In this case, we're looking at heart rate, temperature, respiratory rate, and one or two more parameters to, eventually, add into that index that could give us an alarm. So, the end result of that is to alert a medical professional that β you should probably take a blood sample, so that you can analyze to see if you actually have sepsis coming on. And that would be earlier than when it gets into a very serious situation where it's more obvious that sepsis has onset. So, if we can have medical professionals take that sample early on with a decent degree of probability, we'll then be able to say, yeah, we can start treatment now rather than later. We will be able to save some lives and, obviously, reduce a lot of complications.
Jeffrey Cohen:
And similar to the blood volume monitor, you would be applying this to the forearm or the hand, as far as a clip?
Thomas Sandgaard:
This product here will have the ability to have the sensors applied β they have more flexibility as to where they can be applied than the blood volume monitor. But that is definitely an option to place it there. And the sensors for the most be somewhat similar.
Jeffrey Cohen:
It's the first time I've heard you really talk about or mention acquisitions or complementary products. Are you thinking about that in the pain/opioid arena, or are you thinking about that as far as analysis in the hospital patient population or in any?
Thomas Sandgaard:
We're looking at both. We've come somewhat close or very close, in some cases, actually for both divisions. As of now, what's on the table right now, those things that are more imminent, potential acquisitions, they would be in the pain management space. We always distribute products from other companies. If we had more products in that space, it would have an immediate sales channel. And we're only looking at products that would be able to leverage that we have β that would have the same call point. So, that's what we're looking at. It's got to be the right opportunity for us to pull the trigger.
Jeffrey Cohen:
Lastly, as far as the guidance on both sides with the range as well as the EBITDA numbers, it looked like 2020 was a fairly methodical and orderly ramp up of revenues. It sounds like what you're saying is a little bit of a reset in Q1 similar to Q4, with probably another equal and orderly ramp up throughout the year to get to that midpoint. And with the midpoint in the, call it, 76% or 77% range, are we okay in thinking about, generally speaking, the sales and marketing line being driven by the, say, 80% to 85% and then the G&A line increasing in the 60% to 65%.
Dan Moorhead:
I would say, for the full year, the sales side β this year, sales comes in at a little over 40%. And that's going to be similar next year, but it's going to decrease significantly over the course of the year. With the guidance we gave in Q1, the sales and marketing line is over 50% because of the flatness in revenue in Q1 that we see every year and then you should see it decrease down towards 40% by the end of the year.
Jeffrey Cohen:
It's margin. And on the growth side then, the sales and marketing could be 70%, 75% range for the year?
Dan Moorhead:
I don't have that calculation in front of me. I typically look at it as a percent of revenue, and you'll definitely β I'd have to go back and look at it that way. But again, if you're trending down towards about 40% as a percent of revenue by the end of the year, that's about right.
Thomas Sandgaard:
We're talking about gross profit margin or are we talking about our sales expense line?
Jeffrey Cohen:
I was thinking of just trying to get a better handle on the expense lines.
Jeffrey Cohen:
With that midpoint in guidance, I think we're at our, call it, 60 and 30 [indiscernible] sales and marketing for the year, in that general range.
Dan Moorhead:
Yeah, that's pretty close.
Jeffrey Cohen:
I think I got it. Lastly, on the sales front, so you increased dramatically last year by 300 plus reps, getting over 500, sounds like, this year, perhaps another 100-ish get added. Any commentary on retention or selection or qualification or training of note and how that's been going?
Thomas Sandgaard:
It's about the same as we've seen before. We continue to get better and better at training new reps. It's going to be a little easier this year because training above 500 new reps last year, maybe not that much, 400 or something like that. And then 300 of them are still with us. It was obviously a big task on top of the reps that were already on board. So, this year, by only hiring 100 net, it's going to enable us to make sure we pay more attention, not only during training, but in the first few days when our regional sales managers hold their hands out on the field after they get their initial training. It'd be a much easier task and we could probably achieve even better results in terms of early-on productivity and retention rate.
Operator:
We'll take our next question from Marc Wiesenberger with B. Riley Securities.
Aman Gulani:
This is actually Aman jumping in for Marc. So, I wanted to ask β can you talk about the demand and prescriptions associated with rehabbing from surgical procedures? And where are you relative to normalized levels and how has that trended over the last couple of quarters?
Thomas Sandgaard:
Some people describe the demand for professional or medical pain management to be in the $500 billion range worldwide and half of it being here in the US. That's pretty good way of illustrating that any rep we have in the 800 territories that already mapped out won't barely scratch the surface of the demand that exists in their territories, whether it's the amount of patients that there are or it's the amount of clinics they can even possibly get to during a day or during the time that they work for us. We see the long-term revenue potential, the average of $1 million per sales rep long term. It takes a couple of years for most reps to that kind of productivity. That's order productivity. Then the revenue comes even later than that because of our business model. But right now, because of how many new reps there are and they are just beginning to send in their first few orders, that obviously means that our average is way lower than that, something we've covered many times previously. But obviously, if you say that the average revenue per rep long term is $1 million a year and we'll eventually have filled up 800 territories, that should be equating to a revenue of $800 million in theory. We currently see that we have a few reps that are producing over $2 million a year in annual revenue. And our top 20 reps produce an average of β you've got to be below the top 20 to be producing in the neighborhood of maybe $1 million in annual revenue. So, it's absolutely attainable, but we have so many reps that are just slowly working up to that. So, it's a very slow moving machine that we have built here. But there's also a lot of sustainability to it because the revenue is generated for a couple of years after we get those orders. So, it's slowly getting on the books. And eventually, in the future quarters, we'll see the accumulated effect of those orders turning into revenue.
