ZYNEX INC - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


	☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2020


	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-38804

Zynex, Inc.

(Exact name of registrant as specified in its charter)

NEVADA		90-0275169
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

9555 Maroon Cir.
Englewood, CO		80112
(Address of principal executive offices)		(Zip Code)

(303) 703-4906

(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Ticker symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	ZYXI	The Nasdaq Stock Market LLC

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 ⌧ 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 ⌧ 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.

Large accelerated filer	◻	Accelerated filer	☒

Non-accelerated filer	◻	Smaller reporting company	☒

		Emerging growth company	☐

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 ⌧

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


Class		Shares Outstanding as of October 27, 2020
Common Stock, par value $0.001		34,740,990

Table of Contents

ZYNEX, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q


		Page
PART I—FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019	3

	Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019	4

	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	5

	Unaudited Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019	6

	Unaudited Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

PART II—OTHER INFORMATION		27

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities And Use of Proceeds	27

Item 3.	Defaults Upon Senior Securities	27

Item 4.	Mine Safety Disclosures	27

Item 5.	Other Information	27

Item 6.	Exhibits	28

SIGNATURES		29

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ZYNEX, INC.

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)

(unaudited)


	September 30,		December 31,
	2020		2019
ASSETS
Current assets:
Cash	$	41,229	$	14,040
Accounts receivable		9,365		5,833
Inventory, net		5,898		2,378
Prepaid expenses and other		1,061		315
Total current assets		57,553		22,566

Property and equipment, net		1,670		858
Operating lease asset		4,268		3,831
Finance lease asset		207		180
Deposits		282		329
Deferred income taxes		985		513
Total assets	$	64,965	$	28,277

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses		2,627		2,141
Operating lease liability		1,678		1,211
Finance lease liability		51		45
Income taxes payable		429		52
Accrued payroll and related taxes		2,510		1,748
Total current liabilities		7,295		5,197
Long-term liabilities:
Operating lease liability		3,279		3,282
Finance lease liability		169		145
Total liabilities		10,743		8,624

Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2020 and December 31, 2019		—		—
Common stock, $0.001 par value; 100,000,000 shares authorized; 36,101,353 issued and 34,737,265 outstanding as of September 30, 2020 and 33,862,885 issued and 32,791,665 outstanding as of December 31, 2019		35		34
Additional paid-in capital		36,479		9,198
Treasury stock 1,071,220 shares, at December 31, 2019 at cost		(3,846)		(3,846)
Retained earnings		21,643		14,356
Total Zynex, Inc. stockholders' equity		54,311		19,742
Non-controlling interest		(89)		(89)
Total stockholders' equity		54,222		19,653
Total liabilities and stockholders' equity	$	64,965	$	28,277

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

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ZYNEX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
NET REVENUE
Devices	$	5,301	$	2,661	$	13,026	$	6,924
Supplies		14,725		9,156		41,491		24,386
Total net revenue		20,026		11,817		54,517		31,310

COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue - devices and supplies		4,296		2,261		11,758		5,993
Sales and marketing		9,425		4,184		21,817		10,035
General and administrative		4,896		2,877		12,990		7,947
Total costs of revenue and operating expenses		18,617		9,322		46,565		23,975

Income from operations		1,409		2,495		7,952		7,335

Other income/(expense)
Deferred insurance reimbursement		—		—		—		880
Interest income/(expense)		(5)		1		(14)		1
Other income/(expense), net		(5)		1		(14)		881

Income from operations before income taxes		1,404		2,496		7,938		8,216
Income tax expense		71		463		651		1,671
Net Income	$	1,333	$	2,033	$	7,287	$	6,545

Net income per share:
Basic	$	0.04	$	0.06	$	0.22	$	0.20

Diluted	$	0.04	$	0.06	$	0.21	$	0.19

Weighted average basic shares outstanding		34,486		32,490		33,564		32,350
Weighted average diluted shares outstanding		35,476		34,076		34,715		33,917

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

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ZYNEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	For the Nine Months Ended September 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,287	$	6,545
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,042		549
Non-cash reserve charges		(296)		430
Stock-based compensation		1,806		556
Non-cash lease expense		27		40
Provision for deferred income taxes		(473)		(547)
Change in operating assets and liabilities:
Accounts receivable		(3,532)		(1,463)
Prepaid and other assets		(745)		247
Accounts payable and other accrued expenses		1,625		830
Inventory		(4,274)		(2,100)
Deposits		47		(2)
Other long-term obligations		—		(880)
Net cash provided by operating activities		2,514		4,205

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(759)		(132)
Net cash used in investing activities		(759)		(132)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on finance lease obligations		(42)		(4)
Common stock cash dividends		—		(2,262)
Purchase of treasury stock		—		(171)
Proceeds from issuance of common stock under equity offering		25,240		—
Proceeds from the issuance of common stock on stock-based awards		236		170
Net cash (used in) provided by financing activities		25,434		(2,267)
Net increase in cash and cash equivalents		27,189		1,806
Cash and cash equivalents at beginning of period		14,040		10,128
Cash and cash equivalents at end of period	$	41,229	$	11,934

Supplemental disclosure of cash flow information:
Cash paid for interest	$	(14)	$	—
Cash paid for rent	$	(1,182)	$	(689)
Cash paid for income taxes	$	(750)	$	(2,218)
Supplemental disclosure of non-cash investing and financing activities:
Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,433	$	1,605
Right-of-use assets obtained in exchange for new finance lease liabilities	$	72	$	—
Inventory transferred to sales rep demos	$	377	$	—
Inventory transferred to property and equipment under lease	$	641	$	255

