ZYNEX INC - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended: September 30, 2019

OR

For the transition period from                      to                     

Commission file number 001-38804

Zynex, Inc.

(Exact name of registrant as specified in its charter)

(303) 703-4906

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨    No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

ZYNEX, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ZYNEX, INC.

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)

(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

ZYNEX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

(unaudited)

The accompanying notes are an integral part of these consolidated financial statements

ZYNEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

(unaudited)

The accompanying notes are an integral part of these consolidated financial statements

ZYNEX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

(unaudited)

ZYNEX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

(unaudited)

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

Organization

Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado.  We operate one primary business segment, medical devices which include Electrotherapy and Pain Management Products. As of September 30, 2019, the Company’s only active subsidiary is Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) through which the Company conducts most of its operations. One other subsidiary, Zynex Europe, ApS (“ZEU,” a wholly-owned Denmark corporation), did not generate material revenues during the three and nine months ended September 30, 2019 and 2018 from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume monitoring device, but it is awaiting approval by the U.S. Food and Drug Administration (“FDA”) as well as Certificate European (“CE”) Marking in Europe, therefore, ZMS has achieved no revenues to date.

The term “the Company” refers to Zynex, Inc. and its active and inactive subsidiaries.

Nature of Business

The Company designs, manufactures and markets medical devices that treat chronic and acute pain, as well as activate and exercise muscles for rehabilitative purposes with electrical stimulation. The Company’s devices are intended for pain management to reduce reliance on drugs and provide rehabilitation and increased mobility through the utilization of non-invasive muscle stimulation, electromyography technology, interferential current (“IFC”), neuromuscular electrical stimulation (“NMES”) and transcutaneous electrical nerve stimulation (“TENS”). Our medical devices are designed for home use and to be patient friendly. Our devices are small, portable, battery-operated and include an electrical pulse generator which is connected to the body via electrodes. Our medical devices are marketed in the U.S. and are subject to FDA regulation and approval.  Our products require a physician’s prescription before they can be dispensed in the U.S. Our primary product is the NexWave device, which is marketed to physicians and therapists by our field sales representatives.   The NexWave requires consumable supplies, such as electrodes and batteries, which are shipped to patients on a recurring monthly basis, as needed.  

During the three and nine months ended September 30, 2019 and 2018, the Company generated substantially all of its revenue (99.99%) in North America from sales of its devices and related supplies to patients and health care providers.

Unaudited Consolidated Financial Statements

The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Amounts as of December 31, 2018, are derived from those audited consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the annual audited financial statements, accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which has previously been filed with the SEC.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of September 30, 2019 and the results of its operations and its cash flows for the periods presented.  The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Zynex, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Non-controlling Interest

Non-controlling interest in the equity of a subsidiary is accounted for and reported as stockholders’ equity. Non-controlling interest represents the 20% ownership in the Company’s majority-owned (but currently inactive) subsidiary, Zynex Billing and Consulting, LLC (“ZBC”).

Reclassifications

During 2019, the Company began reporting costs related to its selling and marketing activities separate from its general and administrative costs. As a result, reclassifications between selling and marketing costs and general and administrative costs have been made to the results of operations for the three and nine month periods ending September 30, 2018 to conform to the consolidated 2019 financial statement presentation. These reclassifications had no effect on net earnings, retained earnings or cash flows as previously reported.

Use of Estimates

Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The most significant management estimates used in the preparation of the accompanying consolidated financial statements are associated with the allowance for billing adjustments and uncollectible accounts receivable, the reserve for obsolete and damaged inventory, stock-based compensation, and valuation of long-lived assets and realizability of deferred tax assets.

Revenue Recognition, Allowance for Billing Adjustments and Collectability

On January 1, 2018 the Company adopted the new accounting standard on revenue recognition issued by the Financial Accounting Standards Board (“FASB”). Pursuant to the revenue from contracts with customers standard the Company recognizes revenue when it transfers promised goods to customers in an amount that reflects the consideration to which the Company expects to be entitled, known as the transaction price.

Revenue is generated primarily from sales in the United States of our electrotherapy devices and associated supplies. Sales are primarily made with, and shipped, directly to the patient with a small amount of revenue generated from sales to distributors. Device sales can be in the form of a purchase or a lease. Revenue related to purchased devices are recognized in accordance with ASU No. 2014-09—“Revenue from Contracts with Customers” (ASC 606) and is recognized when the device, which has been prescribed by a doctor, is delivered to the patient which is when control is deemed to have transferred to the customer.