Aman Gulani:
I wanted to ask about your supply chain. Are you seeing any input inflation there? And do you have any ability to pass that on to your customers?
Thomas Sandgaard:
We're fortunate enough to be growing so fast, and also now having pretty much second sauces on everything we do. And that puts us in a very strong negotiating position. So, if the worldwide trend is to see increased prices, we still see decreasing prices on our raw material and components, simply because our volumes are increasing so much. And we've been good at creating second sources, so we have competition of pricing as a result of that. So, we see the opposite trend, but that's not obviously a macro trend. But that's something that's self-inflicted, just the fact that we're doing better.
Aman Gulani:
Last question from me; I'll jump back in the queue. Can you talk about any traction you're getting with other products like NeuroMove and InWave? And do you have any plans to make more aggressive efforts to monetize these products besides the NexWave?
Thomas Sandgaard:
Right now, our focus is to primarily increase revenue of the NexWave. That is where the most obvious demand is. And you can say where you get the most bang for the buck by adding more sales reps, providing them with better training, better promotional material and better support. So, investment has been more in the sales force. Also, we added from going β last year, we added 10 more regional sales managers, so we went from 5 to 15 regional sales managers. That's also an investment we made that primarily fits that space. And the other products that we distribute from other companies and potentially will acquire that fit into that salesforce is where our focus is. Long term, you're right, we've got some great products. Our InWave for incontinence treatment is a great product, and there's really good reimbursement for it as well. So, as we penetrate those markets better, that's certainly something we could take up and do more. That's probably an item we can utilize at least parts of our sales force. The NeuroMove will probably β the way things are reimbursement-wise right now β require more effort, more of an investment long term in potentially securing better reimbursement and/or educating the end users more than necessarily the physicians to drive more revenue on that. That is more longer term. We also need to consider expansion internationally in terms of diversifying and expanding our revenue base that way. So, that will be part of the mix as well. But again, we're probably a couple of years out before we look at β be looking at expanding into those areas. The demand is so big and any effort we put in in pain management in that area right now pays off so quickly that it's an obvious one to put most of our energy on short term in that.
Operator:
Our next question comes from Matt O'Brien with Piper Sandler.
Korinne Wolfmeyer:
This is Korinne on for Matt. First, could you talk a little bit about the revenue mix shift we're seeing with supplies decreasing a bit? And what are the drivers of that? And also, where do you see mix going over the coming years?
Thomas Sandgaard:
I would say, overall, that is pretty meaningless how that flows because it's very constant. Maybe Dan can give the more technical explanation of it. Every patient has a total revenue stream that comes from device and supplies. The only thing is that, when we have a huge uptick in orders, obviously, initially, there would be an uptick in the device revenue versus supplies. But long term, then the supplies revenue catch up to it. But overall, it's flat. It's technicalities. That makes it looks like fluctuations.
Dan Moorhead:
Like he said, it's typically pretty flat. We're usually around 75% supplies. Q4 is always a little bit of an anomaly because we see β at the end of the year, we always see a bump in device. We have the same thing last year. It didn't quantify quite as much as it did this year, but the customer base is a lot bigger this year. So again, I agree with Thomas. I think it's going to be pretty flat, and you're typically in that 25/75 device/supplies as a percentage of revenue.
Korinne Wolfmeyer:
Second, can you just provide a little more color on the gross margin pressures we're seeing? And where you see that going throughout 2021 and 2022?
Dan Moorhead:
We've been pretty constant. We've been in that 78% range for the last several quarters. In prior years, we might have been a little higher than that. But coming out of '15, '16, '17, when the company really didn't have a huge staff, we were lacking in a lot of areas. And so, to get staffing where it needed, we had to make those investments and sacrifice the margin a little bit. Going into 2021, as many people know, we did open up a new facility. That is our production facilities standalone. Prior, it was on the first floor of our corporate headquarters. So that investment, obviously, we took a space that we needed to grow into a little bit. So, I think that'll put a little margin pressure in 2021. And so, instead of maybe that 78% to 82%, maybe we're 75% to 80% going into next year. But the product margins themselves have been pretty constant.
Korinne Wolfmeyer:
Last one for me. I know you touched on this earlier. But can you just expand a little bit more on the retention and turnover you're seeing of your reps? And since you've onboard a bunch of new folks so quickly, we'd be interested in hearing how those metrics have been trending versus historical levels.
Thomas Sandgaard:
Those that we hired during last year, most of them came onboard in the second half. And therefore, a lot of them have still been with us less than a quarter. We typically give them 90 days, sometimes a little extra to prove that they can actually sell, more than just the initial interviewing. And right at year-end, we had a little bit of cleanup. So, we're probably still maybe 10%, 15% attrition rate. So, if you look at other medical device companies, probably a little better than you see in other medical device companies. And I expect we'd be doing even better here this year because we're only going to be hiring at a rate that is less than a third of what we did last year, and much less, probably a quarter of what we did in the second half of last year. And that gives us the ability to be even pickier when we recruit. We can pay more attention to the individuals during training and our regional sales managers will be able to follow up and hold the hands of the new sales reps better than they were able to last year. So I expect to see a significant improvement in the retention in salesforce going forward.
Operator:
This concludes our question-and-answer session. I'd like to turn the conference back over to Thomas Sandgaard for any closing remarks.
Thomas Sandgaard:
Yes, thank you. First of all, I just wanted to apologize for the technical difficulties in dialing in today. But other than that, I hope that today's earnings call has been informative for everyone. And I appreciate the interest in Zynex and listening into this call. Thank you and a great day to all.
Operator:
The conference has now concluded. We thank you again for attending today's presentation. You may now disconnect and have a great day.