Nevada | Nevada | | 90-021449790-0275169 | (State or other jurisdiction of
incorporation or organization) | | (IRS Employer
Identification No.) |
9555 Maroon Circle, Englewood, CO | | 80112 | | | | | | | 9655 Maroon Circle, Englewood, CO | | 80112 | (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (303) (303) 703-4906 Securities registered pursuant to Section 12(b) of the Act: None 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 |
Securities registered pursuant to Section 12(g) of the Act: None Title of each class Common Stock, $0.001 par value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨☐ Yes x☒ No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ¨☐ Yes x☒ No 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. x☒ Yes ¨☐No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). x☒ Yes ¨☐ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large, accelerated filer, an accelerated filer, a non-accelerated filer, or 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 | | x☒ | | | | | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨☐ Yes x☒ No The aggregate market value of the registrant’s common stock held by non-affiliates of the Registrantregistrant as of June 30, 2017,2023, the last business day of the Registrant’s last completed second quarter, based upon the closing price of the common stock as reported by the OTCQBNasdaq Stock Market on such date was approximately $8.7$205.2 million. This computation is based on the number of issued and outstanding shares held by persons other than officers, directors and shareholders of 5% or more of the registrant’s common stock As of February 22, 2018, 32,871,87728, 2024, 42,042,617 shares of common stock are issued and 32,457,63632,170,182 shares are outstanding. Documents incorporated by reference: None. Portions of the Registrant’s definitive proxy statement relating to its 2024 annual meeting of stockholders (the “ Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates. TABLE OF CONTENTS ZYNEX, INC INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 20172023 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This report includes statements of our expectations, intentions, plans, and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. As an issuer of penny stock, the Company will not have the benefit of the safe harbor protection provided by those sections.1934, as amended. Nonetheless, it is important for an investor to understand that these statements involve risks and uncertainties. These statements relate to the discussion of our business strategies and our expectations concerning future operations, margins, profitability, liquidity, and capital resources and toas well as analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. We have used words such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “think,” “estimate,” “seek,” “expect,” “predict,” “could,” “project,”“may” “will” “should” “expect” “intend” “plan” “anticipate” “believe” “think” “estimate” “seek” “expect” “predict” “could” “project” “potential” and other similar terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties, risks, and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by these forward-looking statements. Such risks and other factors also include those listed in Item 1A. “Risk Factors,”Factors” and elsewhere in this report and our other filings with the Securities and Exchange Commission. When considering these forward-looking statements, you should keep in mind the cautionary statements in this report and the documents incorporated by reference. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us. We assume no obligation to update any forward-looking statements after the date of this report as a result of new information, future events or developments, except as required by applicable laws and regulations. When used in this annual report, the terms the “Company,” “Zynex”, “we,” “us,” “ours,” and similar terms refer to Zynex, Inc., a Nevada corporation, and itsour wholly-owned active subsidiaries, Zynex Medical, Inc., Zynex NeuroDiagnostics, Inc., Zynex Monitoring Solutions Inc., Zynex Europe ApS, Zynex Billing and Consulting, LLC and Pharmazy, Inc. As of the date of this annual report, our only operating subsidiary is Zynex Medical, Inc. (“ZMI”). and Zynex Monitoring Solutions, Inc. (“ZMS”) has developed its blood volume monitoring product as described below. None. Table of our other subsidiaries are engaged in business operations.Contents
PART I ITEM 1. BUSINESS History
Zynex Inc. was founded by Thomas Sandgaard in 1996, when he founded smaller private companies that eventually were folded into Zynex, Inc. Zynex Inc., a Nevada corporation, that was formed in December 2001, is the parent company of and conducts business within six subsidiaries: Zynex Medical, Inc. (“ZMI”), a Colorado corporation, Zynex Neurodiagnostics, Inc. (“ZND”), a Colorado corporation, Zynex Monitoring Solutions, Inc. (“ZMS”), a Colorado corporation, Zynex Billing and Consulting, LLC (“ZBC”), a Colorado limited liability company, Zynex Europe (Zynex Europe ApS) (“ZEU”), a Danish corporation, and Pharmazy, Inc. (“Pharmazy”), which was incorporated under the laws of Colorado in June 2015 as a wholly-owned subsidiary of ZMI collectively referred to as “Zynex” or the “Company”.
As of December 31, 2017, 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), generated minimal revenues during the years ended December 31, 2017 and 2016 from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume monitoring device which is in the process of approval by the Food and Drug Administration (“FDA”) in the United States of American and CE Marking in Europe. As a result, 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 compound pharmacy operated as a division of ZMI dba as Pharmazy through January 2016.
Over 99% of total 2016 and 2017 consolidated revenue is attributable to ZMI. Our headquarters are located in Englewood, Colorado.
Subsidiaries
Overview Zynex Medical, Inc. (ZMI): ZMI 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. ZMIThe Company’s devices are intended for pain management to reduce reliance on drugs and medications 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”). All of our medical devices are intendeddesigned to be patient friendly and designed for home use. The ZMIOur devices are small, portable, battery operated, and include an electrical pulse generator which is connected to the body via electrodes. The products are cost effective when compared to traditional physical therapy, and often result in better mobility, less pain and increased potential for a patient to return to work and live a fuller life significantly earlier than with traditional therapies alone. All of our medical devices are marketed in the U.S. and are subject to US Food and Drug Administration (FDA)FDA regulation and approval.clearance. Our products require a physician’s prescription before they can be dispensed in the U.S. We consider the physician’s prescription as an “order”, and it is on this basis that we provide the product to the patient and either bill the patient directly or the patient’s private or government insurer for payment. ZMI’sOur primary product is the NexWave device. The NexWave 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. ZMI alsodistributes complementary rehabilitation products such as back, knee and wrist braces, cervical and lumbar traction, and hot/cold therapy (“Distributed Rehabilitation Products”). These complement our pain management products and are critical for physicians and therapists. These products require a prescription and are covered by most insurance plans and Medicare. ZMI designs, manufactures, and markets the NeuroMove product. The NeuroMove contains electromyography and electric stimulation technology that is primarily used for stroke, spinal cord and traumatic brain injury rehabilitation (“SCI”), by reaching parts of the brain to re-connect with muscles, also known as neuroplasticity. The NeuroMove product is primarily marketed to medical clinics. Zynex did not have material sales of this product in 20162023 or 2017.2022. ZMI also designs, manufactures, and markets the InWave product, an in-home electrical stimulation device used to treat female urinary incontinence. The device requires a prescription and is covered by most insurance plans and Medicare. Zynex did not have material sales of this product in 2023 or 2022. ZMI designs, manufactures and markets the E-Wave product. The E-Wave is a user-friendly NMES device designed for muscle stimulation and re-education. E-Wave is a fully programmable, compact, battery-powered device with adjustable treatment timer, compliance meter, biphasic or monophasic waveforms, and exceptional safety features. The E-Wave is marketed to physicians and therapists and requires consumable supplies, electrodes and batteries, for use. On October 25, 2023, Zynex Medical, Inc. dba Pharmazy (ZMI)submitted FDA application for M-Wave, the next generation E-Wave device. The M-Wave will offer a more modern design and Pharmazy, Inc (Pharmazy):enhanced ease of use with the same versatility as the E-Wave. As of March 12, 2024, the Company does not anticipate a material financial impact of the M-Wave on the Company’s consolidated financial statements.
In 2012, many industry sales representatives, including those representing Zynex, began offering prescription TransDermal Pain Creams (TDPC) to their accounts, a product that paid much higher commissions with less paperwork than TENS devices. TDPC, like TENS, offers very effective, non-addictive pain management with minimal side effects. In late 2013, Zynex opened a compound pharmacy to enter the prescription TransDermal Pain Cream (“TDPC”) market. The new pharmacy operated within ZMI, (ZMI dba “Pharmazy”) and obtained its first state license in February 2014. In June 2015, we incorporated Pharmazy, Inc. in Colorado as a wholly owned subsidiary of ZMI. During January 2016, we shut down our compound pharmacy business. The business struggled due to the unfavorably changing pharmacy insurance reimbursements. In addition, we focused on our core electrotherapy product business and our potential and future blood volume monitor business described for ZMS, below.
Zynex Monitoring Solutions (ZMS): ZMS was formed in 2011 to develop and market medical devices for non-invasive cardiac monitoring. During 2015, ZMS was still in development and did not have any revenue.patient monitoring beginning with our Zynex Fluid Monitoring System. The blood volume monitor is a non-invasive medical device for monitoring central bloodrelative fluid volume that would bechanges used in operating and recovery rooms to detect bloodfluid loss during surgery and internal bleeding during recovery. This deviceThe CM-1500 received 510(k) clearance from the FDA in February 2020 and the wireless CM-1600 received clearance in June 2023. The Zynex Fluid Monitoring System has been subjected to multipletested in several Institutional Review Board (“IRB”) approved clinical studies, both in well-controlled healthy volunteer settings as well as in clinical use environments. In 2022 and 2023, the clinical trials were expanded to include the next generation CM-1600. Enrollment was completed in an apheresis blood donation study with Vitalant Research Institute (the research arm of Vitalant, the nation’s largest independent, nonprofit blood services provider) to track changes in the device’s patented Relative Index (“RI”) during platelet apheresis procedures. A healthy volunteer study was also completed at Yale University Medical School where subjects underwent lower body negative pressure, a well-validated protocol for simulated hemorrhage while wearing the device. Enrollment was initiated in a large-scale multi-site study to measure the sensitivity and specificity of the CM-1600 at detecting minor blood loss, which are being utilized for collectingfinished recruitment and data to further validate the algorithm usedcollection in April 2023. Finally, a non-cardiac surgery perioperative observational study to determine changesthe impact of complex perioperative events on the parameters and RI measured by the CM-1600 was completed in central blood volume and planning for future, additional clinical studies. May 2023. We have submittedbuilt a 510(k)number of commercial devices in pilot-production and continue to refine the algorithms for the patented Relative Index. We have received two U.S. utility patents for this unique application, the first in the fourth quarter of 2018 and the second in the first quarter of 2021, and we believe this product could serve a currently unmet need in the market for safer surgeries and safer monitoring of patients during recovery. In addition to the FDA and are respondingclearance, we plan to their questions. There is no guarantee when or if the product will be cleared for marketing by the FDA. Concurrent to our FDA application, we are pursuingpursue European Union (“EU”) Certificate European (“CE”) Marking. CE Marking is a certification that a product meets the standards established by the 2827 nations of the EU and qualifies for sale in the EU and 4-nation European Free Trade Association.
In early 2022, the integration of Kestrel and its pulse oximetry products into the ZMS organization was completed. Pulse oximetry is a commonly used noninvasive monitoring method for estimation of oxygen saturation in arterial blood. The inaccuracies of traditional Light Emitting Diode (“LED”) based pulse oximeters have recently been highlighted specific to skin pigmentation bias and the inability to accurately measure blood volume monitor has been testedoxygen levels in several Internationalthe presence of other conditions such as in cases of carbon monoxide poisoning or methemoglobinemia. ZMS’ investigational laser-based products are designed to address these inaccuracies and include the novel NiCO™ CO-Oximeter, and HemeOx™, a total hemoglobin oximeter that is designed to enable continuous noninvasive arterial blood monitoring. NiCO is anticipated to be submitted to the FDA for clearance in the first half of 2024. NiCO is currently undergoing Institutional Review Board (“IRB”) approved clinical studies on human subjects to measure hypoxemia. Enrollments at the University of California San Francisco were completed in May 2023 and during 2015, was usedenrollments at Duke University are ongoing. As ZMS’ products are still in several blood donation settings where hundreds of subjects have donated half a liter of blood with strong correlation to the index on the device. We have built a number of commercial devices in pilot-production and continue to refine the algorithms for the Blood Volume Index (BVI). Two utility patents have been filed for this unique application (pending), which we believe could serve a currently unmet need in the market for safer surgeries and safer monitoring of patients during recovery.development, ZMS did not produce any revenue for the years ending December 31, 20172023 and 2016. 2022. In addition to the fluid volume monitor, ZMS filed for a provisional patent for a non-invasive sepsis monitor in December 2020 and an updated utility patent, which was filed in December 2021. Zynex International (Zynex Europe) (ZEU):History
ZEU was formed in 2012 to further progress Zynex’s international expansion. ZEU is currently conducting business and focused on sales and marketing our products within the international marketplace, upon receipt of necessary regulatory approvals. ZEU did not produce significant revenue for the years ended December 31, 2017 and 2016.
Zynex NeuroDiagnostics (ZND):
ZND was formed in 2011 to market electromyography (“EMG”), electroencephalography (“EEG”), sleep pattern, auditory and nerve conductivity neurological diagnosis devices to hospitals and clinics worldwide, through the utilization of existing ZMI diagnostic EMG technology. ZND has not generated revenue for years ended December 31, 2017 and 2016 and we are no longer actively pursuing sales of this product line.
Zynex Billing and Consulting (ZBC):
During the latter part of 2012, we established a medical billing and consulting subsidiary, ZBC. ZBC provided outsourced billing services for private medical practices, which include collection services, medical coding and general billing consulting. ZBC is majority owned by Zynex, Inc. (80%)was founded by Thomas Sandgaard in 1996, when he founded two privately held companies that were eventually folded into Zynex, Inc., a Nevada corporation. Zynex, Inc. is the parent company of two active subsidiaries; Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) and hasZynex Monitoring Solutions, Inc. (“ZMS,” a non-controlling interest member, owning 20%wholly-owned Colorado corporation). We ceased providing billing
Substantially all of the Company’s consolidated revenue in 2023 and consulting services2022 is attributable to ZMI. Our headquarters are located in April of 2015. ZBC produced 0.0%Englewood, Colorado. SALES AND GROWTH STRATEGIES To date, ZMI accounts for substantially all of our revenue and profit. We are focused on expanding our sales force to address what we believe is an untapped market for electrotherapy products for pain management which has become more attractive due to large competitors exiting the years endedmarket. As of December 31, 20172023, we had approximately 500 field sales representatives on staff or in the hiring process. We continue to hire field sales representatives at a rapid rate, focusing on the quality of each candidate with the goal of having approximately 600 sales representatives in the U.S. by the end of 2024. We will be focused on increasing performance management standards for our sales force. In an effort to increase revenue and 2016. diversification, we provide our prescribers and patients with diverse solutions for their pain management needs. We are continually adding new complementary products to our ZMI sales channel, in addition to our current Distributed Products. We believe adding these complementary products will increase our market share and, in the future, grow our core business by providing our electrotherapy patients additional non-pharmacological pain relief and complementary products to our manufactured devices. Distribution and Revenue Streams: Substantially all our revenue is generated through our ZMI subsidiary from our electrotherapy products. ProductsWe sell through a direct sales force in the United States. Our field sales representatives are engaged to sell in predefined geographic markets and are compensated with a base salary plus incentive compensation aligned to corporate objectives based on the type of product sold and insurance. Our efforts to date have been focused on the United States market.
Our revenue is derived from several sources including patients with insurance plans held by commercial health insurance carriers or government payers who pay on behalf of their insureds. The remaining portion of revenue is primarily received from workers’ compensation claims, auto claims, attorneys representing injured patients, hospitals, clinics, and private-pay individuals. We currently marketA large part of our revenue is recurring. Recurring revenue results primarily from the sale of surface electrodes and sell Zynex-manufacturedbatteries sent to existing patients with our devices. Electrodes and batteries are consumable items that are considered an integral part of our products.
Distributed Rehabilitation Products In addition to our own products, we offer our suite of Distributed Rehabilitation Products, through our sales force, a number of private labeled supplies and complementary products from other manufacturers. Customarily, there are no formal contracts between vendors in the durable medical equipment industry. Replacement products and distribute private labeledcomponents are easily found, either from our own products as indicated below: or other manufacturers, and purchases are made by purchase order. Product Name | | Description | | | | Products We currently market and sell Zynex-manufactured products and distribute rehabilitation products and private labeled supplies for Zynex products, as indicated below: | Product Name | | Description | | | | Zynex Medical Products | | | | | | NexWave | | Dual Channel,channel, multi-modality IFC, TENS, NMES Devicedevice | | | | NeuroMove | | Electromyography (EMG) — triggered Electrical Stimulation Deviceelectrical stimulation device | | | | InWave | | Electrical stimulation for treatment of female urinary incontinence | | | | TENSWaveE-Wave M-Wave | | Dual Channel TENS DeviceNMES device NMES device - cleared by FDA in February 2024 | | | | Private Labeled ProductsSupplies | | | | | | Electrodes | | | Electrodes | | Supplies, re-usable for delivery of electrical current to the body | | | | Batteries | | Supplies, for use in electrotherapy products | | | | ComfortracDistributed Rehabilitation Products | | Cervical traction | | | | JetStreamComfortrac/Saunders | | Hot/Cold therapyCervical traction | | | | JetStream/Pain Management Technologies | | Hot/cold therapy | | | | LSO Back Braces | | Lumbar support | | | |
Bracing | | Rehabilitation brace support | | | | Zynex Monitoring Solutions Products(Products in Development, Not Yet Available for Sale) | | | | | | Non-Invasive Blood Volume MonitorCM-1500 | | Blood Volume MonitorZynex Fluid Monitoring System – cleared by FDA in February 2020 | | | | CM-1600 | | Zynex Wireless Fluid Monitoring System – cleared by FDA in June 2023 | | | | NiCO CO-Oximeter | | Laser-based Noninvasive CO-Oximeter (Not yet FDA cleared) | | | | HemeOx tHb Oximeter | | Laser-based Total Hemoglobin Pulse Oximeter (Not yet FDA cleared) |
Product Uses
Pain Management and Control Standard electrotherapy is a clinically proven and medically accepted alternative to manage acute and chronic pain. Electrical stimulation has been shown to reduce most types of local pain, such as tennis elbow, neck or lower back pain, arthritis, and others. The devices used to accomplish this are commonly described as the TENS family of devices. Electrotherapy is not known to have any negative side effects, a significant advantage over most pain relief medications. The benefits of electrotherapy can include:include pain relief, increased blood flow, reduced edema, prevention of venous thrombosis, increased range-of-motion, prevention of muscle disuse atrophy, and reduced urinary incontinence. Electrotherapy introduces an electrical current applied through surface electrodes. The electrical current “distorts” a pain signal on its way to the central nervous system and the brain, thus reducing the pain. Additionally, by applying higher levels of electricity, muscles contract and such contraction mayis believed to assist in the effectsbenefits mentioned above. Numerous clinical studies have been published over several decades showing the effectiveness of IFC and TENS for pain relief. Zynex’sOur primary TENSelectrotherapy device, the NexWave, has received FDA 510(k) clearance. The NexWave is a digital IFC, TENS and NMES device that delivers pain-alleviating electrotherapy.
Stroke and Spinal Cord Injury (“SCI”) Rehabilitation Our proprietary NeuroMove product is a Class II medical device that has been cleared by the FDA for stroke and SCI rehabilitation. Stroke and SCI usually affect a survivor’s mobility, functionality, speech, and memory, and the NeuroMove helpsis designed to help the survivor regain movement and functionality. The NeuroMove product utilizes the relatively new science of “neuroplasticity”, the process by which healthy parts of the brain learn to compensate and assume functions previously carried out by the damaged areas. To accomplish this task, the extraordinarily sensitive NeuroMove technology monitors muscle activity and detects brain signals that indicate, even without any visible movement, the brain’s effort to move a specific muscle or area of the body. Once the effort is detected, the NeuroMove induces actual movement through electrical stimulation, thus providing effective feedback to initiate relearning in the healthy part of the brain.
We believe the NeuroMove product is unique because its built-in microprocessor can recognize low-level attempts by muscles to contract and then “reward” such detection with electrical stimulation. We do not believe there are similar products in the stroke rehabilitation market. Some generic devices are being offered in international markets; however, we do not believe these products provide similar results with respect to stroke rehabilitation. When conscientiously using the NeuroMove product for three to twelve months, studies show that the majority of NeuroMove patients can re-establish the connection between the brain and impaired muscle and thus regain movement and functionality.When movement and functionality are restored, the patient may experience increased mobility, increased productivity, an improved outlook, and a reduced risk of accidents, and may be able to engage in activities they were precluded from before using the NeuroMove. Sales of NeuroMove havedid not generatedgenerate material revenue for the years ended December 31, 20172023 and 2016.
Our Markets2022.