Revenue related to devices out on lease is recognized in accordance with ASC 842 (as defined below). These leases are accounted for as operating leases based on the following criteria below:

Leased units still require a doctor’s prescription and the lease inception is dependent upon delivery. The Company retains title to the leased device and those devices are classified as property and equipment on the balance sheet. Since our leases are month-to-month and can be returned by the patient at any time, revenue is typically recognized monthly until the customer returns the unit.

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Device sales between purchased, subject to ASC 606, and leased, subject to ASC 842, are broken down as following (in thousands):

Supplies revenue is recognized once delivered to the patient, which is when control is deemed to have transferred to the customer. Supplies needed for the device can be set up as a recurring shipment, ordered through the customer support team or our online store as needed.

In the healthcare industry there is often a third party involved that will pay on the patient’s behalf for purchased or leased devices and supplies. The terms of the separate arrangement impact certain aspects of the contracts, with patients covered by Third-party Payors (as defined below), such as contract type, performance obligations and transaction price, but for purposes of revenue recognition the contract with the customer refers to the arrangement between the Company and the patient. The Company does not have any material deferred revenue in the normal course of business as each performance obligation is met upon delivery of goods to the patient. The Company had deferred revenue of $0.9 million as of December 31, 2018 related to an insurance reimbursement claim that was de-recognized during the nine months ended September 30, 2019. For additional detail, see description below in Note 7. There are no substantial costs incurred through support or warranty obligations.

Primarily all of the Company’s revenues are derived, and the related receivables are due, from patients with private health insurance carriers and workers compensation claims (collectively “Third-party Payors”), with a small portion related to private pay individuals , attorney and auto claims. The transaction price is estimated with variable consideration using the most likely amount technique for Third-party Payors reimbursement deductions, known throughout the health care industry as “billing adjustments” whereby the Third-party Payors unilaterally reduce the amount they reimburse for the Company’s products, refund requests, and for the timing and values of amounts to be billed. Inherent in these estimates is the risk that they will have to be revised as additional information becomes available and constraints are released. Specifically, the complexity of Third-party Payor billing arrangements and the uncertainty of reimbursement amounts for certain products from Third-party Payors or unanticipated requirements to refund payments previously received may result in adjustments to amounts originally recorded. Due to continuing changes in the health care industry and Third-party Payor reimbursements, as well as changes in our billing practices to increase cash collections, it is possible our forecasting model to estimate collections could change, which could have an impact on our results of operations and cash flows. Any differences between estimated settlements and final determinations are reflected as an increase or a reduction to revenue in the period when such final determinations are known. Historically these differences have been immaterial and the Company has not had to go back and reassess the adjustments in future periods for past billing adjustments.

The basis of estimates includes historical rates of collection, the aging of the receivables, trends in the historical reimbursement rates by Third-party Payors, determined using the portfolio approach, and current relationships and experience with the Third-party Payors. A change in the way estimates are determined can result from a number of factors, including experience and training of billing personnel, changes in the reimbursement policies or practices of Third-party Payors, or changes in industry rates of reimbursement. The Company monitors the variability and uncertain timing over Third-party Payor groups in our portfolios. If there is a change in our Third-party Payor mix over time, it could affect our net revenue and related receivables. We believe we have a sufficient history of collection experience to estimate the net collectible amounts by Third-party Payors. However, changes to the allowance for billing adjustments, which are recorded as a reduction of transaction price, have historically fluctuated and may continue to fluctuate significantly from quarter to quarter and year to year.

Billing and reimbursement disputes are very common in the Company’s industry. The Company frequently receives refund requests from Third-party Payors relating to specific patients and dates of service. These requests are sometimes related to a limited number of patients or products; at other times, they include a significant number of refund claims in a single request. The Company reviews and evaluates these requests and determines if any refund request is appropriate. The Company also reviews these refund claims when it is rebilling or pursuing reimbursement from Third-party Payors. The Company frequently has significant offsets against such refund requests, and sometimes amounts are due to the Company in excess of the amounts of refunds requested by the Third-party Payors. Therefore, at the time of receipt of such refund requests, the Company is generally unable to determine if a refund request is valid and should be accrued. Such refunds are recorded when the amount is fixed and determinable. However, management maintains an allowance for estimated future refunds which we believe is sufficient to cover future claims in connection with its estimates of variable consideration recorded at the time sales are recorded.

As of September 30, 2019, the Company believes its accounts receivable is reasonably stated at its net collectible value and has an adequate allowance for billing adjustments relating to all known Third-party Payor disputes, adjustments and refund requests.