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

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ZYNEX, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)


				Additional								Total
	Common Stock			Paid-in		Treasury		Retained		Non-Controlling		Stockholders’
	Shares	Amount		Capital		Stock		Earnings		Interest		Equity
Balance, December 31, 2018	32,271,367	$	34	$	8,157	$	(3,675)	$	4,864	$	(89)	$	9,291
Exercised and vested stock-based awards	21,832		—		8		—		—		—		8
Stock-based compensation expense	—		—		140		—		—		—		140
Treasury stock	(52,000)		—		—		(171)		—		—		(171)
Other	(8)		—		—		—		—		—		—
Net income	—		—		—		—		2,350		—		2,350
Balance at March 31, 2019	32,241,191	$	34	$	8,305	$	(3,846)	$	7,214	$	(89)	$	11,618
Exercised and vested stock-based awards	166,623		—		129		—		—		—		129
Warrant exercises	40,366		—		—		—		—		—		—
Stock-based compensation expense	—		—		158		—		—		—		158
Net income	—		—		—		—		2,162		—		2,162
Balance at June 30, 2019	32,448,180	$	34	$	8,592	$	(3,846)	$	9,376	$	(89)	$	14,067
Exercised and vested stock-based awards	85,417		—		34		—		—		—		34
Stock-based compensation expense	—		—		258		—		—		—		258
Net income	—		—		—		—		2,033		—		2,033
Balance at September 30, 2019	32,533,597	$	34	$	8,884	$	(3,846)	$	11,409	$	(89)	$	16,392


					Additional								Total
	Common Stock				Paid-in		Treasury		Retained		Non-Controlling		Stockholders’
	Shares		Amount		Capital		Stock		Earnings		Interest		Equity
Balance, December 31, 2019		32,791,665	$	34	$	9,198	$	(3,846)	$	14,356	$	(89)	$	19,653
Exercised and vested stock-based awards, net of tax		385,917		—		221		—		—		—		221
Stock-based compensation expense		—		—		497		—		—		—		497
Net income		—		—		—		—		2,937		—		2,937
Balance at March 31, 2020		33,177,582	$	34	$	9,916	$	(3,846)	$	17,293	$	(89)	$	23,308
Exercised and vested stock-based awards, net of tax		157,414		—		53		—		—		—		53
Stock-based compensation expense		—		—		579		—		—		—		579
Net income		—		—		—		—		3,017		—		3,017
Balance at June 30, 2020		33,334,996	$	34	$	10,548	$	(3,846)	$	20,310	$	(89)	$	26,957
Stock issued for public offering		1,250,000		1		25,239		—		—		—		25,240
Exercised and vested stock-based awards, net of tax		152,269		—		(38)		—		—		—		(38)
Stock-based compensation expense		—		—		730		—		—		—		730
Net income		—		—		—		—		1,333		—		1,333
Balance at September 30, 2020		34,737,265	$	35	$	36,479	$	(3,846)	$	21,643	$	(89)	$	54,222

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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 in one primary business segment: medical devices that include electrotherapy and pain management products. As of September 30, 2020, 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 nine months ended September 30, 2020 and 2019 from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume monitoring device, which was approved by the U.S. Food and Drug Administration (“FDA”) in February 2020 and is awaiting CE Marking approval in Europe. ZMS has achieved no revenues to date. Its inactive subsidiaries include Zynex NeuroDiagnostics, Inc. ("ZND," a wholly-owned Colorado corporation), Zynex Billing and Consulting, LLC ("ZBC," an 80% owned Colorado limited liability company) and Pharmazy, Inc. ("Pharmazy"), which was incorporated in June 2015 as a wholly-owned Colorado corporation. The Company's compounding pharmacy operated as a division of ZMI doing business as Pharmazy through January 2016.

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 to be patient friendly and for home use. 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, 2020 and 2019, the Company generated substantially all of its revenue in the United States 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, 2019. Amounts as of December 31, 2019, 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, 2019, which has previously been filed with the SEC.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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, 2020 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, 2020 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.

Reclassifications

As of September 30, 2020, the Company revised its cost center allocations to better align with its business operations. As a result, reclassifications between general and administrative and selling and marketing expenses have been made to the three and nine months ended September 30, 2019 financial statements to conform to the consolidated 2020 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 revenue recognition, the reserve for obsolete and damaged inventory, stock-based compensation, valuation of long-lived assets, and realizability of deferred tax assets.

Leases

The Company recognizes finance and operating lease right-of-use assets and liabilities at the lease commencement date based on the estimated present value of the lease payments over the lease term. For our finance leases, the Company uses the implicit rate to determine the present value of future lease payments. For our operating leases that do not provide an implicit rate, the Company uses incremental borrowing rates to determine the present value of future lease payments. The Company includes options to extend or terminate a lease in the lease term when it is reasonably certain to exercise such options. The Company recognizes leases with an initial term of 12 months or less as lease expense over the lease term and those leases are not recorded on our Consolidated Balance Sheets. For additional information on our leases where the Company is the lessee, see Note 8- Leases.