Fluid Monitoring Fluid monitoring involves measuring a patient’s fluid balance, especially regarding fluid inputs and outputs contributing to total intravascular volume. Adequate fluid balance is vital for patient stability and recovery, as both low and high volumes outside of the desired range are associated with complications. Maintaining effective circulating blood volume and pressure are key to assuring adequate oxygen saturation and perfusion. Monitoring methods used for hemodynamic and intravascular volume monitoring have been historically classified as (a) invasive, using a central or pulmonary artery catheter, (b) minimally invasive, with the placement of an arterial line, and (c) noninvasive, where no device is inserted into the body for clinical assessment. The Zynex Fluid Monitoring System CM-1500 and the Zynex Wireless Fluid Monitoring System CM-1600 are noninvasive monitoring devices designed to measure relative changes in fluid volume in adult patients. Fluid status is determined using Zynex’s proprietary algorithm and expressed as the patented Relative Index™, a simple value designed to accurately trend patient vital signs and alert clinicians for early intervention. The CM-1500 was cleared by the FDA in 2020, and the wireless CM-1600 was cleared in June 2023 by the FDA. Pulse Oximetry Monitoring Pulse oximetry is a noninvasive method of measuring the oxygen saturation level (“SpO2”) of arterial blood. As one of the most common medical devices used in and out of hospitals around the world, pulse oximeters have gained widespread clinical acceptance as the standard of care for monitoring oxygen saturation. SpO2 has become the “fifth vital sign”, which, together with heart rate, blood pressure, respiratory rate, and temperature, provides crucial clinical information about a person’s health status. The NiCO™ Noninvasive CO-Oximeter, the first laser-based photoplethysmographic patient monitoring technology, is designed to noninvasively measure and monitor four crucial species of hemoglobin with unprecedented accuracy. The HemeOx™ Total Hemoglobin Pulse Oximeter is designed to noninvasively measure total hemoglobin and oxygen saturation, two critical parameters that typically require invasive arterial blood sampling for measurement. Total hemoglobin is a very commonly ordered blood test in healthcare, and HemeOx™ measures it with the continuous and noninvasive ease of a pulse oximeter at the patient bedside. The NiCO™ Noninvasive CO-Oximeter and the HemeOx™ Total Hemoglobin Pulse Oximeter have not yet been cleared by the FDA. MARKETS Zynex Medical, Inc. (ZMI): To date, the majority of our revenue has been generated by our ZMI electrotherapy products, private labeled supplies, and distributed complementary rehabilitation products. Thus, we primarily compete in the home electrotherapy market with products based on IFC, TENSfor pain management and NMES devices and consumable supplies.rehabilitation. We estimate the annual domestic market for home electrotherapy and rehabilitation products at approximately $500 million. Duemillion to our improved recent financial performance$1 billion. During 2023 and related cash flows,2022, we are currently growingmaintained our sales force of approximately 400-500 direct sales representatives to address what we believe is an unaddressed market in theunderserved electrotherapy market. The current opioid epidemic has been declared a health emergency, and we are uniquely positioned to help reduce the amountnumber of opioids prescribed for treatment of chronic and acute pain symptoms. We are committed to providing health carehealthcare professionals with alternatives to traditional opioid based treatment programs with our prescription-strength products which have no side-effects.side effects. This has never been more necessary than it is today considering the staggering statistics. | ● | · | Pain impacts the lives of more Americans than diabetes, heart disease, and cancer combined. |
| ● | · | Pain is the leading cause of disability, and seeking treatment for chronic or acute pain is the most common reason American’s seek health care is because they are seeking treatment for acute orcare. Approximately 50 million Americans suffer from chronic pain. |
| ● | · | 1 in every 4Nearly 20 million Americans (76.2 million people), suffer with pain that lasts longer than 24 hours. |
| · | Approximately 25.3 million adults struggle withexperienced high-impact chronic pain, paindefined as “limiting life or work activities on most days or every day that has been present for more thanin the past 3 months.months”. |
| ● | · | If pharmaceuticals such as opioids continue to be used as the first line of defense, America will continue to see a rise in opioid misuse, addiction, and drug-related deaths. |
We have added new products such as JetStream Hot/Cold Therapy, Aspen LSO Backbracing and Comfortrac cervical traction, all products targeted at treating acute as well as chronic pain without side-effects.
In the market segments in which we compete, we face a mixture of competitors ranging from large manufacturers with multiple business lines to small manufacturers that offer a limited selection of products. The primary competitor in our market is International Rehabilitative Sciences, Inc. d/b/a RS Medical. In addition, we face competition from providers of alternative medical therapies, such as pharmaceutical companies.
Key characteristics of our electrotherapy and rehabilitation market are: | ● | Collection cycles of initial payment from insurance carriers can range from less than 30 days to many months and considerably longer for many attorney, personal injury, and worker’sworkers’ compensation cases. Such delayed payment negatively |
| | impacts our cash flow and can slow our growth or strain our liquidity. Collections are also impacted by whether effective billing submissions are made by our billing and collections department to the insurance carriers.third-party payers. |
| ● | Prior to payment, the third party payorsthird-party payers often make or take significant payment “adjustmentsadjustments or discounts.” This can also lead to denials and billing disputes with third party payors. third-party payers. |
| ● | The majority of our revenue is generated by the sale of medical devices and from recurring patient supplies specifically from our electrotherapy products sold through ZMI. We are reliant on insurancethird-party payer reimbursement. |
Zynex Monitoring Solutions (ZMS): ZMS is focused on developing products within the non-invasive multi-parameter patient-monitoring marketplace. ZMS is currently focusing on developing its blood volume monitor.fluid monitoring system, the sepsis monitor, and the pulse oximetry products acquired in its acquisition of Kestrel Labs. We believe our product,products, once released into the marketplace (of which there can be no guarantee), will compete against multiple competitors, ranging from large manufacturers with multiple business lines to small manufacturers that offer a limited range of products. We have not yet identified competitors for this product. ZMS has not generated any revenue as this product is stillto date. Competition Since we are in the process of FDA approval and CE Marking.
Zynex NeuroDiagnostics (ZND):
ZND is focused on developing products within the neurosensing marketplace in an effort to diversify our concentration of ZMI electrotherapy revenue. There were no significant revenues during 2017 or 2016 in ZND.
Sales and Growth Strategies
To date, ZMI accounts for substantially all of our revenue and profit. We are currently focused on expanding our sales force to address what we believe is an untapped market for medical electrotherapy products, which has recently become more attractive duewe face a mixture of competitors ranging from large manufacturers with multiple business lines to largesmall manufacturers that offer a limited selection of products. Our principal competitors exiting the market.
include International Rehabilitative Sciences, Inc. d/b/a RS Medical, EMSI, and H-Wave. In an effort to increase revenue and diversification to become less sensitive to reimbursement changes,addition, we are continually adding new productsface competition from providers of alternative medical therapies, such as our hot/cold therapy, cervical tractionpharmaceutical and LSO back braces which are less impacted by insurance reimbursement to our ZMI sales channel and are pursuing other opportunities, including the Blood Volume Monitor. We believe these events and actions will serve to focus and increase our market share in the electrotherapy market and, in the future, diversify our product mix. We also continue to modify and refine our geographic sales channels through experienced sales representatives, representing a mix of Zynex employees, sales contractors and international distributors. As of December 31, 2017 we had approximately101 active field sales representatives. An insignificant amount of our revenue is derived from international sales; however we continue to take steps to penetrate the global medical device marketplace.companies. RESOURCES Manufacturing and Product Assembly Our manufacturing and product assembly strategy consists of the following elements: | ● | Compliance with relevant legal and regulatory requirements. |
| ● | Use of contract manufacturers as much as possible,needed, thereby allowing us to quickly respond to changes in volume and avoid large capital investments for assembly and manufacturing equipment. Domestically and internationally,equipment of certain product components. We believe there is a large pool of highly qualified contract manufacturers, domestically and internationally, for the type of devices we manufacture.manufacturing assistance needed for our manufactured devices. |
| ● | Utilization of in-house final assembly and test capabilities. |
| ● | Development of proprietary software and hardware for all products in house.in-house. |
| ● | Testing all units in a real-life, in-house environment to help ensure the highest possible quality and patient safety while reducing the cost of warranty repairs. |
We utilize contract manufacturers (principally located in the United States)U.S. to manufacture components for our NexWave and NeuroMove units and for some of our other products;products and manufacture / assemble in-house for our NexWave and NeuroMove units. We do not have long termlong-term supply agreements with our contract manufacturers, but we utilize purchase orders with agreed upon terms for our ongoing needs. We believe there are numerous suppliers that can manufacture our products and provide our required raw materials. Generally, we have been able to obtain adequate supplies of our required raw materials and components. We are always evaluating our suppliers for price, quality, delivery time, and service. The reduction or interruption in supply, and an inability to develop alternative sources for such supply, could adversely affect our operations. During 2016 and the first half of 2017, our inventory levels, which is driven by product assembly, was constrained by liquidity issues. Due to improved operating results in 2016 and 2017, we believe our liquidity constraints have been removed and we are in the process of building our inventory reserves to meet current sales demands.
Distribution and Revenue Streams:
Currently, almost all of our revenue is generated through our ZMI subsidiary from our electrotherapy products.
We sell most of our medical devices through direct and independent sales representatives in the United States. Our field sales representatives are engaged to sell in predefined geographic markets and are compensated based on the amount of cash collected from products sold. Currently, the United States has been the market that we have focused on; however, we have established international distributors in Canada, Australia, Russia, China, India, Singapore, Holland, Germany, the United Arab Emirates (UAE), Malaysia, Saudi Arabia, Egypt and Viet Nam. Typically, we sell and ship product directly to our international distributors, who work directly with the ultimate patient or end-user. To date these international customers have not generated significant revenue.
A significant portion of our revenue is derived from patients with private health insurance carriers with insurance plans, typically known as HMO or PPO, on behalf of their insureds as well as worker’s compensation agencies. The balance of the revenue is primarily received from attorneys representing injured patients, hospitals, clinics and private-pay individuals. We no longer accept Medicare and Medicaid orders.
A large part of our revenue is recurring. Recurring revenue results primarily from the sale of surface electrodes and batteries sent to existing patients on our units. Electrodes and batteries are consumable items that are considered an integral part of our products.
Private Labeled Distributed Products
In addition to our own products, we distribute, through our sales force, a number of private labeled products from other domestic manufacturers in order to complement our products. These products generally include patient consumables, such as electrodes and batteries plus cervical traction, lumbar support and hot/cold therapy. Customarily, there are no formal contracts between vendors in the durable medical equipment industry. Replacement products and components are easily found, either from our own products or other manufacturers, and purchases are made by purchase order.
Intellectual Property Although we do not own any patents, we believe thatZynex is committed to aggressively protecting the intellectual property rights the Company has worked so hard to obtain and to expand our products contain certain proprietary software. We currently have applied for utility patents for products related to cardiac monitoring within ZMS in both US and Europe. In the future, we may seek patentsintellectual property portfolio for advances to our existing products and for new products as they are developed. During 2017
Zynex has received two U.S. utility patents, as well as a utility patent in Europe, for our fluid monitoring system. The acquisition of Kestrel Labs, Inc. included an intellectual property portfolio surrounding the acquired laser-based photoplethysmographic technology. This expands both the size and 2016, we incurred approximately $0.1 millionscope of Zynex’s intellectual property portfolio to include key aspects of the exciting pulse oximetry market. Additional patents for photoplethysmographic technology were filed in 2022 and $0.3 million, respectively, of research2023. Zynex also received issued trademarks for NiCO™ and development expenses. We expect our research and development expenditures will be limited throughout 2018. HemeOx™ by the US Patent Trade Office (“USPTO”) in 2023. Zynex is trademarked in the U.S. We utilize non-disclosure and trade secret agreements with employees and third parties to protect our proprietary information. GOVERNMENT REGULATION Regulatory ApprovalUS Food and Process
Federal Drug AssociationAdministration (FDA)
All of our ZMI products are classified as Class II (Medium Risk) devices by the FDA, and clinical studies with our products are considered to be NSR (Non-SignificantNon-Significant Risk Studies)Studies (“NSR”). Our business is regulated by the FDA, and all products typically require 510(k) market clearance before they can be put ininto commercial distribution. Section 510(k) of the Federal Food, Drug and CosmeticsCosmetic Act, is available in certain instances for Class II (Medium Risk) products.devices. It requires that, before introducing most Class II devices into interstate commerce, our introducing the productsponsor must first submit information to the FDA demonstrating that the device is substantially equivalent in terms of safety and effectiveness to a device legally marketed prior to March 1976 or to devices that have been reclassified in accordance with the provisions of the Federal Food, Drug, and Cosmetic Act that do not require approval of a premarket approval application. When the FDA determines that the device is substantially equivalent, the agency issues a “clearance” letter that authorizes marketing of the product. We are also regulated by the FDA’s GMP and QSR (Quality Systems Regulation).Quality System Regulation (“QSR”), which sets forth current Good Manufacturing Practice (“GMP”) requirements for devices. We believe that our products have obtained or are good candidates for the requisite FDA clearance or are exempt from the FDA clearance process. In November 2001, Zynex received FDA 510(k) clearance to market NeuroMove. In September 2011, Zynex received FDA 510(k) clearance to market the NexWave, our current generation IFC, TENS and NMES device. In August 2012, Zynex received FDA 510(k) clearance to market the InWave, our next generation muscle stimulator for treatment of female incontinence. Failure to comply with FDA requirements could adversely affect us.
International Zynex has received continues to explore opportunities to gain regulatory clearance for its devices in markets outside of the U.S. CE Marking approval for several of its products. CE Markingmarking is a certificationthe medical device manufacturer’s claim that a product meets the standards established byessential requirements of all relevant European Medical Device Directives. The CE mark is a legal requirement to place a device on the 28 nations of the EU and qualifies for salemarket in the EUEU. Zynex is currently in the process of pursuing CE marking on several of its electrotherapy devices and 4-nation European Free Trade Association.its CM-1600 Zynex Fluid Monitoring System. The Far East, Middle East, Eastern Europe and Latin American markets have different regulatory requirements. We comply with applicable regulatory requirements within the markets in which we currently sell. If and when we decide to enter additional geographic areas, we intend to comply with applicable regulatory requirements within those markets.
In 2019, Zynex has received ISO13485: 20122016 certification for its compliance with international standards in quality management systems for design, development, manufacturing, and distribution of medical devices. This certification is not only important as an assurance that we have the appropriate quality systems in place but is also crucial to our international expansion efforts as many countries require this certification as part of their regulatory approval. The quality management system is audited on an annual basis and current recertification is pending final audit review. Government Regulation The delivery of health care services and products has become one of the most highly regulated of professional and business endeavors in the United States. Both the federal government and individual state governments are responsible for overseeing the activities of individuals and businesses engaged in the delivery of health care services and products. Federal law and regulations are based primarily upon the Medicare and Medicaid programs. Each program is financed, at least in part, with federal funds. State jurisdiction is based upon the state’s interest in regulating the quality of health care in the state, regardless of the source of payment. Many state and local jurisdictions impose additional legal and regulatory requirements on our business including various states and local licenses, taxes, limitations regarding insurance claim submission and limitations on relationships with referral parties. Failure to comply with this myriad of regulations in a particular jurisdiction may subject us to fines or other penalties, including the inability to sell our products in certain jurisdictions. Federal health carehealthcare laws apply to us when we submit a claim to any other federally funded health carehealthcare program, in addition to requirements to meet government standards. The principal federal laws that we must abide by in these situations include: | ● | Those that prohibit the filing of false or improper claims for federal payment. |
| ● | Those that prohibit unlawful inducements for the referral of business reimbursable under federally funded health carehealthcare programs. |
The federal government may impose criminal, civil, and administrative penalties on anyone who files a false claim for reimbursement from federally funded programs. A federal law commonly known as the “anti-kickback law” prohibits the knowing or willful solicitation, receipt, offer, or payment of any remuneration made in return for: | ● | The referral of patients covered under federally-funded health carefederally funded healthcare programs; or |
| ● | The purchasing, leasing, ordering, or arranging for any goods, facility, items, or service reimbursable under those programs. |
Healthcare Regulation EmployeesFederal and state healthcare laws, including fraud and abuse and health information privacy and security laws, also apply to our business. If we fail to comply with those laws, we could face substantial penalties and our business, results of operations, financial condition, and prospects could be adversely affected. The laws that may affect our ability to operate include but are not limited to: the federal Anti-Kickback Statute, which prohibits, among other things, soliciting, receiving, offering, or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs; and federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent. Additionally, we are subject to state law equivalents of each of the above federal laws, which may be broader in scope and apply regardless of whether the payer is a federal healthcare program, and many of which differ from each other in significant ways and may not have the same effect, further complicate compliance efforts.
Numerous federal and state laws, including state security breach notification laws, state health information privacy laws, and federal and state consumer protection laws, govern the collection, use, and disclosure of personal information. In addition, most healthcare providers who are expected to prescribe our products and from whom we obtain patient health information are subject to privacy and security requirements under the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology and Clinical Health Act (“HIPAA”). We could be subject to criminal penalties if we knowingly obtain individually identifiable health information from a HIPAA-covered entity, including healthcare providers, in a manner that is not authorized or permitted by HIPAA. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect our business, including recently enacted laws in a majority of states requiring security breach notification. These laws could create liability for us or increase our cost of doing business. In addition, the Physician Payments Sunshine Act, enacted as part of the Patient Protection and Affordable Care Act of 2010 (“ACA”), created a federal requirement under the federal Open Payments program that requires certain manufacturers to track and report to the Centers for Medicare and Medicaid Services (“CMS”), annually certain payments and other transfers of value provided to physicians and certain advanced non-physician healthcare practitioners and teaching hospitals made in the previous calendar year, as well as ownership and investment interests held by physicians and their immediate family members. In addition, there are also an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. These laws may affect our sales, marketing, and other promotional activities by imposing administrative and compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state and federal authorities. Research and Development Research and Development costs are expensed when incurred. During 2023 and 2022, we incurred approximately $9.2 million and $7.1 million in operating expenses, respectively, related to our ZMS operations. During 2023 and 2022, approximately $7.7 million and $6.0 million of operating expenses, respectively, required capitalization under Section 174 - “Amortization of Research and Experimental Expenditures” tax treatment. We expect our research and development expenses to increase in 2024 as our ZMS business expands. HUMAN CAPITAL As of December 31, 2017,2023, we employed 109approximately 1,100 full time employees. We also engage Our employees are our most important assets and set the foundation for our ability to achieve our strategic objectives. All our employees contribute to our success and, in particular, our sales representatives are instrumental in our ability to reach more patients in pain. The success and growth of our business depends in large part on our ability to attract, retain and develop a numberdiverse population of independent commission-only sales contractors.talented and high-performing employees at all levels of our organization. To succeed in a competitive labor market, we have developed recruitment and retention strategies, objectives, and measures that we focus on as part of the overall management of our business. These strategies, objectives, and measures form our human capital management framework and are advanced through the following programs, policies, and initiatives: | ● | Competitive pay and benefits. Our compensation programs are designed to align the compensation of our employees with our performance and to provide the proper incentives to attract, retain, and motivate employees to achieve superior results. |
| ● | Training and development. We invest in learning opportunities that foster a growth mindset. Our formal offerings include a tuition reimbursement program, an e-learning program that all corporate employees have access to, and in-house learning opportunities through the Company’s Zynex Growth and Development program. |
| ● | Health and Wellness. We invest in the health and wellness of our employees by offering monthly benefits and offer programs and support to assist our employees. |
ITEM 1A. RISK FACTORS RISKS RELATED TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE Unfavorable global economic conditions could adversely affect our business, financial condition, or results of operations. We’ve encountered significant volatility in our recent operatingOur results
The Company’s results from of operations have improved significantly in recent years but there has been significant volatility in our results over the past 5 years as reflectedcould be adversely affected by general conditions in the following table (in thousands):global economy and in the global financial markets, including conditions that are outside of our control, such as the impact of health and safety concerns, including SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2) (“COVID-19”) pandemic and various variants, as well as military conflicts or wars (such as the ongoing conflicts between Russia and Ukraine and Israel and Palestine) that can cause exacerbated volatility and disruptions to various aspects of the global economy, and other disruptions to global supply chains. Each of these events has caused or may continue to result in extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, whether due to inflationary pressures or otherwise, could result in a variety of risks to our business, including weakened demand for our products and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could strain our suppliers, possibly resulting in supply disruption, or cause delays in payments for our services by third-party payers or our collaborators. Any of the foregoing could harm our business, and we cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business.
| Year | | Revenues | | | Profit (Loss) | | | 2014 | | $ | 11.1 | | | $ | (6.2 | ) | | 2015 | | $ | 11.6 | | | $ | (2.9 | ) | | 2016 | | $ | 13.3 | | | $ | 0.07 | | | 2017 | | $ | 23.4 | | | $ | 7.4 | |
A pandemic, epidemic, or outbreak of an infectious disease, such as of COVID-19 and subsequent variants, may materially and adversely affect our business and results of operations. Our financial resultsPublic health crises such as pandemics or similar outbreaks could adversely impact our business. In 2019, COVID-19 surfaced in Wuhan, China and has since spread worldwide. The COVID-19 pandemic is evolving and to date has led to the implementation of various responses including government-imposed quarantines, travel restrictions, and other public health safety measures. 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 COVID-19 will impact our future business and the economy will also depend on future developments, which are highly uncertain and cannot be volatilepredicted with confidence, including the duration of the pandemic, adverse impacts of the Omicron COVID-19 variant or other COVID-19 variants, new information that will emerge concerning the severity of COVID-19, and there isthe actions to contain COVID-19 or treat its impact, among others. 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 we did not incur significant disruptions to our operations during 2023 and 2022, we are unable at this time to predict with confidence the impact that COVID-19 will have on our business, financial position, and operating results in future periods due to numerous uncertainties. Rapid technological change could cause our products to become obsolete and if we do not enhance our product offerings through our research and development efforts, we may be unable to effectively compete. The technologies underlying our products are subject to rapid and profound technological change. Competition intensifies as technical advances in each field are made and become more widely known. We can give no assurance that others will not develop services, products, or processes with significant advantages over the products, services, and processes that we offer or are seeking to develop. Any such occurrence could have a material and adverse effect on our business, results of operations, and financial condition. We plan to enhance and broaden our product offerings in response to changing customer demands and competitive pressure and technologies, but we may not be successful. The success of any new product offering or enhancement to an existing product will continuedepend on numerous factors, including our current increase in revenue and profits.ability to: | ● | 10 | properlyidentifyandanticipatephysicianandpatientneeds; |
| ● | developandintroducenewproductsorproductenhancementsinatimelymanner; |
| ● | adequatelyprotectourintellectualpropertyandavoidinfringingupontheintellectualpropertyrightsofthirdparties; |
| ● | demonstratethesafetyandefficacyofnewproducts,includingthroughtheconductofadditionalclinicaltrials; |
| ● | obtainthenecessaryregulatoryclearancesorapprovalsfornewproductsorproductenhancements;and |
| ● | achieveadequatecoverageandreimbursementforourproducts. |
Our history of operating losses and negative working capital may make it difficult to raise any new capital and may have an adverse impact on our relationship with third parties with whomIf we do business, includingnot develop and, when necessary, obtain regulatory clearance or approval for new products or product enhancements in time to meet market demand, or if there is insufficient demand for these products or enhancements, our customers, vendorsresults of operations will suffer. Our research and employees.