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Stock-based Compensation

The Company accounts for stock-based compensation through recognition of the cost of employee services received in exchange for an award of equity instruments, which is measured based on the grant date fair value of the award that is ultimately expected to vest during the period. The stock-based compensation expenses are recognized over the period during which an employee is required to provide service in exchange for the award (the requisite service period, which in the Company’s case is the same as the vesting period).  For awards subject to the achievement of performance metrics, stock-based compensation expense is recognized when it becomes probable that the performance conditions will be achieved over the respective performance period.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, accounts receivable, accounts payable, and accrued liabilities, for which current carrying amounts approximate fair value due to their short-term nature. Financial instruments also include capitalized leases, the carrying value of which approximates fair value because the interest rates on the outstanding borrowings are at rates that approximate market rates for borrowings with similar terms and average maturities.

Inventory

Inventory, which primarily represents devices, parts and supplies, are valued at the lower of cost (average) or net realizable value.

The Company monitors inventory for turnover and obsolescence and records losses for excess and obsolete inventory, as appropriate. The Company provides reserves for estimated excess and obsolete inventories based upon assumptions about future demand. If future demand is less favorable than currently projected by management, additional inventory reserves or write-downs may be required.

Inventories, net of reserve, at September 30, 2019 were $2.1 million which was comprised of finished goods, work in progress, and parts and supplies as compared to December 31, 2018 of $0.8 million.

Segment Information 

We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We have identified our Chief Executive Officer and Chief Financial Officer as our chief operating decision-makers (“CODM”).

We currently operate our business as one operating segment which includes two revenue types:  Devices and Supplies. 

Income Taxes

We record deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.

We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing a one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs, among other things.

Recently Adopted Accounting Pronouncements

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The effective date for the standard is for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. The Company determined that adoption did not have a material impact on its consolidated financial statements.

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows companies to reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act (the Tax Act), from accumulated other comprehensive income to retained earnings. The new standard is effective for us beginning January 1, 2019, with early adoption permitted. The Company determined that the adoption did not have a material impact on its consolidated financial statements.

The Company adopted ASU 2016-02, Leases (Topic 842), as of January 1, 2019, with an effective date of January 1, 2018, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standards, which among other things, allowed us to carry forward the historical lease classification. We also elected the hindsight practical expedient to determine the lease term for existing leases. Our election of the hindsight practical expedient resulted in the lengthening of the lease term related to one of our financing leases.

Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $3.6 million and $3.9 million, respectively, as of January 1, 2018. The Company also recorded an adjustment to the opening balance of retained earnings of $6,000 on January 1, 2018. The difference between the additional lease assets and lease liabilities, net of our previously recorded deferred rent liability, was recorded as an adjustment to retained earnings. The standard did not have a material impact on our consolidated statement of operations and had no impact on our statement of cash flows. See Note 8, below, for further discussion regarding the Company’s operating and financing leases.

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Effect of ASC 842 Adoption on the Company’s Consolidated Balance Sheets (in thousands, except share amounts)

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 is effective for us in the first quarter of fiscal 2020, and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2017-12 on our consolidated financial statements.

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13"), Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard will replace today's "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We are currently evaluating the impact that the adoption of ASU 2016-13 will have on our financial condition, results of operations and cash flows.

Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a material impact on the Company’s consolidated financial statements.

(2) PROPERTY AND EQUIPMENT

The components of property and equipment are as follows (in thousands):

The Company monitors devices out on lease for potential loss and places an estimated reserve on the net book value based on historical loss rates.

Total depreciation expense related to our property and equipment was $0.1 million for both the three months ended September 30, 2019 and 2018. Depreciation expense for the nine-month periods ended September 30, 2019 and 2018 was $0.2 million and $0.1 million, respectively.

Total depreciation expense related to devices out on lease was $0.1 million for both the three months ended September 30, 2019 and 2018. Depreciation expense related to devices out on lease was $0.4 million and $0.1 million for the nine months ended September 30, 2019 and 2018, respectively. Depreciation on leased units is reflected on the income statement as cost of revenue.

(3) EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding and the number of dilutive potential common share equivalents during the period, calculated using the treasury-stock method for outstanding stock options.

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2019 and 2018 are as follows (in thousands, except per share data):

For both the three and nine months ended September 30, 2019, options to purchase 0.4 million shares of common stock were excluded from the dilutive stock calculation because their effect would have been anti-dilutive.

For both the three and nine months ended September 30, 2018, options to purchase 0.3 million shares of common stock were excluded from the dilutive stock calculation because their effect would have been anti-dilutive.