A significant portion of our device revenue is derived from patients who obtain our devices under month-to-month lease arrangements. Revenue related to devices on lease is recognized in accordance with ASC 842, Leases. Using the guidance in ASC 842, we concluded these transactions should be accounted for as operating leases based on the criteria below:

●

The lease does not transfer ownership of the underlying asset to the lessee by the end of the lease term;

●

The lease does not grant the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise;

●

The lease term is month-to-month, which does not meet the major part of the remaining economic life of the underlying asset; however, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease;

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

●

There is no residual value guaranteed and the present value of the sum of the lease payments does not equal or exceed substantially all of the fair value of the underlying asset; and

●

The underlying asset is expected to have alternative uses to the lessor at the end of the lease term.

Lease commencement occurs upon delivery of the device to the patient. 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 recognized monthly for the duration of the period in which the patient retains the device.

Revenue Recognition and Accounts Receivable

Revenue is derived from sales and leases of our electrotherapy devices and sales of related supplies and complimentary products. The Company recognizes revenue when control of the product has been transferred to the patient, in the amount that reflects the consideration to which the Company expects to receive. In general, revenue from sales of our devices and supplies is recognized once the product is delivered to the patient, which is when control is deemed to have transferred to our patient.

Sales of our devices and supplies are primarily made with, and shipped directly to, the patient with a small amount of revenue generated from sales to distributors. In the healthcare industry there is often a third party involved that will pay on the patients’ 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 payers, 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. There are no substantial costs incurred through support or warranty obligations.

The following table provides a breakdown of net revenue related to devices accounted for as purchases subject to ASC 606 and leases subject to ASC 842 (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Device revenue
Purchased	$	1,618	$	939	$	4,121	$	2,249
Leased		3,683		1,722		8,905		4,675
Total Device revenue	$	5,301	$	2,661	$	13,026	$	6,924

Primarily all of the Company’s receivables are due from patients with commercial or government health plans and workers’ compensation claims with a small portion related to self-pay individuals, attorney and auto claims. Revenues are estimated using the portfolio approach by third-party payer type based upon historical rates of collection, aging of receivables, trends in historical reimbursement rates by third-party payer types, and current relationships and experience with the third-party payers, which includes estimated constraints for third-party payer refund requests, deductions and adjustments. 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 payer billing arrangements and the uncertainty of reimbursement amounts for certain products from third-party payers 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 payer reimbursement, 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 and actual collectability are reflected in the period in which received. Historically these differences have been immaterial and the Company has not had to go back and reassess the adjustments of future periods for past billing adjustments.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

A change in the way estimates are determined can result from a number of factors, including changes in the reimbursement policies or practices of third-party payers, or changes in industry rates of reimbursement. The Company monitors the variability and uncertain timing over third-party payer types in our portfolios. If there is a change in our third-party payer 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 payer type. However, changes to constraints for billing adjustments have historically fluctuated and may continue to fluctuate significantly from quarter to quarter and year to year.

On May 18, 2020, the Company introduced a full catalog of physical therapy products for distribution through its U.S. sales force. The catalog includes over 3,300 distinct physical therapy products which will be shipped directly from our supplier to our customers. Management has determined that it controls these products prior to transfer to the customer and will therefore be acting as principal for each of these product transactions. Through September 30, 2020, catalog revenue has been minimal.

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

Inventories are stated at the lower of cost and net realizable value. Cost is computed using standard costs, which approximates actual costs on an average cost basis. Following are the components of inventory (in thousands):


	September 30, 2020		December 31, 2019

Raw Materials	$	2,391	$	953
Work-in-process		739		200
Finished Goods		2,920		1,640
	$	6,050	$	2,793
Less: reserve		(152)		(415)
	$	5,898	$	2,378

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 write-downs may be required.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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, Chief Financial Officer, and Chief Operating Officer as our chief operating decision-makers (“CODM”).

We currently operate our business as one operating segment that 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.

The Company is subject to the provisions of the Financial Accounting Standards Board (“FASB”) ASC 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted.

Recent Accounting Pronouncements

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, 2022, and interim periods therein for smaller reporting companies. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the impact that the adoption of ASU 2016-13 will have on our financial condition, results of operations and cash flows.

In December 2019, FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments simplify the accounting for income taxes by removing certain exceptions to the general principals of Topic 740, “Income Taxes” and also improve consistent application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company is currently evaluating the impact of adopting this guidance.

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.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(2) PROPERTY AND EQUIPMENT

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


	September 30, 2020		December 31, 2019
Property and equipment
Office furniture and equipment	$	1,894	$	1,178
Assembly equipment		128		128
Vehicles		181		181
Leasehold improvements		544		500
Sales Rep demo units		335		—
Leased devices		1,396		934
	$	4,478	$	2,921
Less accumulated depreciation		(2,808)		(2,063)
	$	1,670	$	858

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 $0.3 million and $0.1 million for the three months ended September 30, 2020 and 2019, respectively. Depreciation expense for the nine-month periods ended September 30, 2020 and 2019 was $0.5 million and $0.2 million, respectively.

Total depreciation expense related to devices out on lease was $0.2 million and $0.1 million for the three months ended September 30, 2020 and 2019, respectively. Depreciation expense related to devices out on lease was $0.6 million and $0.4 million for the nine-months ended September 30, 2020 and 2019, respectively. Depreciation on leased units is reflected on the income statement as cost of revenue.