We’ve had lack of liquidity in recent periods which led to a going concern opinion in prior years.
During 2013-2015, the Company suffered operating losses which caused a lack of liquidity anddevelopment efforts may require a substantial working capital deficit. This raised substantial doubt aboutinvestment of time and resources before we are adequately able to determine the Company’s abilitycommercial viability of a new product, technology, material, or other innovation. In addition, even if we are able to continuesuccessfully develop enhancements or new generations of our products, these enhancements or new generations of products may not be covered or reimbursed by government healthcare programs such as a going concern.Medicare or private health plans, may not produce sales in excess of the costs of development, and/or may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features.
During 2016, the Company generated net income during Q3 and Q4 and combined with the profitability in 2017, the Company has recorded six consecutive profitable quarters, paid off its line of credit with Triumph Healthcare Finance, a division of TBK Bank, SSB, formerly known as Triumph Community Bank, (“Triumph”) and generated cash reserves and positive working capital.
Our history of operating losses could make it difficult to raise any new capital and may have an adverse impact on our relationship with third parties with whom we do business, including our customers, vendors and employees.
We cannot be certain the Company won’t be impacted by liquidity challenges in the future due to the volatile operating results mentioned above.
We are dependent on reimbursement from insurance companies;third-party payers, most of whom are larger than we are and have substantially more employees and financial resources; changes in insurance reimbursement policies or application of them have resulted in decreased or delayed revenues revenues. A large percentage of our revenues come from third-party payer reimbursement. Most of the third-party payers are large insurance company and government health care program reimbursement.companies with substantially more resources than we have. Upon delivery of our products to our customers,patients, we directly bill the customers’patients’ private insurance companycompanies or government payorpayers for reimbursement. If the billed payorsthird-party payers do not pay their billsremit payment on a timely basis or if they change their policies to exclude or reduce coverage for our products, we would experience a decline in our revenue as well as cash flow. In addition, we may deliver products to customerspatients and invoice based on past practices and billing experiences with health insurance companies andonly to have a health insurance companythird-party payers later deny coverage for such products. In some cases, our delivered product may not be covered pursuant to a policy statement of a health insurance provider,third-party payer, despite a payment history ofwith the insurance providerthird-party payer and benefits to the patients. A health insurance providerthird-party payer may seek repayment of amounts previously paid for covered products. We maintain an allowance for provider discounts forand amounts intended to cover legitimate requests for repayment. Failure to adequately identify and provide for amounts for resolution of repayment demands in our allowance for provider discounts could have a material adverse effect on our results of operations and cash flows. For government health carehealthcare programs, if we identify a deficiency in prior claims or practices, we may be required to repay amounts previously reimbursed to us by government health carehealthcare programs. We frequently 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.request which can accumulate to a significant amount. We review and evaluate these requests and determine if any refund is appropriate. We alsoDuring the adjudication process, we 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. Although we cannot predict whether or when a request for repayment or our subsequent request for reimbursement will be resolved, it is not unusual for such matters to be unresolved for a longan extended period of time. No assurances can be given with respect to our estimates for our allowance for provider discounts forrefund claim reimbursements and offsets or the ultimate outcome of the refund requests. We are dependent on our Medicare Supplier Number. DuringWe are required to have a Medicare Supplier Number in order to have the first quarterability to bill Medicare for services provided to Medicare patients. Furthermore, all third-party and Medicaid contracts require us to have a Medicare Supplier Number. We are required to
comply with Medicare Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (“DMEPOS”) Supplier Standards in order to maintain such number. If we are unable to comply with the Company collected $880,000 from a single insurance company for accounts receivable. The accounts receivable had been previously reducedrelevant standards, we could lose our Medicare Supplier Number. Without such number, we would be unable 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 errorcontinue our various third-party and requested it be refunded to the insurance company. The Company recorded this $880,000 insurance reimbursement as a deferred insurance liability as of March 31, 2016. However, the Company is disputing the refund request and has initiated an internal review of the reimbursement to determine that the original sales arrangement was properly executed, the products had been received and title was transferred, the price of the products or services and the reimbursement rate is fixed and determinable, and the Company’s ultimate claim to the reimbursement is reasonably assured. The Company expects to record the appropriate amount as net revenue when such internal review is complete and the Company’s claim to the amount is reasonably assured. To the extent that the Company has to repay anyMedicaid contracts. A significant portion of our revenues are dependent upon our Medicare Supplier Number, the $880,000, this willloss of which would materially and adversely affect our business, financial condition, results of operations, and cash flows. The Center for Medicare and Medicaid Services (“CMS”) requires that all Durable Medical Equipment providers must be accredited by a CMS-approved accreditation organization. On February 1, 2013, we initially received accreditation from the Accreditation Commission for Health Care (“ACHC”), and we have remained accredited to date. If we lost our accredited status, our business, financial condition, revenues, and results of operations would be materially and adversely affected. We face periodic reviews and billing audits from governmental and private payers, and these audits could have adverse results that may negatively impact our business. As a result of our participation in the Medicaid program and our registration in the Medicare program, we are subject to various governmental reviews and audits to verify our compliance with these programs and applicable laws and regulations. We also are subject to audits under various government programs in which third-party firms engaged by CMS conduct extensive reviews of claims data and medical and other records to identify potential improper payments under the Medicare program. Private pay sources also reserve the right to conduct audits. If billing errors are identified in the sample of reviewed claims, the billing error can be extrapolated to all claims filed which could result in a larger overpayment than originally identified in the sample of reviewed claims. Our costs to respond to and defend reviews and audits may be significant and could have a negativematerial adverse effect on our business, financial condition, results of operations, and cash flows. Moreover, an adverse review or audit could result in: | ● | required refunding or retroactive adjustment of amounts we have been paid by governmental or private payers; |
| ● | state or Federal agencies imposing fines, penalties, and other sanctions on us; |
| ● | loss of our right to participate in the Medicare program, state programs, or one or more private payer networks; or |
| ● | damage to our business and reputation in various markets. |
Any one of these results could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Failure to secure and maintain adequate coverage and reimbursement from third-party payers could adversely affect acceptance of our products and reduce our revenues. The majority of our revenues come from third-party payers, primarily insurance companies. In the Company’s liquidity position.U.S., private payers cover the largest segment of the population, with the remainder either uninsured or covered by governmental payers. The majority of the third-party payers outside the U.S. are government agencies, government sponsored entities, or other payers operating under significant regulatory requirements from national or regional governments. Third-party payers may decline to cover and reimburse certain procedures, supplies, or services. Additionally, some third-party payers may decline to cover and reimburse our products for a particular patient even if the payer has a favorable coverage policy addressing our products or previously approved reimbursement for our products. Furthermore, private and government payers may consider the cost of a treatment in approving coverage or in setting reimbursement for the treatment. Private and government payers are increasingly challenging the prices charged for medical products and services. Additionally, the containment of healthcare costs has become a priority of governments. Adoption of additional price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures could further limit our revenues and operating results. If third-party payers do not consider our products or the combination of our products with additional treatments to be cost-justified under a required cost-testing model, they may not cover our products for their populations or, if they do, the level of reimbursement may not be sufficient to allow us to sell our products on a profitable basis. Reimbursement for the treatment of patients with medical devices is governed by complex mechanisms. These mechanisms vary widely among countries, can be informal, somewhat unpredictable, and evolve constantly, reflecting the efforts of these countries to reduce public spending on healthcare. As a result, obtaining and maintaining reimbursement for the treatment of patients with medical devices has become more challenging. We cannot guarantee that the use of our products will receive reimbursement approvals and cannot guarantee that our existing reimbursement approvals will be maintained in any country. Our failure to secure or maintain adequate coverage or reimbursement for our products by third-party payers in the U.S. or in the other jurisdictions in which we market our products could have a material adverse effect on our business, revenues, and results of operations and cause our stock price to decline. We may not be successful in maintaining the reimbursement codes necessary to facilitate accurate and timely billing for our products or physician services attendant to our products. Third-party payers, healthcare systems, government agencies, or other groups often issue reimbursement codes to facilitate billing for products and physician services used in the delivery of healthcare. If we are unable to maintain the Healthcare Common Procedure Coding System codes (“HCPCS codes”) for physician services related to our products, our revenues and results may be affected by the absence of such HCPCS codes, as physicians may be less likely to prescribe the therapy when there is no certainty that adequate reimbursement will be available for the time, effort, skill, practice expense, and malpractice costs required to provide the therapy to patients. Outside the United States, we have not secured codes to describe our products or to document physician services related to the delivery of therapy using our products. The failure to obtain and maintain these codes could affect the growth of our business. We at times have concentrations of credit risk with third-party payers; failure to collect these and other billed receivables could adversely affect our cash flows and results of operations. At December 31, 2023 the Company did not have gross receivables from any third-party payer which made up over 10% of the accounts receivable balance. The Company had gross receivables from one third-party payer at December 31, 2022, which made up approximately 14% of the accounts receivable balance. Future changes in coverage and reimbursement policies for our products or reductions in reimbursement rates for our products by third party payorspayers could adversely affect our business and results of operations operations. In the United States, our products are prescribed by physicians for their patients. Based on the prescription, which we consider an order, we submit a claim for payment directly to third-party payorspayers such as private commercial insurance carriers, government payorspayers, and others as appropriate, and the payorthird-party payer reimburses us directly. Federal and state statutes, rules, or other regulatory measures that restrict coverage of our products or reimbursement rates could have an adverse effect on our ability to sell or rent our products or cause physical therapists and physicians to dispense and prescribe alternative, lower-cost products.
There are significant estimating risks associated with the amount of revenue, related refund liabilities, accounts receivable, and provider discounts that we recognize, and if we are unable to accurately estimate these amounts, it could impact the timing of our revenue recognition and cash collections, which have a significant impact on our operating results, or lead to a restatement of our financial results results. There are significant estimating risks associated with the estimation of the amount of revenues, related refund liabilities, accounts receivable, and provider discounts that we recognize in a reporting period. The billing and collection process is complex due to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of coverage, differing provider discount rates, and other third party payorthird-party payer issues. Determining applicable primary and secondary coverage for our customers at any point in time, together with the changes in patient coverage that occur each month, requiresrequire complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds to payors.payers. Revenues associated with government programs are also subject to estimating risk related to the amounts not paid by the primary government payorpayer that will ultimately be collectable from other government programs paying secondary coverage, the patient’s commercial health plan secondary coverage or the patient. Collections, refunds, and pay or retractions typically continue to occur for up to three years and longer after our products are provided. While we typically look to our past experience in collections with a payorpayer in estimating ultimate amounts expected to be collected on current billings, nonetheless recent trends and current changes in reimbursement practice, the overall healthcare environment, and other factors nonetheless could ultimately impact the amount of revenues recorded and the receivables ultimately collected. If our estimates of revenues, related refund liabilities, accounts receivable, or provider discounts are materially inaccurate, it could impact the timing of our revenue recognition and have a significant impact on our operating results. It could also lead to a restatement of our financial results. Tax laws and regulations require compliance efforts that can increase our cost of doing business. Changes to these laws and regulations could impact financial results. In May 2014,We are subject to a variety of tax laws and regulations in the FASB issued ASU No. 2014-09—“Revenue from Contractsjurisdictions in which we do business. Maintaining compliance with Customers” (Topic 606) whichthese laws can increase our cost of doing business and failure to comply could result in audits or the imposition of fines or penalties. Further, our future effective tax rates in any of these jurisdictions could be affected, positively or negatively, by changing tax priorities, changes in statutory rates, or changes in tax laws or the interpretation thereof. The most significant recent example of this is effective for us January 1, 2018. We finalized our analysisthe impact of the new revenue guidance and we currently believe the adoption of this guidance will not have a material impact on our consolidated financial statements and our internal controls over financial reporting.
The Tax Cuts and Jobs Act could have material effects on the Company.
TheU.S Tax Cuts and Jobs Act of 2017 (“Tax(the “Tax Act”), which was signed into lawenacted on December 22, 2017, makes significant changes to the taxation of U.S. business entities.2017. These changes include a permanent reduction tosignificantly revised 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. The Company has implemented the Tax Act and does not expect any significant changes related to the Tax Act at this time.
The impact of healthcare reform legislation and other changes in the deductibilityhealthcare industry and in healthcare spending on us is currently unknown but may harm our business. Our revenue is dependent on the healthcare industry and could be affected by changes in healthcare spending and policy. The healthcare industry is subject to changing political, regulatory, and other influences. The Patient Protection and Affordable Care Act (“PPACA”) made major changes in how healthcare is both delivered and reimbursed, and increased access to health insurance benefits to the uninsured and underinsured population of interestthe United States. The PPACA, among other things, increased the number of individuals with Medicaid and private insurance coverage, implemented reimbursement policies that tie payment to quality, facilitated the creation of accountable care organizations that may use capitation and other alternative payment methodologies, strengthened enforcement of fraud and abuse laws, and encouraged the use of information technology. Such changes in the regulatory environment may also result in changes to our payer mix that may affect our operations and net revenue. Certain provisions of the PPACA authorize voluntary demonstration projects, which include the development of bundling payments for acute, inpatient hospital services, physician services, and post-acute services for episodes of hospital care. Further, the PPACA may negatively impact payers by increasing medical costs generally, which could have an effect on corporate debt obligations, among others. Although we are evaluating the Tax Act withindustry and potentially impact our professional advisers, thebusiness and revenue as payers seek to offset these increases by reducing costs in other areas. The full impact of these changes on us cannot be determined at this time. We are also impacted by the TaxMedicare Access and CHIP Reauthorization Act, under which physicians must choose to participate in one of two payment formulas, Merit-Based Incentive Payment System (“MIPS”) or Alternative Payment Models (“APMs”). Beginning in 2019, MIPS allows eligible physicians to receive upward or downward adjustments to their Medicare Part B payments based on certain quality and cost metrics, among other measures. As an alternative, physicians can choose to participate in an Advanced APM. Advanced APMs are exempt from the MIPS requirements, and physicians who are meaningful participants in APMs will receive bonus payments from Medicare pursuant to the law. In addition, current and prior healthcare reform proposals have included the concept of creating a single payer or public option for health insurance. If enacted, these proposals could have an extensive impact on the healthcare industry, including us. We are unable predict whether such reforms may be enacted or their impact on our operations. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments and other third-party payers will pay for healthcare services, which could harm our business, is currently uncertainfinancial condition, and results of operations.
The patient protectionPatient Protection and accountability actAffordable Care Act of 2010 has had an impact on our business which may be in part beneficial and in part detrimental detrimental. In March 2010, broad federal health carehealthcare reform legislation was enacted in the United States. This legislation did not become effective immediately in total and may be modified prior to the effective date of some provisions. This legislation has had an impact on our business in a variety of ways including increased number of Medicaid recipients, increased number of individuals with commercial insurance, additional audits conducted by public health insurance plans such as Medicaid and Medicare, changes to the rules that govern employer group health insurance, and other factors that influence the acquisition and use of health insurance from private and public payors.payers. This legislation has resulted in a change in reimbursement for certain durable medical equipment. We believe the new healthcare legislation and these changes to reimbursement have caused uncertainty with prescribers, which we believe contributed to our drop in orders and revenue during 2013 and 2014 and the lack of any significant increase in 2015. Orders and revenue increased in 2016 and 2017,through 2023; however, we are currently unable to determine whether such trend will continue in future periods or whether the health carehealthcare reform legislation will have other adverse consequences to our business and results of operations. To the extent prescribers write fewer prescriptions for our products or there is an adverse change to insurance reimbursement for our products, due to the new law or otherwise, our revenue and profitability will be materially adversely affected. Effective 2013, there was a 2.3% excise tax on the first sale of medical devices, with certain exceptions. We believe that a majority of our ZMI products are not subject to this tax but currently we can make no assurance. For our products that are or become subject to this excise tax, we are uncertain of our ability to pass this tax on to third parties. Thus far this excise tax has not had a material impact on our financial results.
The uncertainty of continuing healthcare changes and regulations may placenegatively affect our business model in doubtbusiness. As the popular press has made clear, thereThere is substantialsome doubt on the continuation of the Affordable Care Act and the legislation that the current Congress will enact to replace it, if any. There is also substantial doubt whether,Because we cannot be certain about the continuation of the Affordable Care Act or any changes or replacements thereto, even if the Affordable Care Act remains the law of the land, there is also some doubt whether the presidentPresident will support it or take regulatory action to negatively impact its benefits. This significantThe amount of uncertainty creates a significant concern on our customer’scustomers’ willingness to buy products which may or may not be covered by future health carehealthcare benefits even if they are covered currently.