(4) STOCK-BASED COMPENSATION PLANS

In June 2017, our stockholders approved the 2017 Stock Incentive Plan (the “2017 Stock Plan”) with a maximum of 5,000,000 shares reserved for issuance.  Awards permitted under the 2017 Stock Plan include:  Stock Options and Restricted Stock.  Awards issued under the 2017 Stock Plan are at the discretion of the Board of Directors.  As applicable, awards are granted with an exercise price equal to the closing price of our common stock on the date of grant and generally vest over four years. Restricted Stock Awards are issued to the recipient upon vesting and are not included in outstanding shares until such vesting and issuance occurs.  

During the three and nine months ended September 30, 2019, 0.2 million and 0.6 million stock option awards were granted under the 2017 Stock Plan, respectively. During the three and nine months ended September 30, 2018, 0.1 million stock option awards were granted under the 2017 Stock Plan. At September 30, 2019, there were 2.1 million stock option awards issued and 1.2 million stock option awards exercisable under all plans. As of September 30, 2019, 3.7 million stock options remain reserved for issuance under the 2017 Stock Plan.

During the three and nine months ended September 30, 2019, 35,000 and 45,000 shares of restricted stock were granted to management under the 2017 Stock Plan, respectively.  The fair market value of restricted shares for share-based compensation expensing is equal to the closing price of our common stock on the date of grant. The vesting of the Restricted Stock Awards typically occur quarterly over three years for the Board of Directors and quarterly over four years for management.

The following summarizes stock-based compensation expenses recorded in the consolidated statements of operations:

During the three and nine months ended September 30, 2019, the Company recorded compensation expense related to stock options and restricted stock of approximately $0.3 million and $0.6 million, respectively. During the three and nine months ended September 30, 2018, the Company recorded compensation expense of approximately $0.1 million and $0.2 million, respectively. The Company includes stock-based compensation expense in its in general and administrative expense on the accompanying consolidated statements of operations.

The Company received proceeds of approximately $34,000 and $0.2 million related to option exercises during three and nine months ended September 30, 2019, respectively. The Company received proceeds of approximately $21,000 and $0.2 million related to option exercises during the three and nine months ended September 30, 2018, respectively.

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company used the Black Scholes option pricing model to determine the fair value of stock option grants, using the following assumptions for the three and nine months ended September 30, 2019 and 2018.

A summary of stock option activity under all equity compensation plans for the nine months ended September 30, 2019, is presented below:

A summary of restricted stock award activity under all equity compensation plans for the nine months ended September 30, 2019, is presented below:

As of September 30, 2019, the Company had approximately $3.6 million of unrecognized compensation expense related to stock options and restricted stock awards that will be recognized over a weighted average period of approximately 3.0 years.

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(5) STOCKHOLDERS’ EQUITY

Common Stock Dividend

Our Board of Directors declared a cash dividend of $0.07 per share on November 6, 2018. The dividend of $2.3 million was paid on January 18, 2019 to stockholders of record as of January 2, 2019.

Treasury Stock

From December 6, 2017 through March 6, 2018, we had the ability through our stock purchase program to re-purchase our common stock at prevailing market prices either in the open market or through privately negotiated transactions up to $2.0 million. On March 6, 2018, we reached the limit of $2.0 million and share re-purchases were ceased. From the inception of the plan through March 6, 2018, we purchased 495,091 shares of our common stock for $2.0 million or an average price of $4.04 per share.

From May 14, 2018 through May 13, 2019, we had the ability through our stock purchase program to re-purchase our common stock at prevailing market rates either in the open market or through privately negotiated transactions up to $2.0 million. For the nine months ending September 30, 2019, the Company purchased 52,000 shares of our common stock for $0.2 million for an average price of $3.29 per share, related to the new program. From May 14, 2018 through May 13, 2019, the Company purchased 576,129 shares of our common stock for $1.8 million or an average price $3.20 per share.

Warrants

During the nine months ended September 30, 2019, 50,000 warrants were exercised. These warrants were issued during October 2017 as payment for professional services. The exercise was done pursuant to a net exercise provision and, as a result, 9,634 shares of common stock were withheld to facilitate the payment of the exercise price which resulted in the issuance of 40,366 shares of common stock.

A summary of stock warrant activity for the nine months ended September 30, 2019 is presented below (in thousands):

(6) INCOME TAXES

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, primarily related to excess tax benefits on stock option exercises. For the three and nine months ended September 30, 2019 discrete items adjusted were $0.2 million and $0.6 million, respectively. At September 30, 2019 the Company is currently estimating an annual effective tax rate of approximately 27%. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made.  There is a potential for volatility of the effective tax rate due to various factors.