During the nine months ended September 30, 2020, the Company began capitalizing product demo units sent to its territory managers to use in the field. The Company monitors these devices for potential loss and places an estimated reserve on the net book value based on an analysis of terminated territory managers that have not yet returned their units.

(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.

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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, 2020 and 2019 are as follows (in thousands, except per share data):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Basic earnings per share
Net income available to common stockholders	$	1,333	$	2,033	$	7,287	$	6,545
Basic weighted-average shares outstanding		34,486		32,490		33,564		32,350

Basic earnings per share	$	0.04	$	0.06	$	0.22	$	0.20

Diluted earnings per share
Net income available to common stockholders	$	1,333	$	2,033	$	7,287	$	6,545
Weighted-average shares outstanding		34,486		32,490		33,564		32,350
Effect of dilutive securities - options and restricted stock		990		1,586		1,151		1,567
Diluted weighted-average shares outstanding		35,476		34,076		34,715		33,917

Diluted earnings per share	$	0.04	$	0.06	$	0.21	$	0.19

For both the three and nine months ended September 30, 2020, options to purchase 65,000 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, 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.

(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 grant and are not included in outstanding shares until such vesting and issuance occurs.

At September 30, 2020, the company had 1.0 million stock options outstanding and 0.5 million exercisable under the following plans:


	Outstanding	Exercisable
	Number of Options	Number of Options
	(in thousands)	(in thousands)
Plan Category
2005 Stock Option Plan	299		299
Equity Compensation Plans not approved by Shareholders	37		25
2017 Stock Option Plan	679		219
Total	1,015	$	543

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Cost of Revenue	$	13	$	5	$	22	$	15
Sales and marketing expense		13		2		45		6
General, and administrative		704		251		1,739		535
Total stock based compensation expense		730		258		1,806		556

During the nine months ended September 30, 2020, there were 14,000 options granted at a weighted average exercise price of $10.15 per share. The weighted-average grant date fair value of options granted during the nine months ended September 30, 2020 was $8.88. There were no options granted during the three months ended September 30, 2020. The Company issued 83,000 and 291,000 shares of restricted stock to management during the three and nine months ended September 30, 2020, respectively.

During the nine months ended September 30, 2019, there were 621,000 options granted at a weighted average exercise price of $5.65 per share. The weighted-average grant date fair value of options granted during the nine months ended September 30, 2019 was $4.98. The Company issued 45,000 shares of restricted stock to management during the nine months ended September 30, 2019.

The Company received cash proceeds of $0.1 million and $0.6 million related to option exercises during the three and nine months ended September 30, 2020, respectively. The Company received proceeds of approximately $34,000 and $0.2 million related to option exercises during the three and nine months ended September 30, 2019, respectively.

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, 2020 and September 30, 2019.


	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2020		2019		2020		2019
Expected term (years)	6.38		6.25		6.42		6.25
Risk-free interest rate	0.34	%	1.83	%	1.15	%	2.34	%
Expected volatility	112.97	%	121.58	%	116.79	%	121.83	%
Expected dividend yield	—	%	—	%	—	%	—	%

A summary of stock option activity under all equity compensation plans for the nine months ended September 30, 2020, is presented below:


				Weighted-
		Weighted-		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Shares	Exercise		Contractual	Value
	(in thousands)	Price		Term (Years)	(in thousands)
Outstanding at December 31, 2019	1,855	$	2.48	6.42	$	10,032
Granted	14	$	10.15
Expired	—		—
Forfeited	(234)	$	4.71
Exercised	(620)	$	0.90
Outstanding at September 30, 2020	1,015	$	3.04	6.74	$	14,622

Exercisable at September 30, 2020	543	$	1.47	5.47	$	8,677

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

During the three and nine months ended September 30, 2020, 0.1 million and 0.3 million shares of restricted stock were granted to the Board of Directors and management under the 2017 Stock Plan, respectively. During the three and nine months ended September 30, 2019, 35,000 and 45,000 shares of restricted stock were granted, 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 on the Restricted Stock Awards typically occur quarterly over three years for the Board of Directors and quarterly or annually over two to four years for management.

A summary of restricted stock award activity under all equity compensation plans for the nine months ended September 30, 2020, is presented below:


		Number of
		Shares
		(in thousands)
Granted but not vested at December 31, 2019		102
Granted		291
Forfeited		—
Vested		(95)
Granted but not vested at September 30, 2020		298

For the nine months ended September 30, 2020, the Company made payments of $0.2 million related to tax withholding obligations for the vesting or exercise of awards in exchange for 20,236 shares withheld. There were no shares withheld to facilitate the payment of taxes in 2019.

As of September 30, 2020, the Company had approximately $4.7 million of unrecognized compensation expense related to stock options and restricted stock awards that will be recognized over a weighted average period of approximately 2.4 years.

(5) STOCKHOLDERS’ EQUITY

Treasury Stock

On May 14, 2018, our Board of Directors approved a new program to buy back an additional $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. 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.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Warrants

A summary of stock warrant activity for the nine months ended September 30, 2020 is presented below:


				Weighted
		Weighted		Average		Aggregate
	Number of	Average		Remaining		Intrinsic
	Warrants	Exercise		Contractual		Value
	(in thousands)	Price		Life (Years)		(in thousands)
Outstanding at December 31, 2019	100	$	2.63		4.77	$	525
Granted	—	$	—
Exercised	—	$	—
Forfeited	—	$	—
Outstanding and Exercisable at September 30, 2020	100	$	2.63		4.02	$	1,483

Equity Offering

On July 14, 2020, the Company announced commencement of an underwritten public offering of an aggregate of 2,500,000 shares of common stock at a public offering price of $22.00 per share. In the offering, 1,250,000 shares of common stock were sold by the Company and 1,250,000 shares of common stock were sold by a selling stockholder. The selling stockholder was Sandgaard Holdings, LLC., which is 100% controlled by Thomas Sandgaard, CEO and chairman of the board. The offering closed on July 17, 2020.