We are subject, directly or indirectly, to United States federal and state healthcare fraud and abuse and false claims laws and regulations. Prosecutions under such laws have increased in recent years, and we may become subject to such litigation. If we are unable to or have not fully complied with such laws, we could face substantial penalties. Our operations are subject to various state and federal fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal Stark Law, and the federal False Claims Act. These laws may impact, among other things, our sales, marketing, and education programs. The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. The Anti-Kickback Statute is broad and, despite a series of narrow safe harbors, prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment, and possible exclusion from Medicare, Medicaid, and other federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs. The federal Ethics in Patient Referrals Act of 1989, commonly known as the “Stark Law”, prohibits, subject to certain exceptions, physician referrals of Medicare and, as applicable under state law, Medicaid patients to an entity providing certain “designated health services” if the physician or an immediate family member has any financial relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral. Various states have corollary laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a healthcare provider to their patients when referring patients to that provider. Both the scope and exceptions for such laws vary from state to state. The federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. The False Claims Act defines “knowingly” to include actual knowledge, acting in deliberate ignorance of the truth or falsity of information, or acting in deliberate disregard of the truth or falsity of information. False Claims Act liability includes liability for reverse false claims for avoiding or decreasing an obligation to pay or transmit money to the government. This includes False Claims Act liability for failing to report and return overpayments within 60 days of the date on which the overpayment is “identified”. Penalties under the False Claims Act can include exclusion from the Medicare program. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Suits filed under the False Claims Act, known as qui tam actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers”, may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers of medical device, pharmaceutical, and healthcare companies to have to defend a False Claims Act action. When an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act. HIPAA, and its implementing regulations, also created additional federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payer (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items, or services relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. From time to time, the Company has been and is involved in various governmental audits, investigations, and reviews related to its operations. Reviews and investigations can lead to government actions, resulting in the assessment of damages, civil or criminal fines or penalties, or other sanctions, including restrictions or changes in the way we conduct business, loss of licensure, or exclusion from participation in Medicare, Medicaid, or other government programs. Additionally, as a result of these investigations, healthcare providers and entities may face litigation or have to agree to settlements that can include monetary penalties and onerous compliance and reporting requirements as part of a consent decree or corporate integrity agreement, or Corporate Integrity Agreement (“CIA”). If we fail to comply with applicable laws, regulations, and rules, the Company’s financial condition and results of operations could be adversely affected. Furthermore, becoming subject to these governmental investigations, audits, and reviews may result in substantial costs and divert management’s attention from the business as we cooperate with the government authorities, regardless of whether the particular investigation, audit, or review leads to the identification of underlying issues. We are unable to predict whether we could be subject to actions under any of these laws, or the impact of such actions. If we are found to be in violation of any of the laws described above or other applicable state and federal fraud and abuse laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from Medicare, Medicaid, and other government healthcare reimbursement programs, and the curtailment or restructuring of operations. Hospitals and clinicians may not buy, prescribe, or use our products in sufficient numbers, which could result in decreased revenues and profits profits. Hospitals and clinicians may not accept any of our products as effective, reliable, andor cost-effective. Factors that could prevent such institutional customerpatient acceptance include: | ● | If customersif patients conclude that the costs of these products exceed the cost savings associated with the use of these products; |
| ● | If customersif patients are financially unable to purchase these products; |
| ● | Ifif adverse patient events occur with the use of these products, generating adverse publicity; |
| ● | Ifif we lack adequate resources to provide sufficient education and training to our customers;patients; |
| ● | Ifif frequent product malfunctions occur, leading clinicians to believe that the products are unreliable; |
| ● | Uncertaintyuncertainty regarding or change in government or third party payorthird-party payer reimbursement policies for our products; and |
| ● | Ifif physicians or other health care providers believe that our products will not be reimbursed by insurers or decide to prescribe competing products. |
Because our sales are dependent on prescriptions from physicians, if any of these or other factors resultsresult in fewer prescriptions for our products being written, we will have reduced revenues and may not be able to fully fund our operations. Although we experienced an increase in orders for our ZMI products during 20162023 and 20172022 compared to prior years, we can make no assurances that demand for our products will not decline in future periods. Any new competitor could be larger than us and have greater financial and other resources than we do, and those advantages could make it difficult for us to compete with them them. Many competitors to our products may have substantially greater financial, technical, marketing, and other resources. Competition could result in our need to reduce prices, result in fewer orders, reduced gross margins, and loss of market share. Our products are regulated by the FDA.FDA in the United States. Competitors may develop products that are substantially equivalent to our FDA clearedFDA-cleared products, thereby using our products as predicate devices to more quickly obtain FDA approval for their own.own products. If overall demand for our products should decrease, it could have a material adverse effect on our operating results. Substantial competition is expected in the future in the area of stroke rehabilitation that may directly compete with our NeuroMove product. These competitors may use standard or novel signal processing techniques to detect muscular movement and generate stimulation to such muscles. Other companies may develop rehabilitation products that perform better and/or are less expensive than our products, which could have a material adverse effect on our operating results.
Failure to keep pace with the latest technological changes could result in decreased revenues revenues. The market for some of our products is characterized by rapid change and technological improvements. Failure to respond in a timely and cost-effective way to these technological developments could result in serious harm to our business and operating results. We have derived, and we expect to continue to derive, a substantial portion of our revenues from the development and sale of products in the medical device industry. As a result, our success will depend, in part, on our ability to develop and market product offerings that respond in a timely manner to the technological advances of our competitors, evolving industry standards, and changing patient preferences. There is no assurance that we will keep up with technological improvements. Our business could be adversely affected by reliance on sole suppliers. Notwithstanding our current multiple supplier approach, certain essential product components may be supplied in the future by sole, or a limited group of, suppliers. Most of our products and components are purchased through purchase orders rather than through long-term supply agreements, and large volumes of inventory may not be maintained. There may be shortages and delays in obtaining certain product components. Disruption of the supply or inventory of components could result in a significant increase in the costs of these components or could result in an inability to meet the demand for our products. In addition, if a change in the manufacturer of a key component is required, qualification of a new supplier may result in delays and additional expenses in meeting customer demand for products. These factors could adversely affect our revenues and ability to retain our experienced sales force. A third-party manufacturer’s inability to produce our goodsproducts’ components on time and to our specifications could result in lost revenue revenue. Third-party manufacturers assemble and manufacture to our specifications components of the NexWave and NeuroMove and some of our other products.products to our specifications. The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customerspatients for those items, which could result in cancellation of orders, refusal to accept deliveries, or a reduction in purchase prices, any of which could have a material adverse effect on our revenues. Because of the timing and seriousness of our business, and the medical device industry in particular, the dates on which customerspatients need and require shipments of products from us are critical. Further, because quality is a leading factor when customers,patients, doctors, health insurance providers, and distributors accept or reject goods, any decline in quality by our third-party manufacturers could be detrimental not only to a particular order, but also to our future relationship with that particular customer.patient. We could experience cost increases or disruptions in supply of raw materials or other components used in our products. Our third-party manufacturers that assemble and manufacture components for our products expect to incur significant costs related to procuring raw materials required to manufacture and assemble our product. The prices for these raw materials fluctuate depending on factors beyond our control, including market conditions and global demand for these materials and could adversely affect our business, prospects, financial condition, results of operations, and cash flows. Further, any delays or disruptions in our supply chain could harm our business. For example, COVID-19, including associated variants, could cause disruptions to and delays in our operations, including shortages and delays in the supply of certain parts, including semiconductors, materials and equipment necessary for the production of our products, and the internal designs and processes we or third-parties may adopt in an effort to remedy or mitigate impacts of such disruptions and delays could result in higher costs. In addition, our business also depends on the continued supply of battery cells for our products. We are exposed to multiple risks relating to availability and pricing of quality battery cells. These risks include: | ● | 14 | the inability or unwillingness of battery cell manufacturers to build or operate battery cell manufacturing plants to supply the numbers of battery cells (including the applicable chemistries) required to support the growth of the electric or plug-in hybrid vehicle industry as demand for such cells increases; |
| ● | disruption in the supply of battery cells due to quality issues or recalls by the battery cell manufacturers; and |
| ● | an increase in the cost or decrease in the available supply of raw materials used in battery cells, such as lithium, nickel, and cobalt. |
Furthermore, currency fluctuations, tariffs, or shortages in petroleum and other economic or political conditions may result in significant increases in freight charges and raw material costs. Substantial increases in the prices for raw materials or components would increase our operating costs and could reduce our margins. We depend upon third parties to manufacture and to supply key semiconductor chip components necessary for our products. We do not have long-term agreements with our semiconductor chip manufacturers and suppliers, and if these manufacturers or suppliers become unwilling or unable to provide an adequate supply of semiconductor chips, with respect to which there is a global shortage, we would not be able to find alternative sources in a timely manner and our business would be adversely impacted. Semiconductor chips are a vital input component to the electrical architecture of our products, controlling wide aspects of the products’ operations. Many of the key semiconductor chips we use in our products come from limited or single sources of supply, and therefore a disruption with any one manufacturer or supplier in our supply chain would have an adverse effect on our ability to effectively manufacture and timely deliver our products. We do not have any long-term supply contracts with any suppliers and purchase chips on a purchase order basis. Due to our reliance on these semiconductor chips, we are subject to the risk of shortages and long lead times in their supply. We are in the process of identifying alternative manufacturers for semiconductor chips. We have in the past experienced, and may in the future experience, semiconductor chip shortages, and the availability and cost of these components would be difficult to predict. For example, our manufacturers may experience temporary or permanent disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters, component or material shortages, cost increases, acquisitions, insolvency, changes in legal or regulatory requirements, or other similar problems. In particular, increased demand for semiconductor chips in 2020, due in part to the COVID-19 pandemic and increased demand for consumer electronics that use these chips, resulted in a severe global shortage of chips in 2021 and 2022. As a result, our ability to source semiconductor chips to be used in our products has been adversely affected. This shortage may result in increased chip delivery lead times, delays in the production of our products, and increased costs to source available semiconductor chips. To the extent this semiconductor chip shortage continues, and we are unable to mitigate the effects of this shortage, our ability to deliver sufficient quantities of our products to fulfill our preorders and to support our growth through sales to new customers would be adversely affected. In addition, we may be required to incur additional costs and expenses in managing ongoing chip shortages, including additional research and development expenses, engineering design, and development costs in the event that new suppliers must be onboarded on an expedited basis. Further, ongoing delays in production and shipment of products due to a continuing shortage of semiconductor chips may harm our reputation and discourage additional preorders and sales, and otherwise materially and adversely affect our business and operations. If we need to replace manufacturers, our expenses and cost of goods could increase, resulting in smallerlow profit margins. We compete with other companies for the production capacity of our manufacturers and import quota capacity. Some of these competitors have greater financial and other resources than we have and thus have an advantage in the competition for production and import quota capacity. If we experience a significant increase in demand, or if we need to replace an existing manufacturer, we may have to expand our third-party manufacturing capacity. We cannot assure that this additional capacity will be available when required on terms that are acceptable to us or similar to existing terms, which we have with our manufacturers, either from a production standpoint or a financial standpoint. We enter into a number of purchase order commitments specifying a time for delivery, method of payment, design and quality specifications, and other standard industry provisions, but we do not have long-term contracts with any manufacturer. None of the manufacturers we use produce our products exclusively. Should we be forced to replace one or more of our manufacturers, we may experience increased costs or an adverse operational impact due to delays in distribution and delivery of our products to our customers,patients, which could cause us to lose customerspatients or lose revenue because of late shipments.
Cyber-attacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to our competitive position.
Increased sophistication and activitiesWe are a relatively small company with a limited number of perpetrators of cyber-attacks have resulted in an increase in information security risks in recent years. Hackers develop and deploy viruses, worms, and other malicious software programs that attack products and servicesstaff. Sales fluctuations and gain access to networks and data centers. If we were to experience difficulties maintaining existing systems or implementing new systems, we could incur significant losses due to disruptions in our operations. Additionally, these systems contain valuable proprietary and confidential information andemployee turnover may contain personal data of our customers. A security breach could result in disruptions of our internal systems and business applications, harm to our competitive position from the compromise of confidential business information, or subject us to liability under laws that protect personal data. As cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. Any of these consequences would adversely affect our business.
We are a relatively small company. Consequently, compared to larger companies, sales fluctuations could have a greater impact on our revenue and margins.profitability on a quarter-to-quarter and year-to-year basis, and delays in patient orders could cause our operating results to vary significantly from quarter-to-quarter and year-to-year. In addition, as a small company we have limited staff and are heavily reliant on certain key personnel to operate our business. If a key employee were to leave the company, it could have a material impact on our business and results of operations, as we might not have sufficient depth in our staffing to fill the role that was previously being performed. A delay in filling the vacated position could put a strain on existing personnel, result in a failure to satisfy our contractual obligations, or to effectively implement our internal controls, which could materially harm our business.
If we are unable to retain the services of Mr. Sandgaard or if we are unable to successfully recruit qualified managerial and sales personnel, with experience in our business, we may not be able to continue our operations operations. Our success depends to a significant extent upon the continued service of Mr. Thomas Sandgaard, our Chief Executive Officer, and Founder, and beneficial owner of 53%approximately 50% of our outstanding stock.stock as of February 28, 2024. Loss of the services of Mr. Sandgaard could have a material adverse effect on our growth, revenues, and prospective business. There is currently no employment agreement with Mr. Sandgaard. We do not maintain key-man insurance on the life of Mr. Sandgaard. In addition, in order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully retaining and recruiting qualified managerial and sales personnel having experience in our business.personnel. Competition for qualified individuals is intense. Various factors, such as marketability of our products, our reputation, our liquidity, and sales commission structure can affect our ability to find, attract, or retain sales personnel. There can be no assurance that we will be able to find attract and retainattract qualified new employees and sales representatives and retain existing employees and sales representatives. We need to maintain insurance coverage, which could become very expensive or have limited availability availability. Our marketing and salesales of medical device products and services createscreate an inherent risk of claims for product liability. As a result, we carry product liability insurance and will continue to maintain insurance in amounts we consider adequate to protect us from claims. We cannot, however, be assured that we have resources sufficient to satisfy liability claims in excess of policy limits if required to do so. Also, if we are subject to such liability claims, there is no assurance that our insurance provider will continue to insure us at current levels or that our insurance rates will not substantially rise in the future, resulting in increased costs to us or forcing us to either pay higher premiums or reduce our coverage amounts, which would result in increased liability to claims. In addition, Although we do not manufacture the products we distribute, if one of the products distributed by us proves to be defective or is misused by a health care practitioner or patient, we may be subject to liability that could adversely affect our financial condition and results of operations. Although we do not manufacture the products that we distribute, a defect in January 2017, wethe design or manufacture of a product distributed or serviced by us, or a failure of a product distributed by us to perform for the use specified, could have obtained directora material and officer insuranceadverse effect on our reputation in the industry and subject us to claims of liability for injuries and otherwise. Misuse of the product distributed by us by a practitioner or patient that covers currentresults in injury could similarly subject us to liability. Any substantial underinsured loss could have a material and prior periods.adverse effect on our business, financial condition, results of operations, and cash flows. Furthermore, any impairment of our reputation could have a material and adverse effect on our revenues and prospects for future business.
We depend upon obtaining regulatory approvalclearance of any new products and/or manufacturing operations we develop and maintain approvalsclearances of current products; failure to obtain or maintain such regulatory approvalsclearances could result in increased costs, lost revenue, penalties, and fines. Before marketing anycertain new products, we will need to complete one or more clinical investigations of each product. There can be no assurance that the results of such clinical investigations will be favorable to us. We may not know the results of any study, favorable or unfavorable to us, until after the study has been completed. Such data must be submitted to the FDA as part of any regulatory filing seeking approvalclearance to market the product. Even if the results are favorable, the FDA may dispute the claims of safety, efficacy, or clinical utility and not allow the product to be marketed. The salesales price of the product may not be enough to recoup the amount of our investment in conducting the investigative studies, and we may expend significant funds on research and development on products that are rejected by the FDA. Some of our products are marketed based upon our interpretation of FDA regulation allowing for changes to an existing device. If our interpretations are incorrect, we could suffer consequences that could have a material adverse effect on our results of operations and cash flows and could result in fines and penalties. There can be no assurance that we will have the financial resources to complete development of any new products, or to complete the regulatory approvalclearance process, or to maintain regulatory compliance of existing products.
We may not be able to obtain clearance of a 510 (k)510(k) pre-market notification or grant of a de novo classification request or approval of a denovo or pre-market approval application with respect to any products on a timely basis, if at all. If timely FDA clearance or approval of new products is not obtained, our business could be materially adversely affected. Clearance of a 510(k) pre-market notification or DeNovode novo application may also be required before marketing certain previously marketed products, which have been modified after they have been cleared. Should the FDA so require, the filing of a new 510(k) pre-market notification for the modification of the product may be required prior to marketing any modified devices. device. To determine whether adequate compliance has been achieved, the FDA may inspect our facilities at any time. Such compliance can be difficult and costly to achieve and maintain. Our compliance status may change due to future changes in, or interpretations of, FDA regulations or other regulatory agencies. Such changes may result in the FDA withdrawing marketing clearance or requiring or requesting product recall. In addition, any changes or modifications to a device or its intended use may require us to reassess compliance with good manufacturing practices guidelines, potentially interrupting the marketing and sale of products. We may also fail to comply with complex FDA regulations due to their complexity or otherwise. Failure to comply with regulations could result in enforceable actions, including product seizures, product recalls, withdrawal of clearances or approvals, injunctions, and civil and criminal penalties, any of which could have a material adverse effect on our operating results and reputation. Our products are subject to recall even after receiving FDA or foreign clearance or approval, which would harm our reputation and business. We are subject to medical device reporting regulations that require us to report to the FDA or respective governmental authorities in other countries if our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to cause or contribute to death or serious injury if the malfunction were to recur. The FDA and similar governmental authorities in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacturing. A government mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling. Any recall would divert managerial and financial resources and could harm our reputation with customers. We cannot assure you that we will not have product recalls in the future or that such recalls would not have a material adverse effect on our business. We have not undertaken any voluntary or mandatory recalls to date. We continue to incur substantial expensesexpenses. TheThis area of medical device research is subject to rapid and significant technological changes. Developments and advances in the medical industry by either competitors or other parties can affect our business in either a positive or negative manner. Developments and changes in technology that are favorable to us may significantly advance the potential of our research, while developments and advances in research methods outside of the methods we are using may severely hinder or completely halt completely our development.
We are a small company in terms of employees and technical and research resources and we have limited liquidity.resources. We expect to incur research and development, and sales and marketing, and general and administrative expenses. These amounts may increase, and recently have in connection with our efforts to expand our sales force, before any commensurate incremental revenue from these efforts may be obtained and may adversely affect our potential profits, and we may lack the liquidity to pay for such expenditures. These factors may also hinder our ability to meet changes in the medical industry as rapidly or effectively as competitors with more resources.
We may be unable to protect our trademarks, trade secrets and other intellectual property rights that are important to our business
We consider our trademarks, trade secrets and other intellectual property an integral component of our success. We rely on trademark law and trade secret protection and confidentiality agreements with employees, customers, partners and others to protect our intellectual property. Effective trademark and trade secret protection may not be available in every country in which our products are available. We currently own no patents. We cannot be certain that we have taken adequate steps to protect our intellectual property, especially in countries where the laws may not protect our rights as fully as in the United States. In addition, if our third-party confidentiality agreements are breached there may not be an adequate remedy available to us. If our trade secrets become publicly known, we may lose competitive advantages.
Substantial costs could be incurred defending against claims of infringement intellectual property infringement. Other companies, including competitors, may obtain patents or other proprietary intellectual property rights that would limit, interfere with, or otherwise circumscribe Zynex’sour ability to make, use, or sell products. Should there be a successful claim of infringement against us, and if we could not license the alleged infringed technology at a reasonable cost, our business and operating results could be adversely affected. There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. The validity and breadth of claims covered in medical technology patents involve complex legal and factual questions for which important legal principles remain unresolved. Any litigation claims against us, independent of their validity, may result in substantial costs and the diversion of resources with no assurance of success. Intellectual property claims could cause us to: | ● | Ceasecease selling, incorporating, or using products that incorporate the challenged intellectual property:property; |
| ● | Obtainobtain a license from the holder of the infringed intellectual property right, which may not be available on reasonable terms, if at all; and |
| ● | Re-design Zynex’sre-design our products excluding the infringed intellectual property, which may not be possible. |
Our business could be adversely affected by reliance on sole suppliers
Notwithstanding our current multiple supplier approach, in the future certain essential product componentsWe may be supplied by sole, or a limited group of, suppliers. Mostunable to protect our trademarks, trade secrets, and other intellectual property rights that are important to our business.
We consider our trademarks, trade secrets, and other intellectual property an integral component of our productssuccess. We rely on trademark law and components are purchased through purchase orders rather than through long term supplytrade secret protection and confidentiality agreements with employees, customers, partners, and large volumes of inventoryothers to protect our intellectual property. Effective trademark and trade secret protection may not be maintained. There may be shortagesavailable in every country in which our products are available. We obtained utility patents on the fluid monitoring system in 2021 and delays in obtaining certain product components. Disruption of the supply or inventory of components could result in a significant increase2018 in the costsU.S. and in 2020 in Europe. We cannot be certain that we have taken adequate steps to protect our intellectual property, especially in countries where the laws may not protect our rights as fully as in an inability to meet the demand for our products.United States. In addition, if a change in the manufacturer of a key component is required, qualification of a new supplierour third-party confidentiality agreements are breached, there may result in delays and additional expenses in meeting customer demand for products. These factors could adversely affectnot be an adequate remedy available to us. If our revenues and ability to retain our experienced sales force.trade secrets become publicly known, we may lose competitive advantages.
Our products are subject to recall even after receiving FDA or foreign clearance or approval, which would harm our reputation and business
We are subject to medical device reporting regulations that require us to report to the FDA or respective governmental authorities in other countries if our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur. The FDA and similar governmental authorities in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacturing. A government mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling.