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s effective income tax rate was 27% for the nine months ended September 30, 2019. Discrete items recognized during the three months ended September 30, 2019 and 2018, resulted in a tax benefit of approximately $0.2 million and $16,000, respectively. Discrete items recognized during the nine months ended September 30, 2019 and 2018, resulted in a tax benefit of approximately $0.6 million and $0.3 million, respectively. The Company recorded income tax expense of $0.5 million and $1.7 million for the three and nine months ended September 30, 2019, respectively, and income tax expense of $0.2 million and $0.4 million for the three and nine months ended September 30, 2018.

Taxes of $2.2 million and $0.2 million were paid during the nine months ended September 30 2019 and 2018, respectively.

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(7) DEFERRED INSURANCE REIMBURSEMENT

During the first quarter of 2016, the Company collected $880,000 from a single insurance company for accounts receivable. The accounts receivable had been previously reduced to zero by the allowance for billing adjustments. Subsequent to March 31, 2016, the insurance company verbally communicated to the Company that this payment was made in error and requested it be refunded to the insurance company. The Company recorded this $880,000 insurance reimbursement as a deferred insurance liability.

During the first quarter of 2019, the Company recognized $880,000 as other income and reversed the liability as management’s assessment was that any repayment obligation was deemed remote. The Company has included this amount in other income in order to ensure comparability of the Company’s operating income results for the nine months ended September 30, 2019 and 2018. Management’s legal determination that any refund obligation is remote was based on the facts and circumstances related to the dispute, which included reviewing the legal statutes within the jurisdictions the Company operates.

(8) LEASES

The Company’s primary leases are as follows:

The Company’s operating leases do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring the lease liability. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company’s incremental borrowing rate was determined to be 4.8% for its operating lease liabilities. The Company’s equipment lease agreement has an implicit rate of 8.3%, which was used to measure its financing lease liability. The remaining lease term was 4.0 years for the Company’s operating leases and 5.0 years for its financing leases.

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The table below reconciles the undiscounted future minimum lease payments under the Company’s operating and capital leases to the total operating and capital lease liabilities recognized on the consolidated balance sheets as of September 30, 2019 (in thousands):

Operating and financing lease costs were $0.4 and $0.8 million for the three and nine months ended September 30, 2019, respectively and $0.2 million and $0.7 million for the same periods in 2018, which were included in general and administrative expenses on the consolidated statement of operations.

(9) CONCENTRATIONS

For the three months ended September 30, 2019, the Company sourced approximately 49% of the supplies for its electrotherapy products from two significant vendors (defined as supplying at least 10%). For the same period in 2018, the Company sourced approximately 51% of the supplies from three significant vendors.

For the nine months ended September 30, 2019, the Company sourced approximately 49% of supplies for its electrotherapy products from one significant vendor. For the same period in 2018 the company sourced approximately 44% of supplies from one significant vendor.

Management believes that its relationships with suppliers are good. However, if the relationships were to be replaced, there may be a short-term disruption to operations, a period of time in which products may not be available and additional expenses may be incurred.

The Company had receivables from two health insurance carriers at September 30, 2019 that made up approximately 38% of the net accounts receivable balance. The Company had receivables from one health insurance carrier at December 31, 2018, that made up approximately 23%, respectively, of the net accounts receivable balance.

(10) LITIGATION

From time to time, the Company may become party to litigation and other claims in the ordinary course of business. To the extent that such claims and litigation arise, management would accrue the estimated exposure for such events when losses are determined to be both probable and estimable.

The Company is currently not a party to any material pending legal proceedings.

(11) RELATED PARTY TRANSACTIONS

As of September 30, 2019, the Company employs Mr. Martin Sandgaard, son of Thomas Sandgaard. Total compensation for Martin Sandgaard was $24,000 and $71,000 for the three and nine months ended September 30, 2019, respectively. Mr. Sandgaard’s compensation for the three and nine months ended September 30, 2018 was $19,000 and $65,000, respectively.

To meet Mr. Sandgaard’s obligation to his former wife under a settlement agreement, the Company, during the fourth quarter of 2015, entered into a three-year employment arrangement totaling $100,000 per year with Mr. Joachim Sandgaard. During the three and nine months ended September 30, 2018, total compensation paid to Joachim Sandgaard was $21,000 and $75,000. Joachim Sandgaard’s employment with the Company ceased during December 2018.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Notice Regarding Forward-Looking Statements

This quarterly report contains statements that are forward-looking, such as statements relating to plans for future organic growth and other business development activities, as well as the impact of reimbursement trends, other capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks include the ability to engage effective sales representatives, the need to obtain FDA clearance and CE marking of new products, the acceptance of new products as well as existing products by doctors and hospitals, our dependence on the reimbursement from insurance companies for products sold or leased to our customers, acceptance of our products by health insurance providers for reimbursement, larger competitors with greater financial resources, the need to keep pace with technological changes, our dependence on third-party manufacturers to produce key components of our products on time and to our specifications, implementation of our sales strategy including a strong direct sales force, and other risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2018.