(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, 2020 discrete items adjusted were $0.4 million and $1.6 million, respectively. At September 30, 2020 the Company is currently estimating an annual effective tax rate of approximately 29%, or 12% when taking into account known discrete items. 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 8% for the nine months ended September 30, 2020. Discrete items recognized during the three months ended September 30, 2020 and 2019, resulted in a tax benefit of approximately $0.4 million and $0.2 million, respectively. Discrete items recognized during the nine months ended September 30, 2020 and 2019, resulted in a tax benefit of approximately $1.6 million and $0.6 million, respectively. The Company recorded income tax expense of $0.1 million and $0.7 million for the three and nine months ended September 30, 2020, respectively, and income tax expense of $0.5 million and $1.7 million for the three and nine months ended September 30, 2019.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, net operating loss carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from 30% to 50% of EBITDA. We are analyzing the different aspects of the CARES Act to determine whether any specific provisions may impact us.

Taxes of $0.7 million and $2.2 million were paid during the nine months ended September 30, 2020 and 2019, respectively.

(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. 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, 2020 and 2019. 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 has four operating leases pertaining to its corporate headquarters located in Englewood, CO. Details of each lease are as follows:

●

The Company entered into a sublease agreement on October 20, 2017 with CSG Systems Inc. for approximately 41,715 square feet. The term of the sublease runs through June 30, 2023, with an option to extend for an additional two years through June 30, 2025. During the first year of the sublease, the rent per square foot was $7.50, which increased to $19.75 during the second year of the sublease. Each year thereafter increasing by an additional $1 per square foot. The Company has not yet determined whether it is reasonably certain to exercise its renewal option and has therefore only considered the initial term in the calculation of the lease liability and lease asset. The Company is also obligated to pay its proportionate share of building operating expenses. The sub-landlord agreed to contribute approximately $0.2 million toward tenant improvements which was accounted for as a reduction of the operating lease asset and subsequently treated as a reduction of rent expense over the term of the lease. Upon lease commencement, the Company recorded an operating lease liability of $3.9 million and a corresponding right-of-use asset for $3.6 million.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

●

The Company entered into an amendment to its sublease agreement, above, on March 11, 2019 for an additional 21,420 square feet of office space. The term of the sublease for the additional space began on June 1, 2019 and runs through June 30, 2023, with an option to extend the term for an additional two years through June 30, 2025. During the first seven months of the Amendment to the Sublease, the rent per square foot was $10.00, which increased to $20.75 from January 1, 2020 through October 31, 2020. For annual periods beginning November 1, 2020, the price per square foot increases by an additional $1 per square foot. Upon lease commencement, the Company recorded an operating lease liability and a corresponding right-of-use asset for $1.6 million each.

●

The Company entered into an amendment to its sublease agreement, above, on January 3, 2020, for an additional 22,546 square feet of office space. The term of the sublease began on March 9, 2020 and will run through June 30, 2025. From the commencement date through October 31, 2020, the rent per square foot is $13.00, increasing to $21.75 per square foot from November 1, 2020 through October 31, 2021. The price per square foot increases by an additional $1 annually beginning November 1, 2021. Upon lease commencement, the Company recorded an operating lease liability and a corresponding right-of-use asset for $1.4 million each.

●

The Company entered into a lease agreement on September 17, 2020 with GIG CW Compark, LLC for approximately 50,488 square feet. The term of the lease is 65 months, which begins on the commencement date, which is anticipated to occur sometime during Q4 2020. The lease includes an option to extend the lease for one additional five year period. Base rent begins at $9.40 per square feet increasing each year thereafter by an additional $0.30 per square foot. The Company has not yet determined whether or not it is reasonably certain to exercise its renewal option. The Company is also obligated to pay its proportional share of building operating expenses. The landlord agreed to contribute approximately $0.4 million toward tenant improvements.

The Company has two finance leases for office equipment as follows:

●

The Company entered into an equipment lease on September 20, 2019 with Konica Minolta Premier Finance for a copier/printer and related software located at its corporate offices. The term of the equipment lease agreement is 5 years with the option to purchase the equipment at the end of the lease. The Company does not expect to exercise the option to purchase the equipment and, accordingly, has not considered the effect of the purchase in the evaluation of the lease asset and liability. Rent is to be paid monthly at a fixed rate for the term of the equipment lease agreement. Upon lease commencement, the Company recorded a finance lease liability and a corresponding right-of-use asset for $0.2 million each.

●

The Company entered into an equipment lease on March 3, 2020 with Konica Minolta Premier Finance for copiers/printers and related software located at its corporate offices. The term of the equipment lease agreement is 4 years with the option to purchase the equipment at the end of the lease. The Company does not expect to exercise the option to purchase the equipment and, accordingly, has not considered the effect of the purchase in the evaluation of the lease asset and liability. Rent is to be paid monthly at a fixed rate for the term of the equipment lease agreement. Upon lease commencement, the Company recorded a finance lease liability and a corresponding right-of-use asset for $0.1 million each.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 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 4.5% for its operating lease liabilities. The Company’s equipment lease agreements have implicit rates from 8.3% to 9.7%, which was used to measure its finance lease liability. The remaining lease term was 2.8 years for the Company’s operating leases and 4.1 years for its finance leases.