Any recall would divert managerial and financial resources and could harm our reputation with customers. We cannot assure you that we will not have product recalls in the future or that such recalls would not have a material adverse effect on our business. We have not undertaken any voluntary or involuntary recalls to date.
Our principal executive officer owns a controlling interest in our voting stock and investors will not have any voice in our management
Our President, Chief Executive Officer, and Chairman, , Thomas Sandgaard, beneficially owns approximately 53% of our outstanding common stock as of February 22, 2018. As a result, Mr. Sandgaard has the ability to control substantially all day to day operations of our company and all matters submitted to our stockholders for approval, including:
| ● | Election of our board of directors; | | ● | Removal of any of our directors; | | ● | Amendment of our certificate of incorporation or bylaws; | | ● | Approval of significant corporate transactions, such as a sale, merger or liquidation of our Company; and | | ● | Adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us. |
We are a relatively small company with a limited number of products and staff. Sales fluctuations and employee turnover may adversely affect our business
We are a relatively small company. Consequently, compared to larger companies, sales fluctuations could have a greater impact on our revenue and profitability on a quarter-to-quarter and year-to-year basis and delays in patient orders could cause our operating results to vary significantly from quarter to quarter and year-to-year. In addition, as a small company we have limited staff and are heavily reliant on certain key personnel to operate our business. If a key employee were to leave the company it could have a material impact on our business and results of operations as we might not have sufficient depth in our staffing to fill the role that was previously being performed. A delay in filling the vacated position could put a strain on existing personnel or result in a failure to satisfy our contractual obligations or to effectively implement our internal controls, and materially harm our business.
We’ve had material weaknesses in our internal controls over financial reporting in previous periods
We believe we have remediated prior material weaknesses but as a small company with limited resources, it is possible we identify material weaknesses in the future. If we do not remediate any such weaknesses in the future, in addition to any impact on our stock price, it could also impact our ability to raise capital and could affect adversely our reputation, which collaterally could affect our ability to retain sales personnel and business relationships with insurance companies paying for our products and vendors.
We may fail to protect the privacy, integrity and security of customer information information. We possess and process sensitive customer information and Protected Health Information protected by the Health Insurance Portability and Affordability Act (“HIPAA”). While we have taken reasonable and appropriate steps to protect that information, if our security procedures and controls were compromised, it could harm our business, reputation, results of operations, and financial condition and may increase the costs we incur to protect against such information security breaches, such as increased investment in technology, the costs of compliance with health carehealthcare privacy and consumer protection laws. A compromise of our privacy or security procedures could also subject us to liability under certain health carehealthcare privacy laws applicable to us. Other federal and state laws restrict the use and protect the privacy and security of personally identifiable information are, in many cases, are not preempted by HIPAA and may be subject to varying interpretations by the courts and government agencies. These varying interpretations can create complex compliance issues for us and our partners and potentially expose us to additional expense, adverse publicity and liability, any of which could adversely affect our business. There is ongoing concern from privacy advocates, regulators and others regarding data privacy and security issues, and the number of jurisdictions with data privacy and security laws has been increasing. Also, there are ongoing public policy discussions regarding whether the standards for de-identification, anonymization or pseudonymization of health information are sufficient, and the risk of re-identification sufficiently small, to adequately protect patient privacy. We expect that there will continue to be new proposed and amended laws, regulations and industry standards concerning privacy, data protection and information security in the United States, such as the California Consumer Privacy Act (“CCPA”), as amended by the California Privacy Rights Act (“CPRA”), which amendments went into effect on January 1, 2023, The CCPA creates specific obligations with respect to processing and storing personal information, and the CPRA amendments created a new state agency that is vested with authority to implement and enforce the CCPA. Additionally, a similar law went into effect in Virginia on January 1, 2023, and further US-state comprehensive privacy laws are set to go into effect throughout 2023, including laws in Colorado, Connecticut, and Utah. These laws are substantially similar in scope and contain many of the same requirements and exceptions as the CCPA, including a general exemption for clinical trial data and limited obligations for entities regulated by HIPAA. However, we cannot yet determine the full impact these laws or other such future laws, regulations and standards may have on our current or future business. Any of these laws may broaden their scope in the future, and similar laws have been proposed on both a federal level and in more than half of the states in the U.S. A number of other states have proposed new privacy laws, some of which are similar to the above discussed recently passed laws. Such proposed legislation, if enacted, may add additional complexity, variation in requirements, restrictions and potential legal risk, require additional investment of resources in compliance programs, impact strategies and the availability of previously useful data and could result in increased compliance costs and/or changes in business practices and policies. The existence of comprehensive privacy laws in different states in the country would make our compliance obligations more complex and costly and may increase the likelihood that we may be subject to enforcement actions or otherwise incur liability for noncompliance. Cyber-attacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to our competitive position. Increased sophistication and activities of perpetrators of cyber-attacks have resulted in an increase in information security risks in recent years. Hackers develop and deploy viruses, worms, and other malicious software programs that attack products and services and gain access to networks and data centers. In addition to extracting sensitive information, such attacks could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information. The prevalent use of mobile devices also increases the risk of data security incidents. If we experience difficulties maintaining existing systems or implementing new systems, we could incur significant losses due to disruptions in our operations. Additionally, these systems contain valuable proprietary and confidential information and may contain personal data of our customers. While we believe we have taken reasonable steps to protect such data, techniques used to gain unauthorized access to data and systems, disable or degrade service, or sabotage systems, are constantly evolving, and we may be unable to anticipate such techniques or implement adequate preventative measures to avoid unauthorized access or other adverse impacts to such data or our systems. In addition, some of our third-party service providers and partners also collect and/or store our sensitive information and our customers’ data on our behalf, and these service providers and partners are subject to similar threats of cyber-attacks and other malicious internet-based activities, which could also expose us to risk of loss, litigation, and potential liability. A security breach could result in disruptions of our internal systems and business applications, harm to our competitive position from the compromise of confidential business information, or subject us to liability under laws that protect personal data. Additionally, actual, potential or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. Specifically, as cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. Any of these consequences would adversely affect our revenue and margins. Additionally, although we maintain cybersecurity insurance coverage, we cannot be certain that such coverage will be adequate for data security liabilities actually incurred, will cover any indemnification claims against us relating to any incident, will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our reputation, business, prospects, results of operations and financial condition. We have identified material weaknesses in our internal controls over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We identified a material weakness in our internal controls over financial reporting as of December 31, 2023 and 2022, related to information technology general controls (“ITGCs”) that were not designed and operating effectively to ensure (i) appropriate segregation of duties was in place to perform program changes and (ii) the activities of individuals with access to modify data and make program changes were appropriately monitored. Business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. Also as of December 31, 2023, we identified a material weakness in our communications with our independent auditors as it relates to open or pending financial statement adjustments and the timing of decisions to take write-offs. Although the material weaknesses identified above did not result in any material misstatements in our consolidated financial statements for the periods presented and there were no changes to previously released financial results, our management concluded that these control weaknesses constitute a material weakness and that our internal control was not effective as of December 31, 2023. Our management is committed to take comprehensive actions to remediate the material weakness in internal control over financial reporting. We are in the process of developing and implementing remediation plans to address the material weakness described above. While we are committed to designing and implementing new controls and measures to remediate these material weaknesses, we cannot assure you that the measures will be sufficient to remediate the material weaknesses or avoid the identification of additional material weaknesses in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our consolidated financial statements that could result in a restatement of our financial statements and could cause us to fail to meet our periodic reporting obligations, any of which could diminish investor confidence in us and cause a decline in the price of our common stock. Expansion of our operations and sales internationally may subject us to additional risks, including risks associated with unexpected events events. A component of our growth strategy is to expand our operations and sales internationally. There can be no assurance that we will be able to successfully market, sell, and deliver our products in foreign markets, or that we will be able to successfully expand our international operations. Global operations could cause us to be subject to unexpected, uncontrollable and rapidly changing risks, events, and circumstances. The following factors, among others, could adversely affect our business, financial condition and results of operations: | ● | difficulties in managing foreign operations and attracting and retaining appropriate levels of senior management and staffing; |
| ● | longer cash collection cycles; |
| ● | proper compliance with local tax laws which can be complex and may result in unintended adverse tax consequences; |
| ● | difficulties in enforcing agreements through foreign legal systems; |
| ● | failure to properly comply with U.S. and foreign laws and regulations applicable to our foreign activities including, without limitation, product approval, healthcare and employment law requirements and the Foreign Corrupt Practices Act; |
| ● | difficulties in managing foreign operations and attracting and retaining appropriate levels of senior management and staffing; | | ● | longer cash collection cycles; | | ● | proper compliance with local tax laws which can be complex and may result in unintended adverse tax consequences; | | ● | difficulties in enforcing agreements through foreign legal systems; | | ● | fluctuations in exchange rates that may affect product demand and may adversely affect the profitability in U.S. dollars of the products we provide in foreign markets; |
| ● | the ability to efficiently repatriate cash to the United States and transfer cash between foreign jurisdictions; and |
| ● | changes in general economic conditions or political circumstances in countries where we operate. |
Our acquisition of other companies could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results. As part of our business strategy, we have made and may in the future acquire or make investments in other companies, solutions or technologies to, among other reasons, expand or enhance our product offerings. In the future, any significant acquisition would require the consent of our lenders. Any failure to receive such consent could delay or prohibit us from acquiring companies that we believe could enhance our business. We may not ultimately strengthen our competitive position or achieve our goals from our recent or any future acquisition, and any acquisitions we complete could be viewed negatively by users, customers, partners or investors. In addition, if we fail to successfully integrate such acquisitions, or the technologies associated with such acquisitions, into our company, the revenues and operating results of the combined company could be adversely affected. For example, in December 2021 we acquired Kestrel Labs, Inc. and we must effectively integrate the personnel, products, technologies and customers and develop and motivate new employees. In addition, we may not be able to successfully retain the customers and key personnel of such acquisitions over the longer term, which could also adversely affect our business. The integration of our recently acquired business or future-acquired business will require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired business and accurately forecast the financial impact of the acquisition, including accounting charges. We may have to pay cash, incur debt or issue equity securities to pay for any acquisition, each of which could affect our financial condition or the value of our capital stock. For example, in connection with our acquisition of Kestrel Labs, Inc., we paid an approximate value of $30.5 million, consisting of $16.1 million in cash which was financed through Bank of America N.A. and approximately $14.4 million in shares of our common stock, a portion of which was to be held in escrow. To fund any future acquisition, we may issue equity, which would result in dilution to our stockholders, or incur more debt, which would result in increased fixed obligations and could subject us to additional covenants or other restrictions that would impede our ability to manage our operations. If we are not able to integrate acquired businesses successfully, our business could be harmed. Our inability to successfully integrate our recent and future acquisitions could impede us from realizing all of the benefits of those acquisitions and could severely weaken our business operations. The integration process may disrupt our business and, if implemented ineffectively, may preclude realization of the full benefits expected by us and could harm our results of operations. In addition, the overall integration of the combining companies may result in unanticipated problems, expenses, liabilities, and competitive responses, and may cause our stock price to decline. The difficulties of integrating an acquisition include, among others: | ● | unanticipated issues in integration of information, communications, and other systems; |
| ● | unanticipated incompatibility of logistics, marketing, and administration methods; |
| ● | maintaining employee morale and retaining key employees; |
| ● | integrating the business cultures of both companies; |
| ● | preserving important strategic client relationships; |
| ● | consolidating corporate and administrative infrastructures and eliminating duplicative operations; and |
| ● | coordinating geographically separate organizations. |
In addition, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings, or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all. For example, the failure to get regulatory approval to sell certain products of an acquired business may significantly reduce the anticipated benefits of the acquisition and could harm our results of operations, even if we have put in place contingencies for the delivery of closing consideration, such as the escrowed shares initially held back in our acquisition of Kestrel Labs, Inc. Further, acquisitions may also cause us to: | ● | issue securities that would dilute our current stockholders’ ownership percentage; |
| ● | use a substantial portion of our cash resources; |
| ● | increase our interest expense, leverage, and debt service requirements if we incur additional debt to pay for an acquisition; |
| ● | assume liabilities, including environmental liabilities, for which we do not have indemnification from the former owners or have indemnification that may be subject to dispute or concerns regarding the creditworthiness of the former owners; |
| ● | record goodwill and non-amortizable intangible assets that are subject to impairment testing on a regular basis and potential impairment charges; |
| ● | experience volatility in earnings due to changes in contingent consideration related to acquisition liability estimates; |
| ● | incur amortization expenses related to certain intangible assets; |
| ● | lose existing or potential contracts as a result of conflict of interest issues; |
| ● | incur large and immediate write-offs; or |
| ● | become subject to litigation. |
Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations. We are required to prepare our financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”), which is periodically revised and/or expanded. From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASBFinancial Accounting Standards Board (“FASB”) and the SEC. It is possible that future accounting standards we are required to adopt may require additional changes to the current accounting treatment that we apply to our financial statements and may require us to make significant changes to our reporting systems. Such changes could result in a material adverse impact on our business, results of operations and financial condition. For example, effective January 1, 2018, we were required The conversion feature of our convertible senior notes, if triggered, may adversely affect our financial condition and operating results. We have outstanding a total of $60 million of convertible senior notes. See Note 8: Convertible Senior Notes to adopt ASC 606. The Company currently believesthe Consolidated Financial Statements included in “Part II, Item 8 - Financial Statements and Supplementary Data.” If the conversion feature of any changes made in adopting ASC 606of those convertible seniornotes is triggered, holders will be immaterialentitled to its financial statement butconvert the adoptionnotes at their option at any time during specified periods. If one or more holders elect to convert their notes, we may be required, or may choose, to settle the obligation through the payment of ASC 606 is complex and it is possiblecash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the adoptionoutstanding principal of ASC 606 hasthe convertiblenotes as a current rather than long-term liability, which would result in a material effect onreduction of our financial statements. See Note 1 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for details regarding ASC 606. net working capital. RISKS RELATINGRELATED TO OUR COMMON STOCK
Our common stock may be subject to the “penny stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock
Since our common stock is not listed or quoted on any stock exchange and no other exemptions may apply, trading in our common stock on the OTC Markets may be subject to the “penny stock” rules of the SEC. These rules require, among other things, that any broker engaging in a transaction in our securities provide its customers with a risk disclosure document, disclosure of market quotations, if any, disclosure of the compensation of the broker and its salespersons in the transaction, and monthly account statements showing the market values of our securities held in the customer’s accounts. The brokers must provide bid and offer quotations and compensation information before making any purchase or sale of a penny stock and also provide this information in the customer’s confirmation. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Sales of significant amounts of shares held by Mr. Sandgaard, or the prospect of these sales, could adversely affect the market price of our common stock Sales of significant amounts of shares held by Mr. Sandgaard, or the prospect of these sales, could adversely affect the market price of our common stock. As a resolution in certain issues in his divorce, in December 2015 Mr. Sandgaard transferred 250,000 shares of common stock he owned to the former Mrs. Sandgaard, which shares will become tradeable by Ms. Sandgaard after complying with the legal requirements under Rule 144 and other guidance. Mr. Sandgaard’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us,the Company, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price. Mr. Sandgaard has no control whether or when Ms. Sandgaard may choose to sell those shares or other shares of the Company’s common stock she may own.
Because we have no plans to pay dividends on our common stock, investors must look solely to stock appreciation for a return on their investment in us
We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all future earnings to fund the development and growth of our business. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that the board of directors deems relevant.
Investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their current investment. Investors seeking cash dividends should not purchase our common stock. Given the extremely small trading volume, it is unlikely that any shareholder will be able to achieve a significant profit even if the stock price rises (of which there can be no assurance).
Our statues as a ‘controlled company’ could make our class A common stock less attractive to some investors or otherwise harm our stock price.
Although our common stock is currently quoted on the OTCQB, because we qualify as a "controlled company" under the corporate governance rules for listed companies, we would not be required to have a majority of our board of directors be independent if we were a listed company, nor would we be required to have a compensation committee or an independent nominating function. Accordingly, should the interests of our controlling stockholder differ from those of other stockholders, the otherexisting stockholders may not have the same protections afforded to stockholders of companies that are subject to all corporate governance rules. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.
Our existing shareholders have experienced dilution as a result of shares issued to the broker-dealer involved in our recent placement of debt and will experience further dilution if we elect to raise equity capital to meet our liquidity needs
Due to our past liquidity issues, we have had to raisePreviously, we’ve raised capital in the form of debt and/or equity to meet our working capital needs. We may also be requiredchoose to issue equity (or debt)or debt securities in the future to meet our liquidity or other needs which would result in additional dilution to our existing stockholders. Although we will attempt to minimize the dilutive impact of any future capital-raising activities, we cannot offer any assurance that we will be able to do so. If we raise additional working capital, weWe may have to issue additional shares of our common stock at prices at a discount from the then-current market price of our common stock. If we raise additional working capital, existing stockholders may experience dilution.
We paid a dividend on our common stock, and cash used to pay dividends will not be available for other corporate purposes In 2018, our Board of Directors declared a dividend of $0.07 per share, which was paid in January 2019. In 2021, our Board of Directors declared a dividend of $0.10 per share, which was paid in January 2022. The decision to pay dividends in the future will depend on general business conditions, the impact of such payment on our financial condition, and other factors our Board of Directors may consider. If we elect to pay future dividends, this could reduce our cash reserves to levels that may be inadequate to fund expansions to our business plan or unanticipated contingent liabilities. Our stock price could become more volatile and your investment could lose value. All of the factors discussed in this section could affect our stock price. A significant drop in our stock price could also expose us to the risk of securities class actions lawsuits, which could result in substantial costs and divert management’s attention and resources, which could adversely affect our business. Conversion of our convertible senior notes into common stock may dilute the ownership interests of existing stockholders or may otherwise depress the price of our common stock. If it were to occur, the conversion of convertible senior notes would dilute the ownership interests of existing stockholders to the extent we deliver shares of common stock upon conversion. Any sales in the public market of such shares could adversely affect prevailing market prices of our common stock. In addition, the existence of the convertible senior notes and the anticipated conversion of the notes into shares of our common stock could depress the price of our common stock. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 1C. CYBERSECURITY Risk Management and Strategy We recognize the critical importance of developing, implementing, and maintaining robust cybersecurity measures to safeguard our information systems and protect the confidentiality, integrity, and availability of our data. Managing Material Risks & Integrated Overall Risk Management We have strategically integrated cybersecurity risk management into our broader risk management framework to promote a company-wide culture of cybersecurity risk management. This integration ensures that cybersecurity considerations are an integral part of our decision-making processes at every level. Our management team works closely with our IT department to continuously evaluate and address cybersecurity risks in alignment with our business objectives and operational needs. Oversee Third-party Risk Because we are aware of the risks associated with third-party service providers, we have implemented stringent processes to oversee and manage these risks. We conduct thorough security assessments of all third-party providers before engagement and maintain ongoing monitoring to ensure compliance with our cybersecurity standards. The monitoring includes annual assessments of the SOC reports of our providers and implementing complementary controls. This approach is designed to mitigate risks related to data breaches or other security incidents originating from third-parties. Risks from Cybersecurity Threats We have not encountered cybersecurity challenges that have materially impaired our operations or financial standing. ITEM 2. PROPERTIES During February 2023, the Company entered into a lease agreement for approximately 41,427 square feet of office space for the operations of ZMS in Englewood, Colorado. The lease commenced on July 1, 2023 and runs through December 31, 2028. At the expiration of the lease term the Company has the option to renew the lease for one additional five-year period. The Company is entitled to rent abatements for the first six months of the lease and tenant improvement allowances. In October 2017,April 2021, we signed a leasesublease for a newour corporate headquarters in Englewood, Colorado beginning in January 2018.May 2021 for up to approximately 110,754 square feet. This lease runs through April 2028. We entered into a lease agreement for a warehouse and production facility with approximately 50,488 square feet in September 2020. The lease is for approximately 41,715 square feet and continues through June 30, 20232026 with an option for a two yearfive-year extension through June 2025. Our prior headquarters2031. During March 2022, we entered into a lease contained a termination clause upon 30 days’ notice by either party which we executed during December 2017. We alsoagreement for approximately 4,162 square feet of office space for the operations of ZMS in Boulder, Colorado. The lease a small office/warehouse in Denmark. began on April 1, 2022 and will run through April 1, 2025. We believe that these leased properties are sufficient to support our current requirements until the leases expire.and that we will be able to locate additional facilities as needed. See Note 1112 to the Consolidated Financial Statements for additional information on these leases. ITEM 3. LEGAL PROCEEDINGS We are not a party to any material pending legal proceedings. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ITEM 4A. EXECUIVE OFFICERS OF THE REGISTRANT Set forth below is certain information concerning the Company’s executive officers. | 21 | | | | Name | | Age | | Title and Business Experience | Thomas Sandgaard | | [65] | | President and Chief Executive Officer. Mr. Sandgaard founded the Company in 1996 after a successful European-based career in the semiconductor, telecommunications and medical equipment industries with ITT, Siemens and Philips Telecom. Mr. Sandgaard has been our President, CEO and Chairman since 1996. Mr. Sandgaard held middle and senior management positions in the areas of international sales and distribution, technology transfers, mergers and acquisitions and marketing. Mr. Sandgaard holds a degree in electronics engineering from the University of Southern Denmark and an MBA from Copenhagen Business School. Mr. Sandgaard currently does not hold, and has not held in the past five years, directorships with any company with a class of securities registered pursuant to section 12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940 | | | | | | Daniel Moorhead | | [51] | | Chief Financial Officer. Mr. Moorehead joined the Company in June 2017 as the Chief Financial Officer and is responsible for all finance and accounting functions. Prior to joining Zynex, Mr. Moorhead was Chief Financial Officer of Evolving Systems, Inc. (Nasdaq: EVOL) from January 2016 until May 2017, after having served as Vice President of Finance & Administration from December 2011 through December 2015 and in other financial management roles from 2002-2005 and 2008-2011. Mr. Moorhead is a CPA and holds a B.B.A. in Accounting from the University of Northern Colorado. | | | | | | Anna Lucsok | | [38] | | Chief Operating Officer. Ms. Lucsok joined the company in 2018 and previously served as Vice President of Reimbursement and Sales Operations with Zynex Medical. In this position she was responsible for leading and expanding Zynex’s order, reimbursement, patient experience, and inside sales support operations. Ms. Lucsok brings more than nine years of healthcare operations experience as well as critical knowledge of revenue cycle management and medical care collections. She’s previously held key positions with companies such as University of Colorado Hospital, the US Air Force and Schryver Medical. Ms. Lucsok holds certification in medical billing as well as completed her degree in Healthcare Administration and Management from Colorado State University. |
PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES OurOn February 12, 2019, our common stock is currentlybegan trading on The Nasdaq Capital Market under the symbol “ZYXI”. Prior to uplisting to the Nasdaq Capital Market, the Company’s common stock was quoted on the OTCQB (managed by OTC Markets, Inc) Bulletin Board under the symbol “ZYXI”.