These interim financial statements and the information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the annual audited consolidated financial statements, and notes to consolidated financial statements, included in the Company’s 2018 Annual Report on Form 10-K and subsequently filed reports, which have previously been filed with the Securities and Exchange Commission.

General

The Company has its headquarters in Englewood, Colorado.  We operate one primary business segment, medical devices which include Electrotherapy and Pain Management Products. As of September 30, 2019, the Company’s only active subsidiary is Zynex Medical, Inc. through which the Company conducts most of its operations. One other subsidiary, Zynex Europe, ApS did not generate material revenues during the nine months ended September 30, 2019 and 2018 from international sales and marketing. Zynex Monitoring Solutions, Inc. has developed a blood volume monitoring device, but it is awaiting approval by the FDA as well as CE Marking in Europe, therefore, ZMS has achieved no revenues to date.

RESULTS OF OPERATIONS

Summary

Net revenue was $11.8 million and $8.1 million for the three months ended September 30, 2019 and 2018, respectively, and $31.3 million and $22.6 million for the nine months ended September 30, 2019 and 2018, respectively. Net revenue increased 45% and 39% for the three and nine-month periods ended September 30, 2019, respectively. Net income was $2.0 million for the three months ended September 30, 2019 compared with $2.6 million during the same period in 2018. Net income was $6.5 million for the nine months ended September 30, 2019 compared with $6.9 million during the same period in 2018. We generated cash flows from operating activities of $4.2 million during the nine months ended September 30, 2019. Working capital at September 30, 2019 was $14.1 million, an increase of 92% from $7.3 million as of December 31, 2018.

Net Revenue

Net revenues are comprised of device and supply sales, reduced by estimated Third-party Payors’ reimbursement deductions and an allowance for uncollectible amounts, if needed. The reserve for billing allowance adjustments and allowance for uncollectible accounts are adjusted on an ongoing basis in conjunction with the processing of Third-party Payor insurance claims and other customer collection history. Product device revenue is primarily comprised of TENS products and also includes our cervical traction, lumbar support and hot/cold therapy products. Supply revenue includes consumable supplies related primarily to our TENS products.

We also sell consumable supplies for all patients using our electrotherapy products, consisting primarily of surface electrodes and batteries. Revenue for the electrotherapy products is reported net, after adjustments for estimated insurance company reimbursement deductions and estimated allowance for uncollectible accounts. The deductions are known throughout the health care industry as “billing adjustments” whereby the healthcare insurers unilaterally reduce the amount they reimburse for our products as compared to the sales prices charged by us. The deductions from gross revenue also take into account the estimated denials, net of resubmitted billings of claims for products placed with patients which may affect collectability. See our Significant Accounting Policies in Note 2 to the Consolidated Financial Statements for a more complete explanation of our revenue recognition policies.

We continually pursue improvements to our processes of billing insurance providers. We review all claims which are initially denied or not received. As these situations are identified and resolved, the appropriate party is appropriately rebilled (resubmitted) or, for those claims not previously billed, billed.

We sometimes receive, and expect to continue to receive, refund requests from insurance providers relating to specific patients and dates of service. Billing and reimbursement disputes are very common in our industry. These requests are sometimes related to a few patients and other times include a significant number of refund claims in a single request. We review and evaluate these requests and determine if any refund is appropriate. We also review claims where we are rebilling or pursuing additional reimbursement from that insurance provider. We frequently have significant offsets against such refund requests which may result in amounts that are due to us in excess of the amounts of refunds requested by the insurance providers. Therefore, at the time of receipt of such refund requests we are generally unable to determine if a refund request is valid.

As of September 30, 2019, we believe we have an adequate allowance for billing adjustments relating to known insurance disputes and refund requests. However, no assurances can be given with respect to such estimates of reimbursements and offsets or the ultimate outcome of any refund requests.

Net revenue increased $3.7 million or 45% to $11.8 million for the three months ended September 30, 2019, from $8.1 million for the same period in 2018. Net revenue increased $8.7 million or 39% to $31.3 million for the nine months ended September 30, 2019, from $22.6 million for the same period in 2018. For both the three- and nine-month periods ended September 30, 2019, the growth in net revenue from the same periods in 2018 is primarily related to a 95% and 65% growth in device orders, respectively, which led to an increased customer base and drove higher sales of consumable supplies. We are also continually improving our billing and collection procedures, which allow us to increase our collection rates.