	Operating lease liability		Finance lease liability
October 1, 2020 through December 31, 2020		444		18
2021		1,878		67
2022		1,964		67
2023		1,017		67
2024		—		39
Total undiscounted future minimum lease payments	$	5,303	$	258
Less: Difference between undiscounted lease payments and discounted lease liabilities:		(346)		(38)
Total lease liabilities	$	4,957	$	220

Operating lease costs were $0.5 million and $1.2 million for the three and nine months ended September 30, 2020, respectively, which were included in general and administrative expenses on the consolidated statement of operations. Operating lease costs were $0.4 million and $0.8million for the three and nine months ended September 30, 2019, respectively.

(9) CONCENTRATIONS

For the three months ended September 30, 2020, the Company sourced approximately 64% of the supplies for its electrotherapy products from five significant vendors (defined as supplying at least 10%). For the same period in 2019, the Company sourced approximately 49% of the supplies from two significant vendors.

For the nine months ended September 30, 2020, the Company sourced approximately 31% of supplies for its electrotherapy products from one significant vendor. For the same period in 2019 the company sourced approximately 49% 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 one third-party payer at September 30, 2020 that made up approximately 26% of the net accounts receivable balance. The Company had receivables from two third-party payers at December 31, 2019, that made up approximately 39% 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.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(11) COVID-19

In December 2019, a novel Coronavirus disease (“COVID-19”) was reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. During the third quarter, the Company's operations were impacted by closures of clinics and reductions in elective surgeries which decreased availability of physicians to prescribe our products. Additionally, the Company had to navigate the impacts it had on employee and supply chain issues. While the Company did not see a significant impact on its operating results or financial position during the nine months ended September 30, 2020 from COVID-19, it is unable at this time to predict the impact that COVID-19 will have on its business, financial position and operating results in future periods due to numerous uncertainties. The Company has been and continues to closely monitor the impact of the pandemic on all aspects of its business. See also the risk factor relating to COVID-19 disclosed in Item 1A of Part II, below.

(12) SUBSEQUENT EVENT

On October 22, 2020, the Board appointed Neil Friery as the Company’s Chief Operating Officer – Zynex Monitoring Solutions, Inc., effective November 9, 2020 (the “Effective Date”).

In connection with the appointment, the Company entered into an employment agreement with Mr. Friery, (the “Friery Employment Agreement”), pursuant to which Mr. Friery shall receive an annual base salary of $325,000 and shall be eligible to receive incentive compensation in an amount up to $162,500 per year (the “Incentive Compensation”). Pursuant to the Friery Employment Agreement, in the event that Zynex Monitoring terminates the Friery Employment Agreement without cause, or Mr. Friery resigns with good reason, Mr. Friery shall receive his then annual base salary plus 12 months’ worth of his then Incentive Compensation, payable in twelve equal monthly installments. Additionally, Pursuant to the Friery Employment Agreement, in the event that the Friery Employment Agreement is terminated for any reason before the end of any quarterly or annual performance period on which the Incentive Compensation is based, Mr. Friery shall receive a pro-rata portion of the Incentive Compensation that was earned for the quarter/year in which the Friery Employment Agreement was terminated.

On the Effective Date, Mr. Friery shall receive a signing bonus of 10,000 restricted shares of Company common stock and $50,000 cash. The 10,000 restricted shares shall vest annually over a four-year period in increments of 2,500. Additionally, Mr. Friery shall receive quarterly grants of 5,000 restricted shares that shall vest annually over a four-year period in increments of 1,250.

There is no arrangement or understanding between Mr. Friery and any other person pursuant to which he was selected as an officer of the Company. There is no family relationship between Mr. Friery and any director or executive officer of the Company and Mr. Friery is not a party to a related party transaction within the meaning of Item 404(a) of Regulation S-K.

The Company evaluated subsequent events up to October 27, 2020 and concluded that there were no additional subsequent events.

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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 U.S. Food and Drug Administration (“FDA”) clearance and Certificate European (“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 third-party payors for products sold or leased to our patients, acceptance of our products by health third-party payors 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, the impact of COVID-19 on our business, and other risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2019.

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 2019 Annual Report on Form 10-K and subsequently filed reports, which have previously been filed with the Securities and Exchange Commission.

General

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, 2020, 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 or nine months ended September 30, 2020 and 2019 from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume monitoring device, which was approved by the U.S. Food and Drug Administration (“FDA”) in February 2020 and is awaiting CE Marking approval in Europe. ZMS has achieved no revenues to date.

RESULTS OF OPERATIONS

Summary

Net revenue was $20.0 million and $11.8 million for the three months ended September 30, 2020 and 2019, respectively, and $54.5 million and $31.3 million for the nine months ended September 30, 2020 and 2019, respectively. Net revenue increased 69% and 74% for the three and nine-month periods ended September 30, 2020, respectively. Net income was $1.3 million for the three months ended September 30, 2020 compared with $2.0 million during the same period in 2019. Net income was $7.3 million for the nine months ended September 30, 2020 compared with $6.5 million during the same period in 2019. We generated cash flows from operating activities of $2.5 million during the nine months ended September 30, 2020. Working capital at September 30, 2020 was $50.3 million, an increase of 189% from $17.4 million as of December 31, 2019.