The following table sets forth the range of high and low bid quotations for our common stock for each quarter of the last two fiscal years, as reported on the OTCQB. The quotations represent inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions.
| | | For the Years Ended December 31, | | | | | 2017 | | | 2016 | | | | | High | | | Low | | | High | | | Low | | | First Quarter | | $ | 0.35 | | | $ | 0.30 | | | $ | 0.45 | | | $ | 0.25 | | | Second Quarter | | $ | 0.61 | | | $ | 0.31 | | | $ | 0.36 | | | $ | 0.20 | | | Third Quarter | | $ | 1.89 | | | $ | 0.61 | | | $ | 0.31 | | | $ | 0.15 | | | Fourth Quarter | | $ | 3.18 | | | $ | 1.80 | | | $ | 0.36 | | | $ | 0.10 | |
“ZYXI.” As of February 22, 2018,28, 2024, there were 32,457,63632,170,182 shares of common stock outstanding and approximately 269188 record holders of our common stock. Recent Sales of Unregistered Securities None. Purchases of Equity Securities by the Issuer and Affiliated Purchasers BeginningOn September 11, 2023, the Company announced that its board of directors had approved a repurchase program of up to $10.0 million of the Company’s common stock (the “September 2023 Repurchase Program”) beginning on December 6, 2017,September 13, 2023, and continuing through December 5, 2018, wethe earlier of September 12, 2024, or when all $10.0 million worth of shares have been repurchased.
On November 1, 2023, the ability through our stock purchaseCompany announced that its board of directors had approved a repurchase program of up to re-purchase our$20.0 million of the Company’s common stock at prevailing market prices either(the “November 2023 Repurchase Program”) beginning on November 1, 2023, and continuing through the earlier of October 31, 2024, or when all $20.0 million worth of shares have been repurchased. Under the Company’s repurchase programs, the Company may repurchase its common stock from time to time in the open market or through privatelyand negotiated transactions uptransactions. Repurchases will be made subject to $2.0 million.market conditions, available liquidity, cash flow, applicable legal requirements, and other factors. The sizespecific prices, numbers of shares, and timing of such purchases, ifpurchase transactions will be determined by the Company from time to time. The repurchase programs do not obligate the Company to acquire any was based on marketparticular amount of common stock and business conditions as well as other factors. Wemay be suspended or discontinued at any time. The repurchase programs are not obligatedintended to purchase any shares.comply with Rule 10b-18 promulgated under the Securities Exchange Act of 1934. From the inceptionThe following table sets forth a summary of the plan through December 31, 2017, we purchased 86,837 sharesCompany’s purchases of our common stock for $0.2during the fourth quarter of 2023 pursuant to the Company’s authorized share repurchase programs:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Total Number of | | In Thousands | | | | | | | | Shares | | Maximum Value | | | | | | | | Purchased as | | of Shares That | | | Total | | Average | | Part of a | | May Yet Be | | | Number of | | Price | | Publicly | | Purchased | | | Shares | | Paid Per | | Announced | | Under the | Period | | Purchased | | Share | | Plan | | Plan | October 1 - October 31, 2023 | | | | | | | | | | Share repurchase program (1) | | 536,715 | | $ | 8.23 | | 1,204,239 | | — | | | | | | | | | | | November 1 - November 30, 2023 | | | | | | | | | | Share repurchase program (2) | | 524,200 | | $ | 9.20 | | 524,200 | | 15,176 | | | | | | | | | | | December 1 - December 31, 2023 | | | | | | | | | | Share repurchase program (2) | | 488,000 | | $ | 9.75 | | 1,012,200 | | 10,417 | Quarter Total | | | | | | | | | | | | | | | | | | | | Share repurchase program (1) | | 536,715 | | $ | 8.23 | | 1,204,239 | | — | Share repurchase program (2) | | 1,012,200 | | $ | 9.47 | | 1,012,200 | | 10,417 |
(1) Shares were purchased through the Company’s publicly announced September 2023 Repurchase program. The program was fully utilized during the Company's fourth quarter. (2) Shares were purchased through the Company’s publicly announced November 2023 Repurchase program dated November 1, 2023. The program expires on October 31, 2024, or reaching $20.0 million or an average price of $2.86repurchases. Dividends Our Board of Directors declared a special cash dividend of $0.10 per share. We have nevershare and a 10% stock dividend during the fourth quarter of 2021, which was paid any cash dividends on our capital stockout and do not anticipate paying any cash dividendsissued in the foreseeable future. We intendJanuary 2022. There can be no guarantee that we will continue to retain future earnings to fund ongoing operations and future capital requirements of our business.pay dividends. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board deems relevant.
Recent Sales of Unregistered Securities
During the period covered by this annual report on Form 10-K, there were no sales by us of unregistered securities except as noted below and as described in Note 10 to the Audited Financial Statements.
The following sets forth the information required by Item 701 of Regulation S-K:
| 1. | On February 28, 2017, the Company conducted a closing under the Offering ( as defined below under Note 10 to the Audited Financial Statements) and issued subordinated promissory notes totaling $1,035,000. Newbridge Securities Corporation (“Newbridge”) was compensated in connection with sales made in the Offering consisting of (i) a cash amount equaling 10% commissions and a 3% non-accountable expense allowance, (ii) 776,250 shares of our Common Stock and (iii) a due diligence fee of $15,000. |
| 2. | Newbridge, a FINRA member and SEC-registered broker-dealer, was the underwriter for the offering and compensated as set forth above. |
| 3. | The Company received $1,035,000. |
| 4. | The Offering was made to accredited investors only pursuant to SEC Rule 506(b) and Sections 4(a)(2) and 4(a)(5) of the Securities Act of 1933. |
| 5. | The subordinated promissory notes are not convertible. |
| 6. | The proceeds of the Offering were used to pay the commissions and expenses of Newbridge, a due diligence fee of $15,000, and our Lender $342,000 as repayment of principal and interest on the outstanding obligations. The Company is using the balance of the proceeds for working capital. |
ITEM 6. SELECTED FINANCIAL DATA [RESERVED] Not requiredrequired. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This annual report containsThe information and financial data discussed below is derived from our consolidated financial statements that are forward-looking, such asfor the years ended December 31, 2023, and 2022. The consolidated financial statements relating to plans for future organic growthof the Company were prepared 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 resultspresented in accordance with generally accepted accounting principles in the United States. The information and financial data discussed below is only a summary and was prepared to provide a historical and narrative discussion of our financial condition and results of operations through the eyes of management and should be read in conjunction with the historical financial statements and related notes of the Company contained elsewhere in this Report. The consolidated financial statements contained elsewhere in this Report fully represent the Company’s financial condition and operations; however, they are not indicative of the Company’s future and, accordingly, such results may differ from those expressed in anyperformance. See “Cautionary Statement Regarding Forward Looking Statements” above for a discussion of forward-looking statements made by or on behalfand the significance of such statements in the Company. These risks include the Company’s possible need for additional capital in order to grow our business, our ability to engage effective sales representatives, the need to obtain U.S. Food and Drug Administration (“FDA”) clearance and Certificate European (“CE”) markingcontext 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 rented 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 included in “Item 1A-Risk Factors.”.
this Annual Report. OVERVIEW We operate in one primary business segment, Electrotherapyelectrotherapy and Pain Management Products.pain management products. As of December 31, 2017,2023, the Company’s only active subsidiary is Zynex Medical, Inc. (“subsidiaries are ZMI,” a wholly-owned Colorado corporation)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 years ended December 31, 2017U.S. electrotherapy and 2016 from international salespain management operations, and marketing. Zynex Monitoring Solutions, Inc. (“ZMS. ZMS,” a wholly-owned Colorado corporation) iscorporation, has developed a fluid monitoring system, which has received two utility patents and FDA approval in the U.S. ZMS also acquired Kestrel during 2021, which had two pulse-oximeter products they are developing a blood volume monitoring device, but it is not yet developed or ready for market and as a result,numerous patents. However, 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 compound pharmacy operated as a division of ZMI dba as Pharmazy through January 2016. The following information should be read in conjunction with our Consolidated Financial Statements and related notes contained in this Annual Report. HIGHLIGHTS During the year ended December 31, 2023, the Company achieved the following: | ● | 23Achieved a 43% increase in order growth, 17% growth in revenue, and a 29% increase in operating cash flows compared to the prior year; |
| ● | Recorded net income of $9.7 million and our 8th consecutive profitable year; |
| ● | Achieved higher sales representative productivity with increase revenue per sales representative; |
| ● | Due to strong results and related cash flow, we repurchased approximately $37.9 million worth of the Company’s common stock; |
| ● | Ranked 11th in Forbes list of “Americas Best Small Companies 2023”; |
| ● | Ranked 23rd in the Top 100 Healthcare Technology Companies of 2023 according to The Healthcare Technology Report; |
| ● | Included in the Deloitte Technology Fast 500 Fastest Growing Companies for a 5th consecutive year; |
| ● | Completed multiple IRB-approved clinical studies including the apheresis blood donation study with Vitalant Research Institute, detection of fluid changes in subjects during a dialysis procedure at DaVita, study at Yale University where subjects underwent simulated hemorrhage using a lower body negative pressure chamber and a non-cardiac surgery perioperative observational study to determine the impact of complex perioperative events on the parameters and Relative Index (RI) measured by the CM-1600 at Cleveland Clinic; and |
| ● | Completed a hypoxemia study at the University of California, San Francisco and ongoing enrollments at Duke University for NiCO as well as Q-Submissions and meetings with the FDA. |
Inflation Reduction Act LIQUIDITY
During 2013-2015,On August 16, 2022, President Biden signed the Company suffered operating lossesInflation Reduction Act of 2022, or IRA, into law, which caused a lackamong other things, (i) directs the U.S. Department of liquidityHealth and Human Services, or HHS, to negotiate the price of certain high-expenditure, single-source drugs and biologics covered under Medicare, and subjects drug manufacturers to civil monetary penalties and a substantial working capital deficit. This raised substantial doubt about the Company’s ability to continue aspotential excise tax for offering a going concern.
During 2016, the Company generated net income during Q3 and Q4 and combined with the profitability in 2017, the Company has recorded six consecutive profitable quarters, paid off its line of credit with Triumph Healthcare Finance, a division of TBK Bank, SSB, formerly known as Triumph Community Bank, (“Triumph”) (Note 9) and generated cash reserves and positive working capital.
As a result, in accordance with Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements – Going Concern, as of December 31, 2017, management evaluated whether there are conditions and eventsprice that raise doubt about the entity’s ability to continue as a going concern and concluded there is not equal to or less than the negotiated “maximum fair price” under the law; (ii) imposes rebates under Medicare Part B and Medicare Part D to penalize drug price increases that outpace inflation; and (iii) redesigns the Medicare Part D program, increasing manufacturer rebates within the catastrophic coverage phase. The IRA permits HHS to implement many of these provisions through guidance, as opposed to regulation, for the initial years. These provisions began to take effect progressively beginning in fiscal year 2023, although they have been subject to legal challenges. It is currently unclear how the IRA will be effectuated but is likely to have a significant doubt.impact on the pharmaceutical industry.
The IRA also includes various tax provisions, including an excise tax on stock repurchases, expanded tax credits for clean energy incentives, and a corporate alternative minimum tax that generally applies to U.S. corporations with average adjusted financial statement income over a three-year period in excess of $1 billion. The Company is currently abledoes not expect these tax provisions to meetmaterially impact its obligations as they become due within one year. Management’s evaluation is based only on relevant conditions and events that are known and reasonably knowable as of the date of these financial statements. RECENT DEVELOPMENTS
SUMMARY Net revenue increased 76%17% in 20172023 to $23.4$184.3 million from $13.3$158.2 million in 2016. The increase in net revenue resulted in net2022. Net income of $7.4was $9.7 million and $17.0 million for the years ended December 31, 2023 and 2022, respectively. Cash flows from operating activities increased 29%, or $4.0 million, to $17.8 million for the year ended December 31, 2017 from $69,000 in 2016. We generated2023. Increased cash flows from operating activitiesoperations along with our current cash position allowed us to repurchase $37.9 million of $8.3common stock and maintain working capital of $69.3 million duringfor the year ended December 31, 2017. Increased profitability and the related cash flows allowed us to pay off our credit facility with Triumph on June 30, 2017 and produced working capital at December 31, 20172023.
Table of $4.4 million compared to a ($4.3 million) deficit as of December 31, 2016.Contents During the first quarter of 2017, the Company raised approximately $1.0 million of gross proceeds in a private placement completed through Newbridge Securities Corporation. Those funds were used to increase available inventory through the production of devices and acquisition of supplies and a portion was paid to Triumph.
RESULTS OF OPERATIONS The following table presents our consolidated statements of operationsincome in comparative format (in thousands). | | | For the Years Ended December 31, | | | | | | | | 2017 | | | 2016 | | | Change | | | NET REVENUE | | | | | | | | | | | | | | Product devices | | $ | 8,755 | | | $ | 9,032 | | | $ | (277 | ) | | Product supplies | | | 14,677 | | | | 4,281 | | | | 10,396 | | | Total revenue | | | 23,432 | | | | 13,313 | | | | 10,119 | | | | | | | | | | | | | | | | | COSTS OF REVENUE AND OPERATING EXPENSES | | | | | | | | | | | | | | Costs of revenue - product & supply | | | 4,819 | | | | 3,517 | | | | 1,302 | | | Selling, general and administrative expense | | | 9,669 | | | | 9,156 | | | | 513 | | | Total costs of revenue and operating expenses | | | 14,488 | | | | 12,673 | | | | 1,815 | | | | | | | | | | | | | | | | | Income from operations | | | 8,944 | | | | 640 | | | | 8,304 | | | | | | | | | | | | | | | | | Other expense | | | | | | | | | | | | | | Other expense | | | - | | | | (204 | ) | | | 204 | | | Interest expense | | | (1,450 | ) | | | (352 | ) | | | (1,098 | ) | | Other expense | | | (1,450 | ) | | | (556 | ) | | | (894 | ) | | | | | | | | | | | | | | | | Income from operations before income taxes | | | 7,494 | | | | 84 | | | | 7,410 | | | Income tax expense | | | 129 | | | | 15 | | | | 114 | | | Net Income | | | 7,365 | | | | 69 | | | | 7,296 | | | Plus: Net income (loss) - noncontrolling interest | | | - | | | | - | | | | - | | | Net income - attributable to Zynex, Inc. | | $ | 7,365 | | | $ | 69 | | | $ | 7,296 | |
| | | | | | | | | | | | For the Years Ended | | | | | | December 31, | | $ | | | 2023 | | 2022 | | change | NET REVENUE | | | | | | | | | | Devices | | $ | 58,822 | | $ | 43,497 | | $ | 15,325 | Supplies | | | 125,500 | | | 114,670 | | | 10,830 | Total net revenue | | | 184,322 | | | 158,167 | | | 26,155 | | | | | | | | | | | COSTS OF REVENUE AND OPERATING EXPENSES | | | | | | | | | | Costs of revenue – devices and supplies | | | 38,366 | | | 32,005 | | | 6,361 | Sales and marketing | | | 86,659 | | | 67,116 | | | 19,543 | General and administrative | | | 48,517 | | | 36,108 | | | 12,409 | Total costs of revenue and operating expenses | | | 173,542 | | | 135,229 | | | 38,313 | | | | | | | | | | | Income from operations | | | 10,780 | | | 22,938 | | | (12,158) | | | | | | | | | | | Other Income (expense) | | | | | | | | | | Gain on sale of fixed assets | | | 39 | | | — | | | 39 | Loss on change in fair value of contingent consideration | | | 2,854 | | | (300) | | | 3,154 | Interest expense | | | (1,094) | | | (440) | | | (654) | Other income/(expense), net | | | 1,799 | | | (740) | | | 2,539 | | | | | | | | | | | Income from operations before income taxes | | | 12,579 | | | 22,198 | | | (9,619) | Income tax expense | | | 2,847 | | | 5,150 | | | (2,303) | Net income | | $ | 9,732 | | $ | 17,048 | | $ | (7,316) | | | | | | | | | | | Net income per share: | | | | | | | | | | Basic | | $ | 0.27 | | $ | 0.44 | | $ | (0.17) | Diluted | | $ | 0.27 | | $ | 0.44 | | $ | (0.17) | | | | | | | | | | | Weighted average basic shares outstanding | | | 35,555 | | | 38,467 | | | (2,912) | Weighted average diluted shares outstanding | | | 36,142 | | | 39,127 | | | (2,985) |
The following table presents our consolidated statements of operationsincome reflected as a percentage of total revenue.revenue: | | | For the Years Ended December 31, | | | | | 2017 | | | 2016 | | | NET REVENUE | | | | | | | | | | Product devices | | | 37 | % | | | 68 | % | | Product supplies | | | 63 | % | | | 32 | % | | Total revenue | | | 100 | % | | | 100 | % | | | | | | | | | | | | COSTS OF REVENUE AND OPERATING EXPENSES | | | | | | | | | | Costs of revenue - product & supply | | | 21 | % | | | 26 | % | | Selling, general and administrative expense | | | 41 | % | | | 69 | % | | Total costs of revenue and operating expenses | | | 62 | % | | | 95 | % | | | | | | | | | | | | Income from operations | | | 38 | % | | | 5 | % | | | | | | | | | | | | Other expense | | | | | | | | | | Other expense | | | - | % | | | (2 | )% | | Interest expense | | | (6 | )% | | | (3 | )% | | Other expense | | | (6 | )% | | | (4 | )% | | | | | | | | | | | | Income (loss) from operations before income taxes | | | 32 | % | | | 1 | % | | Income tax expense | | | 1 | % | | | 0 | % | | Net Income (loss) | | | 31 | % | | | 1 | % | | Plus: Net loss - noncontrolling interest | | | - | % | | | - | % | | Net income (loss) - attributable to Zynex, Inc. | | | 31 | % | | | 1 | % |
| | | | | | | | For the Years Ended December 31, | | | | 2023 | | 2022 | | NET REVENUE | | | | | | Devices | | 32 | % | 28 | % | Supplies | | 68 | % | 72 | % | Total net revenue | | 100 | % | 100 | % | | | | | | | COSTS OF REVENUE AND OPERATING EXPENSES | | | | | | Costs of revenue – devices and supplies | | 21 | % | 20 | % | Sales and marketing | | 47 | % | 42 | % | General and administrative | | 26 | % | 23 | % | Total costs of revenue and operating expenses | | 94 | % | 85 | % | | | | | | | Income from operations | | 6 | % | 15 | % | | | | | | | Other income/(expense) | | | | | | Gain on sale of fixed assets | | — | % | — | % | Loss on change in fair value of contingent consideration | | 2 | % | — | % | Interest expense | | (1) | % | — | % | Other income/(expense), net | | 1 | % | — | % | | | | | | | Income from operations before income taxes | | 7 | % | 14 | % | Income tax expense | | 2 | % | 3 | % | Net income | | 5 | % | 11 | % | | | | | | | Net income per share: | | | | | | Basic | | 0.27 | | 0.44 | | Diluted | | 0.27 | | 0.44 | | | | | | | | Weighted average basic shares outstanding | | 35,555 | | 38,467 | | Weighted average diluted shares outstanding | | 36,142 | | 39,127 | |
Net Revenue Net revenues are comprised of product device and product supply sales, reducedconstrained by estimated Third-party Payorsthird-party payer reimbursement deductions and an allowance for uncollectible amounts, if needed.deductions. 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 Payorthird-party payer insurance claims and other customer collection history. Inherent in these estimates is the risk that they will have to be revised as additional information becomes available and constraints are released. If initial estimates are updated these changes are accounted for as increases or decreases in the transaction price. Assuming the underlying performance obligation to which the change in price relates has already been satisfied, those changes in transaction price are immediately recognized as increases or decreases in revenue (not credit losses (bad debt expense)) in the period in which the estimate changes. Product device revenue is primarily comprised of sales and rentals of our transcutaneous electrical nerve stimulation (“TENS”)electrotherapy products and also includes complementary rehabilitation products such as our cervical traction, lumbar support, bracing, and hot/cold therapy products. Supply Supplies revenue includesis primarily comprised of sales of our 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 productsrelated to both devices and supplies is reported net, after adjustments for estimated insurance companythird-party payer reimbursement deductions and estimated allowance for uncollectible accounts. The deductions are known throughout the health carehealthcare industry as “billing adjustments”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 frequentlyoccasionally 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 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 December 31, 2017, 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 $10.1$26.2 million or 76%17% to $23.4$184.3 million for the year ended December 31, 2017,2023, from $13.3$158.2 million for the year ended December 31, 2016.2022. The growth in net revenue is primarily related to the 43% growth in device orders which led to an increased customer base whichand drove higher sales of consumable supplies and improvements in our billing and collection procedures.supplies. During the fourth quarter of 2023, the Company placed an allowance of $6.2 million on receivables which were determined to be uncollectible. The allowance was recorded to net revenue during the period. Product Device Revenue
Product deviceDevice revenue is related to the purchase or lease of our electrotherapy products as well as complementary products including cervical traction, lumbar support, knee braces and hot/cold therapy products. Product deviceDevice revenue decreased $0.2increased $15.3 million or 3%35% to $8.8$58.8 million for the year ended December 31, 2017,2023, from $9.0$43.5 million for the year ended December 31, 2016.2022. The decreaseincrease in product device revenue is primarily related to fewer orders in 2017, partially offset by improvementsthe growth in our billingdevice and collection procedures.complementary product orders of 43% from 2022 to 2023 as a result of increased sales representative productivity.