Device Revenue

Device revenue is related to the sale or lease of our products. Device revenue increased $0.9 million or 47% to $2.7 million for the three months ended September 30, 2019, from $1.8 million for the same period in 2018. 

Device revenue increased $1.9 million or 37% to $6.9 million for the nine months ended September 30, 2019, from $5.1 million for the same period in 2018.

The increase in device revenue is primarily related to growth in orders which is attributable to our sales force expansion.

Supplies Revenue

Supplies revenue is related to the sale of supplies, primarily electrodes and batteries, for our products. Supplies revenue increased $2.8 million or 45% to $9.2 million for the three months ended September 30, 2019, from $6.3 million for the same period in 2018. 

Supplies revenue increased $6.9 million or 39% to $24.4 million for the nine months ended September 30, 2019, from $17.5 million for the same period in 2018.

The increase in supplies revenue is primarily related to an increased customer base from increased device sales in 2018 and 2019, plus improvements in our billing and collection procedures.

Operating Expenses

Cost of Revenue – Device and Supply

Cost of Revenue – device and supply consist primarily of device and supply costs, operations labor and overhead, shipping and depreciation. Cost of revenue for the three months ended September 30, 2019 increased 38% to $2.3 million from $1.6 million for the same period in 2018. As a percentage of revenue, cost of revenue – device and supply decreased to 19% for the three months ended September 30, 2019 from 20% for the same period in 2018. The slight decrease in cost of revenue as a percentage of revenue is due to several factors, including an increase of 49% in device and 44% in supply orders from the three months ended September 30, 2018 as well as slightly improved margins on supplies.

Cost of revenue for the nine months ended September 30, 2019 increased 42% to $6.0 million from $4.2 million for the same period in 2018. As a percentage of revenue, cost of revenue – device and supply was 19% for both the nine months ended September 30, 2019 and 2018.

Sales and Marketing Expense

Sales and marketing expenses primarily consist of employee related costs, including commissions and other direct costs associated with these personnel including travel expenses and marketing expenses.

Sales and marketing expense for the three months ended September 30, 2019 increased 148% to $3.9 million from $1.6 million for the same period in 2018. Sales and marketing expense for the nine months ended September 30, 2019 increased 118% to $9.5 million from $4.4 million for the same period in 2018.

The increase in sales and marketing expense for both the three and nine months ended September 30, 2019 is primarily due to the expansion of our sales force including adding approximately 75 additional sales representatives over the past 12 months, of which approximately 57 were added during the nine months ended September 30, 2019. As a percentage of revenue, sales and marketing expense increased to 33% and 30% for the three and nine months ended September 30, 2019, respectively from 20% and 19% for the same periods in 2018. The increase as a percentage of revenue is primarily due to the increase in costs associated with the sales force expansion and the related ramp-up period as sales reps build their sales territory. 

General and Administrative Expense

General and administrative expenses primarily consist of employee related costs, and other direct costs associated with our personnel including facilities and travel expenses and professional fees, depreciation and amortization. General and administrative expense for the three months ended September 30, 2019 increased 50% to $3.1 million from $2.1 million for the same period in 2018. This increase is primarily due to an increase in compensation and benefits expense related to headcount growth, an increase in non-cash stock-based compensation expense as a result of several key hires during the third quarter of 2019 and an increase in rent and facilities expense as we expanded our corporate offices in June 2019. As a percentage of revenue, general and administrative expense was 26% for both the three months ended September 30, 2019 and 2018.

General and administrative expense for the nine months ended September 30, 2019 increased 30% to $8.5 million from $6.5 million for the same period in 2018. The increase in general and administrative expense for the nine months is primarily due to increased compensation and benefit expense related to headcount growth, and increased fees related to our uplisting to the Nasdaq Capital Market. As a percentage of revenue, general and administrative expense decreased to 27% for the nine months ended September 30, 2019 from 29% for the same period in 2018. The decrease as a percentage of revenue is primarily due to the increase in revenue during the period, partially offset by the aforementioned expenses. 

Other Income (Expense)

For the nine months ended September 30, 2019, other income was $0.9 million. The $0.9 million was related to a deferred insurance reimbursement from the first quarter of 2016. The Company collected $0.9 million from an insurance company for accounts receivable. Subsequent to March 31, 2016, the insurance company verbally communicated to the Company that this payment was made in error and requested it be refunded to the insurance company. The Company recorded this $0.9 million as a deferred insurance liability.

During the first quarter of 2019, the Company recognized $0.9 million as other income and released the liability. The Company has included this amount in other income in order to ensure comparability of the Company’s operating income results for the nine months ended September 30, 2019 and 2018. Management’s legal determination that any refund obligation is remote was based on the facts and circumstances related to the dispute, which included reviewing the legal statutes within the jurisdictions the Company operates.