Net Revenue

Net revenues are comprised of device and supply sales, constrained by estimated third-party payor reimbursement deductions and estimated uncollectible amounts. Device revenue is primarily comprised of sales and rentals of our electrotherapy products and also includes our cervical traction, lumbar support and hot/cold therapy products.

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Supplies revenue is primarily comprised of sales of our consumable supplies to patients using our electrotherapy products, consisting primarily of surface electrodes and batteries.

Revenue related to both devices and supplies is reported net, after adjustments for estimated third-party payor reimbursement deductions and estimated uncollectible amounts. Estimates for third-party payor reimbursement deductions and uncollectible accounts are adjusted on an ongoing basis in conjunction with the processing of third-party payor insurance claims and other customer collection history. Billing allowance adjustments are common in our industry whereby third-party payors unilaterally reduce the amount they reimburse for our products as compared to the sales price charged by us. These deductions from gross revenue 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 1 to the Consolidated Financial Statements for a more complete explanation of our revenue recognition policies.

We occasionally 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 that have been resubmitted or where we are 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.

Net revenue increased $8.2 million or 69% to $20.0 million for the three months ended September 30, 2020, from $11.8 million for the same period in 2019. Net revenue increased $23.2 million or 74% to $54.5 million for the nine months ended September 30, 2020, from $31.3 million for the same period in 2019. For both the three and nine-month periods ended September 30, 2020, the growth in net revenue from the same periods in 2019 is primarily related to a 96% and 85% growth in device orders, respectively, which led to an increased customer base and drove higher sales of consumable supplies.

Device Revenue

Device revenue is related to the sale or lease of our electrotherapy and complimentary products. Device revenue increased $2.6 million or 99% to $5.3 million for the three months ended September 30, 2020, from $2.7 million for the same period in 2019.

Device revenue increased $6.1 million or 88% to $13.0 million for the nine months ended September 30, 2020, from $6.9 million for the same period in 2019.

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

Supplies Revenue

Supplies revenue is related to the sale of supplies, primarily electrodes and batteries, for our electrotherapy products. Supplies revenue increased $5.6 million or 61% to $14.7 million for the three months ended September 30, 2020, from $9.2 million for the same period in 2019.

Supplies revenue increased $17.1 million or 70% to $41.5 million for the nine months ended September 30, 2020, from $24.4 million for the same period in 2019.

The increase in supplies revenue is primarily related to an increased customer base from increased device sales in 2019 and 2020, plus improvements in our billing and collection procedures.

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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, 2020 increased 90% to $4.3 million from $2.3 million for the same period in 2019. As a percentage of revenue, cost of revenue – device and supply increased to 21% for the three months ended September 30, 2020 from 19% for the same period in 2019. The increase in cost of revenue is primarily due to an increase of 96% in device orders, as well as an increase in overhead and freight costs from the three months ended September 30, 2019.

Cost of revenue for the nine months ended September 30, 2020 increased 96% to $11.8 million from $6.0 million for the same period in 2019. As a percentage of revenue, cost of revenue – device and supply increased to 22% for the nine months ended September 30, 2020 from 19% for the same period in 2019. The increase in cost of revenue is primarily due to an increase of 85% in device orders, as well as an increase in overhead and freight costs from the nine months ended September 30, 2019.

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 campaign and related expenses.

Sales and marketing expense for the three months ended September 30, 2020 increased 125% to $9.4 million from $4.2 million for the same period in 2019. Sales and marketing expense for the nine months ended September 30, 2020 increased 117% to $21.8 million from $10.0 million for the same period in 2019.

The increase in sales and marketing expense for both the three and nine months ended September 30, 2020 is primarily due to the expansion of our sales force including adding 261 net additional sales representatives over the past 12 months, of which 238 were added during the nine months ended September 30, 2020. As a percentage of revenue, sales and marketing expense increased to 47% and 40% for the three and nine months ended September 30, 2020, respectively, from 35% and 32% for the same periods in 2019. The increase as a percentage of revenue is primarily due to the increase in costs associated with the increase in headcount as well as expenses for marketing materials that aid in distance selling during clinic shutdowns related to COVID-19, partially offset by the increase in revenue during the period.

General and Administrative Expense

General and administrative expenses primarily consist of employee-related costs, and other direct costs associated with these personnel including facilities and travel expenses and professional fees, depreciation and amortization. General and administrative expense for the three months ended September 30, 2020 increased 70% to $4.9 million from $2.9 million for the same period in 2019. The increase in general and administrative expense for the three months is primarily due to increased compensation and benefit expense related to headcount growth and increased occupancy expense as a result of corporate office expansion. As a percentage of revenue, general and administrative expense remained at 24% for the three months ended September 30, 2020 compared to the same period in 2019.

General and administrative expense for the nine months ended September 30, 2020 increased 63% to $13.0 million from $7.9 million for the same period in 2019. The increase in general and administrative expense for the nine months is primarily due to increased compensation and benefit expense related to headcount growth. As a percentage of revenue, general and administrative expense decreased to 24% for the nine months ended September 30, 2020 from 25% for the same period in 2019. The decrease as a percentage of revenue is primarily due to the increase in revenue during the period, partially offset by costs associated with increased headcount from prior year.