Product Supplies Revenue
Product suppliesSupplies revenue is related to the sale of supplies, typically electrodes and batteries, for our products. Product suppliesSupplies revenue increased $10.4$10.8 million or 243%9% to $14.7$125.5 million for the year ended December 31, 2017,2023, from $4.3$114.7 million for the year ended December 31, 2016.2022. The increase in product supplies revenue is primarily related to an increasedgrowth in our customer base from increasedhigher device sales in 20162023 and improvements in our billing and collection procedures.
prior years. Operating Expenses CostCosts of Revenue –Product–Devices and SupplySupplies
CostCosts of Revenue –productrevenue – devices and supplysupplies consist primarily of productdevice and supplysupplies costs, operations labor and overhead, shipping and depreciation. CostCosts of revenue increased $6.4 million or 20% to $38.4 million for the year ended December 31, 2017, increased 37% to $4.82023, from $32.0 million from $3.5 million, respectively.for the year ended December 31, 2022. The increase in costcosts of revenue is primarily duedirectly related to the increase in product supplydevice and supplies orders. As a percentage of revenue, cost of revenue –product– devices and supply decreased tosupplies remained flat at 21% for the years ended December 31, 2023 and 2022, respectively.
Sales and Marketing Expense Sales and marketing expense primarily consists of employee-related costs, including sales commissions and other direct costs associated with these personnel including travel and marketing expenses. Sales and marketing expense for the year ended December 31, 20172023 increased 29% to $86.7 million from 26%$67.1 million for the year ended December 31, 2016.2022. The decreaseincrease in sales and marketing expense is primarily due to an increased head count in our direct sales force and sales operations group, which includes our patient experience team, as well as increased compensation related to higher-than-normal inflation in the U.S. Increased orders also resulted in higher sales commissions as well as travel expenses. As a percentage of revenue, sales and marketing expense increased to 47% from 42% during the year ended December 31, 2023 compared the same period in 2022. The increase as a percentage of revenue is primarily due to the aforementioned increase in expenses, partially offset by increased revenue during the period.year ended December 31, 2023. General and Administrative ExpensesExpense Selling, generalGeneral and administrative expensesexpense primarily consistconsists of employee related costs, including commissions and other direct costs associated with these personnel including facilities and travel expenses andexpense, professional fees and depreciation and amortization. Selling, generalGeneral and administrative expense for the year ended December 31, 20172023 increased 6%34% to $9.7$48.5 million from $9.2$36.1 million for the year ended December 31, 2016.2022. The increase in selling, general and administrative expense is primarily due to incentive compensation and stock compensation expense related to warrants issued. the following:
| ● | an increase of $5.7 million in compensation and benefits expense driven by headcount growth in our ZMI reimbursement team, which is directly related to our 43% order growth during the period; |
| ● | an increase of $1.5 million in compensation and benefits expense driven by headcount growth and inflationary salary increases for ZMS; and |
| ● | an increase of $5.2 million in other expenses, including professional fees of $2.3 million, and other general and administrative costs of $2.9 million associated primarily with growth of the Company and order volume. |
As a percentage of revenue, selling, general and administrative expense decreasedincreased to 42%26% for the year ended December 31, 20172023 from 69%23% for the year ended December 31, 2016.2022. The decreaseincrease as a percentage of revenue is primarily due to the aforementioned increase in expenses, partially offset by increased revenue during the period which more than offsetyear ended December 31, 2023. The Company expects that general and administrative expenses will continue to increase through 2024 as the aforementioned slight increase in expenses. Company continues to expand its corporate headcount to accommodate continued order growth and continued research and development activities at ZMS. Other Income (Expense) Other income was $1.8 million for the year ended December 31, 2023, of which $2.9 million related to a gain on the change in fair value of contingent consideration. Other income was offset by $1.1 million in interest expense related to our Senior Convertible Notes, net of interest earned. Other expense is composed primarilywas $0.7 million for the year ended December 31, 2022, of which $0.4 million was related to interest on notes payable, and a $0.3 million loss on the change in fair value of contingent consideration. Income Tax Expense We recorded income tax expense of $2.8 million and debt issuance costs. For$5.2 million for the years ended December 31, 20172023 and 2016, other expense increased to $1.5 million from $0.6 million,2022, respectively. The increase duringeffective income tax rate for the period is related to amortization of debt issuance costsyears ended December 31, 2023 and debt discount related the private placement completed in during the first quarter of 2017 plus the increase in value of the common shares related to the private placement from the inception of the note and the date the shares were issued to the noteholders which is recorded as additional interest expense of approximately $0.7 million. 2022 was 23% for both periods. FINANCIAL CONDITION As of December 31, 2017,2023, we had working capital of $4.4$69.3 million, compared to a deficit$48.5 million as of December 31, 20162022. The principal source of $4.3 million.working capital was $44.6 million in cash and cash equivalents and $26.8 million in accounts receivable. The increase in working capital is primarily due todriven from the offering of Convertible Senior Notes and the profitability during 2017.the year ended December 31, 2023. This increase was offset by the purchase of $37.9 million in treasury stock in 2023. We generated $8.3$17.8 million and $13.7 million in positive operating cash flows during 2017the years ended December 31, 2023 and expect to generate positive cash flows from operations going forward. 2022, respectively. LIQUIDITY AND CAPITAL RESOURCES We have historically financed operations through cash flows from operations, debt and equity transactions. As of December 31, 2017,2023, our principal source of liquidity was $5.6$44.6 million in cash and $2.2cash equivalents, $26.8 million in accounts receivables, netand our working capital balance was $69.3 million. In May 2023, the Company issued $52.5 million aggregate principal amount of allowances.5.00% Convertible Senior Notes due May 15, 2026 (the “2023 Convertible Senior Notes”). In May 2023, the Company issued an additional $7.5 million aggregate principal amount of the 2023 Convertible Senior Notes upon the exercise by the initial purchasers of their over-allotment option. Interest on the 2023 Convertible Senior Notes is payable semiannually in arrears, beginning November 15, 2023. The increased cash balance2023 Convertible Senior Notes will mature on May 15, 2026, unless earlier converted or repurchased, and are redeemable at December 31, 2017 was due cash flows from operationsthe option of $8.3 million during 2017 which was partially offset by using cash to retire our credit facility with Triumph and principal payments related to our private placement which was completed in the first quarter of 2017. The credit facility had been in default since 2014 and the payoff allows the company operating flexibility going forward.Company on or after May 20, 2025 (See Note 8). Our anticipated uses of cash in the future will be to fund the expansion of our business, fund a company share buyback program and debt service related to the private placement which is scheduled to be fully retired in the first half of 2018. business. Net cash provided by operating activities for the years ended December 31, 20172023 and 20162022 was $8.3$17.8 million and $1.8$13.7 million, respectively. The increase in cash provided by operating activities for the year ended December 31, 20172023 was primarily due to the significant increase inimproved collections and continued profitability in 2017. Net cash used in investing2023. Cash provided by operating activities for each of the yearsyear ended December 31, 2017 and 20162022 was $0.1primarily due to cash collections related to net income of $17.0 million, and $0.2 million, respectively. Cashoffset by increased inventory balances.
Net cash used in investing activities for the years ended December 31, 20172023 and 2016 is2022 was $1.0 million and $0.4 million, respectively. Cash used in investing activities for the year ended December 31, 2023 was primarily related to the purchase of propertycomputer, office and warehouse equipment, and ongoing capital projects for ZMS operations. Cash used in investing activities for the year ended December 31, 2022 was primarily related to the purchase of computer, office and warehouse equipment. Net cash used in financing activities for the years ended December 31, 2017 and 2016 was $2.9 million and $1.3 million, respectively. The cash used inprovided by financing activities for the year ended December 31, 20172023 was primarily due to the retirement of our credit facility$7.6 million compared with Triumph of $2.8 million, the company share buyback program and payments related to our promissory notes from our private placement, partially offset by the cash received in the private placement. Thenet cash used in financing activities was $35.8 million for the year ended December 31, 20162022. The cash provided by financing activities of $7.6 million for the year ended December 31, 2023 was primarily relateddue to net proceeds from the issuance of Senior Convertible Notes of $57.0 million, offset by purchases of $37.9 million in treasury stock and principal payments made on long term debt totaling $10.7 million. Net cash used in financing activities of $35.8 million for the year ended December 31, 2022 was primarily due to the repurchase of Company stock totaling $26.4 million, principal payments made on our credit facility with Triumph. term loan totaling $5.3 million and the payment of cash dividends in January 2022 totaling $3.6 million. We believe our cash, and cash equivalents, together with anticipated cash flow from operations will be sufficient to meet our working capital, debt extinguishment and capital expenditure requirements for at least the next twelve months. In making this assessment, we considered the following: | ● | · | Ourour cash and cash equivalents balance at December 31, 20172023 of $5.6$44.6 million; |
| ● | · | Ourour working capital balance of $4.4$69.3 million; |
| ● | ·our accounts receivable balance of $26.8 million; |
| ● | Ourour profitability duringover the last 6 quarters;8 years; and |
| ● | · | Ourour planned capital expenditures of less than $0.5approximately $2.5 million during 2018.2024. |
Contractual Obligations The following table summarizes the future cash disbursements to which we are contractually committed as of December 31, 20172023 (in thousands). | | | Total | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | Thereafter | | | Unsecured subordinated promissory notes | | $ | 384 | | | $ | 384 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | Capital lease obligations | | | 123 | | | | 123 | | | | - | | | | - | | | | - | | | | - | | | | - | | | Operating leases | | | 4,531 | | | | 463 | | | | 830 | | | | 873 | | | | 914 | | | | 956 | | | | 495 | | | | | $ | 5,038 | | | $ | 970 | | | $ | 830 | | | $ | 873 | | | $ | 914 | | | $ | 956 | | | $ | 495 | |
| | | | | | | | | | | | | | | | | | | | | | | | Total | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter | Operating leases | | | 19,980 | | | 4,511 | | | 4,632 | | | 4,428 | | | 4,237 | | | 2,172 | | | — | Finance leases | | | 672 | | | 209 | | | 169 | | | 108 | | | 93 | | | 93 | | | — | | | $ | 20,652 | | $ | 4,720 | | $ | 4,801 | | $ | 4,536 | | $ | 4,330 | | $ | 2,265 | | $ | — |
We lease office and operatingwarehouse facilities and equipment under non-cancelable operating leases. CurrentThe current office facility leases include our newcurrent and former corporate headquarters and a production warehouse, all located in Englewood, Colorado and a small warehouse/officelease in Denmark.Boulder, Colorado for the operations of ZMS Boulder. Rent expense was $0.5$4.0 million and $4.5 million for the years ended December 31, 20172023 and 2016. We signed a new headquarters facility lease2022, respectively. A portion of the rent expense was non-cash in October 2017 with a term from January 1, 2018 through June 30,nature as we received rent abatements during both years ending December 31, 2023 which includes an option to extendand 2022. For GAAP purposes, the lease for an additional two years through 2025. The lease rate increases annually as of November 1. We account for the effect of such escalating lease payments as if the lease rate were consistentrent is expensed over the lease term.
Our prior headquarters lease in Lone Tree, Colorado containedterm on a termination clause which allowed the Company to terminate the lease at any time with three months written notice. We provided notice to the landlord at the endstraight-line basis.
The Company also leases certainoffice equipment for its corporate and warehouse facilities under capitalnon-cancelable finance lease agreements. CRITICAL ACCOUNTING ESTIMATES In preparing our consolidated financial statements in accordance with GAAP, we are required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue, costs and expenses, and disclosure of contingent liabilities that are reported in the consolidated financial statements and accompanying disclosures. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain. Therefore, we consider these to be our critical accounting estimates. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates and assumptions. See Note 2 to the Consolidated Financial Statements of this Annual Report on Form 10-K for information about these critical accounting policies, as well as a description our other accounting policies. Revenue Recognition and Accounts Receivable Revenue is generated primarily from sales and leases which expire on various dates through 2018. Imputed interest rates onof our electrotherapy devices and related supplies and complementary products. Sales are primarily made with, and shipped, direct to the leases rangepatient with a small amount of revenue generated from approximately 2%sales to 10%. distributors. In the fourth quarterhealthcare 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 2012, ZEU entered into an annual rental agreementthe separate arrangement impact certain aspects of the contract with patients covered by third party payers, such as contract type, performance obligations and transaction price, but for a small office/warehouse space (approximately 250 square feet)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 Denmark, whichthe normal course of business as each performance obligation is met upon delivery of goods to the patient. Device Sales Device sales can be terminated within 120 days’ notice. Annual rent totals 45,000 Danish kroner (approximately $7,500 USD using 2017 year-end exchange rates).in the form of a purchase or a lease.
Off – Balance Sheet Arrangements
As of December 31, 2017 and 2016, we had no off-balance sheet arrangements or obligations.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been preparedRevenue for purchased devices is recognized in accordance with accounting principles generally acceptedAccounting Standards Codification (“ASC”) 606 – “Revenue from Contracts with Customers” (ASC 606) when the device is delivered to the patient and all performance obligations are fulfilled.
Revenue related to devices out on lease is recognized in accordance with ASC 842, Leases. Using the United States of America. We have identifiedguidance in ASC 842, we concluded our transactions should be accounted for as operating leases based on the policies below as critical to our business operations and the understanding of our results of operations.following criteria below:
| ● | 29 | 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. |
| ● | 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. |
| ● | The underlying asset is expected to have alternative uses to the lessor at the end of the lease term. |
Revenue Recognition, Allowance forBilling Adjustments and Collectability
The Company recognizes revenue when eachLease commencement occurs upon delivery of the following four conditions are met: 1) a contract or sales arrangement exists, 2) products have been delivered and title has transferred 3) the price of the products or services is fixed or determinable, and 4) collectability is reasonably assured. The Company recognizes revenue for medical units and supplies when we receive notice that the product has been prescribed and delivereddevice to the patient. The Company priorretains title to recognizingthe 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 verifies the patient’s insurance coverage or obtains the insurance company preauthorization, when required. Revenue from supplies is recognized upon delivery. Revenue from sales to distributorsmonthly for the duration of the period in which the patient retains the device.
Supplies Supplies revenue is recognized whenonce supplies are delivered to the Company receives notice of receipt by the distributor. Revenue is reported net, after adjustments for estimated insurance company or governmental agency (collectively “Third-party Payors”) reimbursement deductions and, for wholesale customers and patient billings, an allowance for uncollectible accounts. The Third-party Payor reimbursement deductions are known throughout the health care industry as “billing adjustments” whereby the Third-party Payors unilaterally reduce the amount they reimbursepatient. Supplies needed for the Company’s products.device can be set up as a recurring shipment or ordered through the customer support team or online store as needed. Variable Consideration A significant portion of the Company’s revenues are derived, and the related receivables are due, from Third-party Payors. The nature of these receivables withinpatients with commercial or government health insurance plans. Revenues are estimated using the medical industry has typically resulted in long collection cycles. The process of determining what products will be reimbursedportfolio approach by Third-party Payors and the amounts that they will reimburse is complex and depends on conditions and procedures that vary among providers and may change from time to time. The Company maintains an allowance for billing adjustments and if necessary, an allowance for doubtful accounts. Billing adjustments result from reimbursements from Third-party Payors that are less than amounts claimed and from where the amount claimed by the Company exceeds the Third-party Payors usual, customary and reasonable reimbursement rate. The Company determines the amount of the allowance and adjusts it at the end of each reporting period,third party payer type based on a number of factors, includingupon historical rates of collection, the aging of the receivables, trends in the historical reimbursement rates of collectionby third-party payer types and current relationships and experience with the Third-party Payors. If the rates of collection of past-due receivables recordedthird-party payers, which includes estimated constraints for previous fiscal periods changes, or if there is a trend in the rates of collection on those receivables, the Company may be required to change the rate at which it provides for additions to the allowance. A change in the rates of the Company’s collections 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. We believe we have a sufficient history of collection experience to estimate the net collectible amounts by payor. However, changes to thethird-party payer refund requests, deductions, allowance for billing adjustments and uncollectible accounts, which are recorded as a reduction of revenue, have historically fluctuated and may continue to fluctuate significantly from quarter to quarter and year to year. Due to the nature of the medical industry and the reimbursement environment in which the Company operates, estimates are required to record net revenues and accounts receivable at their net realizable values (also known as net collectible value).billing allowance adjustments. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically,available and constraints are released. If initial estimates are updated these changes are accounted for as increases or decreases in the transaction price. Assuming the underlying performance obligation to which the change in price relates has already been satisfied, those changes in transaction price are immediately recognized as increases or decreases in revenue (not credit losses (bad debt expense)) in the period in which the estimate changes. Additionally, the complexity of third-party billing arrangements and the uncertainty of reimbursement amounts for certain products or services from payorsthird-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 carehealthcare industry and third-party payer reimbursement, as well as changes in our billing practices to increase cash collections, it is possible that management’s estimatesour forecasting model to estimate collections could change, in the near term, 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 toin 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 of future periods for past billing adjustments. The Company frequently receives refund requests from insurance providers relating to specific patientsmonitors the variability and dates of service. Billing and reimbursement disputes are very commonuncertain timing over third-party payer types in the Company’s industry. 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 insurance providers. 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 insurance providers. 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. However, no assurances can be given with respect to such estimates of reimbursements and offsets or the ultimate outcome of any refund requests. In addition to the allowance for billing adjustments, the Company records an allowance for uncollectible accounts receivable for wholesale (sales to distributors) sales and certain patient billings when necessary. Uncollectible accounts receivable are primarily a result of non-payment from patients who have been direct billed for co-payments or deductibles, lack of appropriate insurance coverage and disallowances of charges by Third-party Payors.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 related to billing adjustments and refund requests have historically fluctuated and may continue to fluctuate significantly from quarter to quarter and year to year.