During the nine months ended September 30, 2018, other expense was comprised of interest expense of $0.2 million. Interest expense during 2018 was made up of interest and the amortization of debt issuance and debt discount costs related to the Company’s private placement promissory notes issued in November 2016 and retired during the second quarter of 2018.

Income Taxes

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s effective income tax rate was 27% for the nine months ended September 30, 2019. For the three and nine months ended September 30, 2019, discrete items, primarily related to excess tax benefits related to stock option exercises and forfeitures, of $0.2 million and $0.6 million, respectively, were recognized as a benefit against income tax expense. For the three and nine months ended September 30, 2019 the Company has an income tax expense of approximately $0.5 million and $1.7 million, respectively. The Company recorded income tax expense of $0.2 million and $0.4 million for the three and nine months ended September 30, 2018.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed operations through cash flows from operations, debt and equity transactions.  At September 30, 2019, our principal source of liquidity was $11.9 million in cash and $4.3 million in accounts receivables, net of allowances.  Our anticipated uses of cash in the future will be to fund the expansion of our business. The Company does not anticipate any large expenditures for capital resources over the next 12 months.

Net cash provided by operating activities for the nine months ended September 30, 2019 and 2018 was $4.2 million and $6.8 million, respectively.  The decrease in cash provided by operating activities for the nine months ended September 30, 2019 was primarily due to the increase in cash paid for income taxes as the Company utilized all available net operating losses in 2018.

Net cash used in investing activities for the nine months ended September 30, 2019 and 2018 was $0.1 million and $0.9 million, respectively.  Cash used in investing activities for the nine months ended September 30, 2019 was primarily related to the purchase of office equipment and leasehold improvements related to our expansion into the third floor at our corporate headquarters. Cash used in investing activities for the nine months ended September 30, 2018 was primarily related to leasehold improvements at our corporate headquarters.

Net cash used in financing activities for both the nine-month periods ended September 30, 2019 and 2018 was $2.3 million and $3.3 million, respectively.  The cash used in financing activities for the nine months ended September 30, 2019 was primarily due to the payment of a dividend of $2.3 million to stockholders of record on January 2, 2019 and re-purchases of our common stock of $0.2 million, which was partially offset by cash received upon the exercise of stock options of $0.2 million. Cash used in financing activities for the nine months ended September 30, 2018 was primarily due to re-purchases of our common stock of $3.0 million and $0.4 million of principal payments on our subordinated notes payable.

We believe our cash and cash equivalents, together with anticipated cash flow from operations will be sufficient to meet our working capital, and capital expenditure requirements for at least the next twelve months. In making this assessment, we considered the following:

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842), with an effective date of January 1, 2018, using the modified retrospective approach. ASU 2016-02 requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for operating and financing leases. We elected the package of practical expedients permitted under the transition guidance within the new standards, which among other things, allowed us to carry forward the historical lease classification. We also elected the hindsight practical expedient to determine the lease term for existing leases. Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $3.6 million and $3.9 million, respectively, as of January 1, 2018. The difference between the additional lease assets and lease liabilities was recorded as an adjustment to retained earnings. The standard did not have a material impact on our consolidated statement of operations and had no impact on our statement of cash flows.

There have been no other significant changes to our critical accounting policies.

Please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and Note 2 to the Consolidated Financial Statements located within our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on February 28, 2019.

OFF BALANCE SHEET ARRANGEMENTS

The Company had no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the ordinary course of business, we are exposed to certain market risks, including changes in interest rates. Uncertainties that are either non-financial or non-quantifiable such as political, economic, tax, other regulatory, or credit risks, including healthcare reimbursement practices, are not included in the assessment of market risks.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer (CEO) and chief financial officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of September 30, 2019, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC), and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control Over Financial Reporting

During the three months ended September 30, 2019, there were no changes that materially affected or are reasonably likely to affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not a party to any material pending legal proceedings.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 28, 2019.

This Quarterly Report on Form 10-Q should be read in conjunction with the risk factors defined in our Annual Report on Form 10-K for the year ended December 31, 2018 under “Item 1A. Risk Factors.”

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of equity securities by the issuer and affiliated purchasers

The following table presents details of our repurchases during the nine months ended September 30, 2019 (in thousands, except average price per share):

On May 14, 2018, our Board of Directors approved a new program to buy back $2.0 million of our common stock at prevailing market prices either in the open market or through privately negotiated transactions through May 13, 2019. The program expired on May 13, 2019. 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

N/A

ITEM 5. OTHER INFORMATION

None

ITEM 6.   EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.