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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. For the three and nine months ended September 30, 2020 the Company has an income tax expense of approximately $0.1 million and $0.7 million, respectively. The Company’s effective income tax rate was 5% and 8% for the three and nine months ended September 30, 2020, respectively. Discrete items, primarily related to excess tax benefits related to stock option exercises, of $0.4 million and $1.6 million for the three and nine months ended September 30, 2020, respectively, are recognized as a benefit against income tax expense.

The Company recorded income tax expense of $0.5 million and $1.7 million for the three and nine months ended September 30, 2019. The Company’s effective income tax rate was 20% and 27% for the three and nine months ended September 30, 2019, respectively. 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.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed operations through cash flows from operations, debt, and equity transactions. At September 30, 2020, our principal source of liquidity was $41.2 million in cash and $9.4 million in accounts receivables. Our anticipated uses of cash will be to fund the expansion of our sales force and corporate billing teams as well as fund increased inventory levels and warehouse needs in response to the growth in our orders.

Net cash provided by operating activities for the nine months ended September 30, 2020 and 2019 was $2.5 million and $4.2 million, respectively. The decrease in cash provided by operating activities for the nine months ended September 30, 2020 was primarily due to an increase in our inventory-on-hand and accounts receivable which offset increased net income during the period.

Net cash used in investing activities for the nine months ended September 30, 2020 and 2019 was $0.8 million and $0.1 million, respectively. Cash used in investing activities for the nine months ended September 30, 2020 was primarily related to the purchase of office equipment, IT infrastructure, and leasehold improvements related to our expansion into the second floor at our corporate headquarters. Cash used in investing activities for the nine months ended September 30, 2019 was primarily related to leasehold improvements at our new corporate headquarters.

Net cash provided by financing activities for the nine months ended September 30, 2020 was $25.4 million, compared with net cash used in financing activities of $2.3 million for the same period in 2019. Net cash provided by financing activities for the nine months ended September 30, 2020 was primarily due to proceeds of $25.2 million from our equity offering, which closed on July 17, 2020. Net 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 $0.1 million.

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:

●

Our cash and cash equivalents balance at September 30, 2020 of $41.2 million;

●

Our working capital balance of $50.3 million;

●

Our profitability during the last 17 quarters; and

●

Our projected income and cash flows for the next 12 months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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.

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, 2019, filed with the Securities and Exchange Commission on February 27, 2020.

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.

RISKS AND UNCERTAINTIES

In December 2019, a novel Coronavirus disease (“COVID-19”) was reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. During the second quarter, the Company's operations were impacted by closures of clinics and reductions in elective surgeries which decreased availability of physicians to prescribe our products. Additionally, the Company had to navigate the impacts it had on employee and supply chain issues. While the Company did not see a significant impact on its operating results or financial position during the nine months ended September 30, 2020 from COVID-19, it is unable at this time to predict the impact that COVID-19 will have on its business, financial position and operating results in future periods due to numerous uncertainties. The Company has been and continues to closely monitor the impact of the pandemic on all aspects of its business. See also the risk factor relating to COVID-19 disclosed in Item 1A of Part II, below.

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 following 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, 2020, 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.

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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, 2020, there were no changes that materially affected or are reasonably likely to affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Other than as set forth below, as of the filing date of this Quarterly Report on Form 10-Q, 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, 2019, filed with the SEC on February 27, 2020, as well as our quarterly reports on Form 10-Q and current reports on Form 8-K.

We face risks related to health pandemics, particularly the recent outbreak of COVID-19, which could adversely affect our business and results of operations.

Our business could be materially adversely affected by a widespread outbreak of contagious disease, including the recent outbreak of the novel coronavirus, known as COVID-19, which has spread to many countries throughout the world, including the United States. The effects of this outbreak on our business have included and could continue to include temporary closures of our providers and clinics and suspensions of elective surgical procedures. This has and could continue to impact our interactions and relationships with our customers.

In addition to temporary closures of the providers and clinics that we serve, we could also experience temporary closures of the facilities of our suppliers, contract manufacturers, or other vendors in our supply chain, which could impact our business, interactions and relationships with our third-party suppliers and contractors, and results of operations. The extent to which the COVID-19 outbreak will impact business and the economy is highly uncertain and cannot be predicted. Accordingly, we cannot predict the extent to which our financial condition, results of operations and value of our common stock will be affected. The uncertainty surrounding the COVID-19 outbreak has caused the Company to increase its inventory in anticipation of possible supply chain shortages related to the COVID-19 virus. While the Company did not incur significant disruptions to its operations during the three quarters of 2020, it is unable at this time to predict the impact that the COVID-19 virus will have on its business, financial position and operating results in future periods due to numerous uncertainties.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

N/A

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS


Exhibit Number		Description

10.1		Lease Agreement, dated September 30, 2020, between Zynex, Inc. and GIG CW Complex, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed October 6, 2020).

10.2		Employment Agreement, dated October 22, 2020, between Zynex, Inc. and Neil Friery (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed October 23, 2020).

31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1*		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Label Linkbase Document

101.PRE*		XBRL Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

*Filed herewith

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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.


	ZYNEX, INC.

	/s/ Daniel J. Moorhead
Dated: October 27, 2020	Daniel J. Moorhead
	Chief Financial Officer
	(Principal Financial and Accounting Officer)