During the quarter ended December 31, 2023, the Company had a material insurance provider contract or policy, application by a provider, a declinechange in the economic condition of providers or a significant turnover of Company billing personnel resulting in diminished collection effectiveness, the estimate of uncollectable receivables. The result of this change in allowance was a reduction of $6.2 million to net revenue ($4.6 million net of tax) or $0.14 per basic and diluted share for the allowance for uncollectible accounts receivable may not be adequate and may result in an increase in the future. As ofthree months ended December 31, 2017,2023, and $0.13 per basic and diluted share for the Company believes its accounts receivable is reasonably stated at its net realizable / collectible value and has an adequate allowance for billing adjustments relating to all known insurance disputes and refund requests.
As ofyear ended December 31, 2017, the Company believes its accounts receivable is reasonably stated at its net realizable / collectible value and has an adequate allowance for billing adjustments relating to all known insurance disputes and refund requests.2023.
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. However, the Company is disputing the refund request and has initiated an internal review of the reimbursement to determine that the original sales arrangement was properly executed, the products had been delivered and title was transferred, the price of the products or services and the reimbursement rate is fixed and determinable, and the Company’s ultimate claim to the reimbursement is reasonably assured. The Company expects to record the appropriate amount as net revenue when such internal review is complete and the Company’s claim to the amount is reasonably assured. No further communication has been received from the insurance company regarding the payment or requested refund.
Inventory
Inventory, which primarily represents finished goods, are valued at the lower of cost (average) or market.
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 equal to the difference between the costs of inventories on hand and the estimated market value based upon assumptions about future demand. If future demand is less favorable than currently projected by management, additional inventory write-downs may be required.
Finished goods at December 31, 2017 and 2016 includes products (finished goods, parts and supplies) held at the Company’s headquarters. During 2016 the Company ramped up the EZ Rx Prescribe program, whereby the NexWave electrotherapy device is sold by prescription and is shipped from the Company manufacturing facilities. During 2016 the EZ Rx Prescription program represented nearly 100% of orders. As a result, the Company is no longer holding substantial field inventory at different locations by healthcare or third party providers. Total gross inventories at December 31, 2017 was $0.4 million which was comprised of finished goods, work in process and parts and supplies as compared to December 31, 2016 of $0.1 million.
On December 31, 2017, the Company did not have open material inventory purchase commitments with vendors.
Stock-basedStock-based Compensation 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. Income Taxes Significant judgment is required in determining our provision for income taxes. We assess the likelihood that our deferred tax asset will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we establish a valuation allowance. We consider future taxable income projections, historical results and ongoing tax planning strategies in assessing the recoverability of deferred tax assets. However, adjustments could be required in the future if we determine that the amount to be realized is less or greater than the amount that we recorded. Such adjustments, if any, could have a material impact on our results of our operations. 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. The Inflation Reduction Act (“IRA”) was enacted into law on August 16, 2022. Included in the IRA was a provision to implement a 15% corporate alternative minimum tax on corporations whose average annual adjusted financial statement income during the most recently completed three-year period exceeds $1 billion. This provision is effective for tax years beginning after December 31, 2022. The IRA did not have a material impact on our reported results, cash flows or financial position during the year ended December 31, 2023. Acquisition Method of Accounting for Business Combinations We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over these fair values is recorded as goodwill. We engage independent third-party valuation specialists to assist us in determining the fair values of certain assets acquired and liabilities assumed. Such valuation require management to make significant estimates and assumptions, especially with respect to intangible assets. Different valuations approaches are used to value different types of intangible assets. Under the income approach, the relief from royalty method is a valuation technique which is used to estimate the value of certain intangible assets. This method utilizes projected financial information and hypothetical royalty rates to estimate the cost savings associated with asset ownership. The estimated cost savings are discounted for risk and the time value of money to estimate an intangible asset’s fair value. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If we do not achieve the results reflected in the assumptions and estimates, our goodwill impairment evaluations could be adversely affected, and we may impair a portion or all of our intangible assets, which would adversely affect our operating results in the period of impairment. Impairment of Long-lived Assets, Including Goodwill We assess impairment of goodwill annually and other long-lived assets when events or changes in circumstances indicates that their carrying value amount may not be recoverable. Long-lived assets consist of property and equipment, net and goodwill and intangible assets. Circumstances which could trigger a review include, but are not limited to: (i) significant decreases in the market price of the asset; (ii) significant adverse changes in the business climate or legal or regulatory factors; (iii) or expectations that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. If the estimated future undiscounted cash flows, excluding interest charges, from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. Contingent Considerations We classified contingent consideration liabilities related to business acquisitions within Level 3 as factors used to develop the estimated fair value were unobservable inputs that are not supported by market activity. We estimated the fair value of contingent consideration liabilities using a Monte Carlo simulation which is based on equity volatility, the risk-free rate, the normal variate, projected milestone dates, discount rates, and probabilities of payment. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “Smaller Reporting Company”, this Item and the related disclosure is not required. We are exposed to market risks, including changes to interest rates and inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements, the notes thereto, and the report there onthereon of EKS&H, LLLP,Marcum LLP, are filed as part of this report starting on page F-1.F-2. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREDISCLOSURE. None. As previously reported on the Company’s Current Report on Form 8-K dated December 31, 2016, GHP Horwath, P.C. notified the Company that it had chosen to not stand for re-appointment. Subsequently, as reported on Form 8-K dated January 16, 2017, the Company appointed EKS&H, LLLP as its independent registered public accounting firm. During the Company’s fiscal years ended December 31, 2016 and 2015, and through the date40
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.procedures We maintain Our management, including our Chief Executive Officer and Chief Financial Officer, have 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, or the Exchange Act, as of December 31, 2023. Based on management’s review, with participation of our Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended December 31, 2023, our disclosure controls and procedures were not effective due to the material weakness in internal control over financial reporting as described below. The term “disclosure controls and procedures,” as such term is defined in RuleRules 13a-15(e) and 15d-15(f)15d-15(e) under the Securities Exchange Act of 1934, (the “Exchange Act”),as amended, or the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assuranceensure that information required to be disclosed by usa company in the reports that we fileit files or submitsubmits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange CommissionCommission’s rules and forms,forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management’s report on internal control over financial reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(e) of the Exchange Act). Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of internal control over financial reporting as of December 31, 2023, based upon the framework in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based upon this evaluation and the material weakness identified below, our management concluded that our internal control over financial reporting was not effective as of December 31, 2023. Material Weakness in Internal Control We identified a material weakness related to Information Technology General Controls (“ITGCs”) that were not designed and operating effectively to ensure (i) appropriate segregation of duties was in place to perform program changes and (ii) the activities of individuals with access to modify data and make program changes were appropriately monitored. Business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted. We also identified a material weakness in the design and operating effectiveness around the valuation of certain accounts receivables. The material weaknesses identified above did not result in any material misstatements in our financial statements or disclosures, and there were no changes to previously released financial results. Our management concluded that the consolidated financial statements included in this Annual Report on Form 10-K, present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The effectiveness of our internal control over financial reporting as of December 31, 2023, has been audited by Marcum LLP as stated in their report, which is included in Item 8 of this Annual Report on Form 10-K. Remediation Plan Our management is committed to maintaining a strong internal control environment. In response to the identified material weakness above, management will take comprehensive actions to remediate the material weakness in internal control over financial reporting. We are in the process of developing and implementing remediation plans to address the material weakness described above. Changes in Internal Control over Financial Reporting Except for the items referred to above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Inherent Limitation on the Effectiveness of Internal Control Our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concludeddo not expect that our disclosure controls and procedures were effective as of the end of such period.
In designingor our internal control over financial reporting will prevent all errors and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures,all fraud. A control system, no matter how well conceiveddesigned and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosurecontrol system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and procedures are met.instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, in designing disclosure controls and procedures, we are required to apply judgment in evaluatingcan be circumvented by the cost-benefit relationshipindividual acts of possible disclosure controls and procedures.some persons, by collusion of two or more people or by management override of the controls. The design of any disclosuresystem of controls and proceduresis also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management’s report on internal controlconditions; over financial reporting.Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is definedtime, controls may become inadequate because of changes in Exchange Act Rule 13a-15(f). All internal control systems, no matter how well designed, haveconditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework set forthlimitations in the report entitled Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The COSO framework summarizes each of the components of a company’s internalcost-effective control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) informationmisstatements due to error or fraud may occur and communication, and (v) monitoring.not be detected.
Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.
As a result of our assessment of internal controls over financial reporting as of December 31, 2016, management had identified the following control deficiencies that represent material weaknesses that were remediated:
| · | The design and operating effectiveness of the Company’s controls over the financial statement close process related to the timely account reconciliation, analysis and assessment of key accounting estimates and financial reporting and disclosure was not in place. This was directly impacted by a limitation on current accounting resources and staffing resulting in limited capabilities for us to conduct independent reviews over the preparation of the related work product. Management identified remediation efforts which have been implemented during the second and third quarter of 2017. We have put policies and procedures in place plus made some key hires in the finance and accounting area and due to these actions, we believe we have fully remediated this deficiency as of September 30, 2017. |
| · | We had a material weakness due to lack of segregation of duties. From October 2015 through May 2017, we had no Chief Financial Officer and our President and Chief Executive Officer assumed the role of Principal Financial Officer, in addition to that of Principal Executive Officer. This one person is also involved in the processing of banking transactions, has overall supervision and review of all cash disbursements and cash receipts, and had responsibility for the overall accounting and approval process. We hired a Chief Financial Officer on June 5, 2017 who will also serve as our Principal Financial Officer. Currently, all financial responsibilities are being managed by Chief Financial Officer and his staff and therefore we believe this material weakness was remediated as of December 31, 2017. |
| · | We previously lacked independent Board members necessary to maintain audit and other board committees consistent with best practice corporate governance standards. On January 10, 2018, we appointed two independent directors, Messrs. Barry D. Michaels and Michael Cress. Mr. Michaels will also serve as chairman of the audit committee. Mr. Cress will also serve on the audit committee. The newly appointed Board members will review the Company’s results of operations for the year ended December 31, 2017 and the related Annual Report on Form 10-K. |
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2017, we completed our corrective action related to our segregation of duties. Our CFO and his staff have assumed all of the financial responsibility in the organization. We also completed the documentation of our internal control processes with our independent consulting firm. Although our newly appointed Board members were added subsequent to December 31, 2017, they will be involved in review of our 2017 year-end results and governance processes.
During the quarter ended September 30, 2017, our new Chief Financial Officer has assumed responsibility for all Company assets and control processes. The Company also retained an outside independent consulting firm which is updating our documentation of controls and performing testing as needed.
During the quarter ended June 30, 2017, we hired a new Chief Financial Officer and implemented certain financial controls related to financial statement close and reporting process.
ITEM 9B. OTHER INFORMATION Rule 10b5-1 Trading Arrangement During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K. None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE The following table and paragraphs that follow provide information concerning each of our directors and executive officers at February 22, 2018. | | | | | | Director/Officer | | | | | Name | | Age | | | Since | | | Position or Office | | Thomas Sandgaard | | | 59 | | | | 1996 | | | President, Chief Executive Officer and Chairman | | Barry D. Michaels | | | 68 | | | | 2018 | | | Director | | Michael Cress | | | 60 | | | | 2018 | | | Director | | Daniel Moorhead | | | 45 | | | | 2017 | | | Chief Financial Officer |
On January 10, 2018, the Board of Directors approved a resolution to increase the size of the Board of Directors from one to three members. Mr. Sandgaardrequired by this item will continue to serve as Chairman.
On January 10, 2018, Barry D. Michaels and Michael Cress were appointed to the Board of Directors and both will join the audit committee with Mr. Michael’s serving as the chairman of the audit committee.
Thomas Sandgaard,age 59,founded the Company in 1996 after a successful European-based careerbe included in the semiconductor, telecommunications and medical equipment industries with ITT, Siemens and Philips Telecom. Mr. Sandgaard has been our President, CEO and Chairman since 1996. Prior to the appointments of Messrs. Michaels and Cress Mr. Sandgaard was and had been our only member of the board of directors. Mr. Sandgaard held middle and senior management positions in the areas of international sales and distribution, technology transfers, mergers and acquisitions and marketing. Mr. Sandgaard holds a degree in electronics engineering from University of Southern Denmark and an MBA from Copenhagen Business School. Mr. Sandgaard founded the Company’s business in 1996 and has been the president, CEO and chairman of the board since the business was founded. Mr. Sandgaard currently does not hold, and has not held in the past five years, directorships with any company with a class of securities registered pursuant to section 12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
Mr. Sandgaard founded the Company in 1996 and has served as our CEO for our entire history. Mr. Sandgaard has tremendous knowledge of our products, industry and the history of our Company. Mr. Sandgaard provides the Company and Board with significant strategic vision and strong leadership.
Barry D. Michaels, age 68, is a retired senior executive with both general and financial management experience in emerging growth companies. Mr. Michaels has more than 35 years of financial and general management experience in the medical device and biotechnology industries with industry leaders including Medtronic, Johnson and Johnson, and Baxter Healthcare. Mr. Michaels served as Chief Financial Officer of three private and four publicly traded companies including Cardima, Inc., Lipid Sciences, Inc., ICN Biomedicals, Inc., IntraTherapeutics, Inc., VIA Medical, and Webster Laboratories. In addition he served as President of a Johnson and Johnson division and acting Chief Executive Officer of Lipid Sciences, Inc. He has raised nearly $800 million in capital within public and private market environments, has taken two companies public, and has led three private companies to favorable liquidity events. He has also served as an independent consultant to medical device and biotechnology companies since 1997 leveraging his strong mix of organizational, operational, and financial management skills to advise senior management and directors. During his tenure in executive management Mr. Michaels has added over 1,100 jobs to the economy and increased shareholder value by more than $2 billion. Mr. Michaels holds a BA in Audiology and an MBA in Finance from San Diego State University and is a graduate of the Executive Program at the University of California, Los Angeles. In addition, he has completed the UCLA Director’s Education Program certification exam and has served as Corporate Secretary to three publicly traded companies. Mr. Michaels has also been appointed Audit Committee Chair of the Company’s Audit Committee. Mr. Michaels qualifies as an audit committee financial expert within the meaning of Section 407 of the Sarbanes-Oxley Act of 2002 and Item 407(d)(5) of Regulation S-K.
With his years of executive experience, Mr. Michaels brings to the board senior-level management experience with deep knowledge of the medical device industry. Mr. Michaels also served as CFO for a NASDAQ listed medical company and brings significant public company experience to the Board where he serves as Audit Committee Chair.
Michael Cress, age 60, currently serves as Chairman and Managing Partner of MD Cress Ventures, a national firm that owns, operates and advises companies within the healthcare sector. Mr. Cress also serves as Chairman of Rainier Healthcare. Prior to MD Cress Ventures he served as the President and CEO of the Cornerstone Healthcare GroupProxy Statement, which owns and manages hospitals throughout the country. Mr. Cress also served as Vice President of Business Development for Kindred Healthcare, a publicly traded healthcare company that owns and operates hospitals, nursing homes, rehabilitation, pharmacy and other segments of the healthcare continuum. He served as the CEO of Vencor Hospital of San Diego and was also an Adjunct Professor for the Masters of Healthcare Administration program at the University of Kansas. Mr. Cress currently serves on several not-for-profit boards including Rachel’s Challenge and is a co-founder and board member for The Neighborhood as well as serving on the boards or advisory boards of several companies, including Linley Capital, BankSNB, Rainier Hospice and Sleep Research.
Mr. Cress has extensive experience in the medical industry and brings not only board experience but also merger and acquisition and strategic planning experience to Zynex’s Board of Directors.
Daniel Moorhead, age 45, joined in June 2017 as the Chief Financial Officer and is responsible for all finance and accounting functions. Prior to joining Zynex, Mr. Moorhead was Chief Financial Officer of Evolving Systems, Inc. (Nasdaq: EVOL) from January 2016 until May 2017, after having served as Vice President of Finance & Administration from December 2011 through December 2015 and in other financial management roles from 2002-2005 and 2008-2011. Mr. Moorhead is a CPA and holds a B.B.A. in Accounting from the University of Northern Colorado.
Committees of the Board of Directors
Since our common stock is currentlyquoted on the OTCQB we are not subject to the corporate governance rules of listed companies. Accordingly we are not required to have independent board members or board committees. Nevertheless, our Board of Directors consists of two independent directors and our Board of Directors has established an Audit Committee, as described below.
Controlled Company Status
Our President and Chief Executive Officer, Thomas Sandgaard, beneficially owns approximately 53% of our outstanding common stock as of February 22, 2018. As a result, we are a “controlled company” within the meaning of Nasdaq and NYSE MKT corporate governance standards. Although no assurances canwill be made that we currently qualify or will qualify to be listed on a national exchange or that we will seek to do so, if we were to be approved to be listed on an exchange we could seek to meet the corporate governance standards of such exchange using certain exemptions applicable to controlled companies.
Under the Nasdaq rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company”, and if we are listed on Nasdaq, although there can be no assurances that we could or would seek to be listed, we expect to utilize exemptions relating to certain Nasdaq corporate governance requirements, including:
The requirement that we have a Nominating Committee that is composed entirely of independent;
The requirement that we have a Compensation Committee that is composed entirely of independent directors; and
The requirement for an annual performance evaluation of the Nominating and Compensation Committees.
The NYSE MKT has similar rules and exemptions with respect to controlled companies, which we expect to utilize if we are listed on the NYSE MKT, although there can be no assurances that we could or would seek to be listed. As a result of these exemptions, we anticipate that, if we are still a controlled company at the time that we apply to be listed on the Nasdaq or the NYSE MKT, our Nominating and Compensation Committees will not consist entirely of independent directors and that we will not be required to have an annual performance evaluation of the Nominating and Compensation Committees.
Audit Committee
The Audit Committee assists the Board of Directors in its oversight of the integrity of the Company’s accounting, auditing, and reporting practices. The Audit Committee meets with our independent registered public accounting firm at least annually to review the results of the annual audit and discuss the financial statements. The Committee will meet with our independent registered public accounting firm quarterly to discuss the results of the accountants’ quarterly reviews as well as quarterly results and quarterly earnings releases; recommends to the Board the registered public accounting firm to be retained; and receives and considers the accountants’ comments as to internal controls and procedures in connection with audit and financial controls. The Audit Committee reviews all financial reports prior to filingfiled with the Securities and Exchange Commission (“SEC”) and reviews all financial press releases prior to release. The specific responsibilitiesnot later than 120 days after the end of our fiscal year ended December 31, 2023 in carrying outconnection with the Audit Committee’s oversight role are set forth in the Audit Committee’s Charter, a copysolicitation of which is posted onproxies for the Company’s website, www.zynex.com, under "Investors — Corporate Governance." The Audit Committee currently consists2024 annual meeting of Messrs. Michaelsstockholders and Cress, each of whom are independent directors as required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), Section 10A(m)(3). The Board of Directors has determined that Mr. Michaels is an "audit committee financial expert" as definedincorporated herein by the rules of the Securities and Exchange Commission.reference.
Director Nominations by Shareholders
We do not have procedures by which a security holder may recommend director nominees to our Board of Directors.
The Company Has Never Held A Stockholders’ Meeting and Has No Plans To Do So
We have never held a stockholders’ meeting and do not have plans to hold a meeting in 2018 unless we are required to hold such a meeting if we become listed on the Nasdaq or the NYSE MKT.
Code of Ethics
The Board has adopted a written code of ethics for each employee, including our Chief Executive Officer and Chief Financial Officer. The code also applies to our agents and representatives, sales representatives and consultants. The code of ethics is posted on our website at www.zynex.com. If we make certain amendments to or waivers of our code of ethics, we intend to satisfy the SEC disclosure requirements by promptly posting the amendment or waiver on our website.
Involvement in Certain Legal Proceedings
During the past ten years, none of the persons serving as executive officers and/or directors of the Company has been the subject matter of any of the following legal proceedings that are required to be disclosed pursuant to Item 401(f) of Regulation S-K including: (a) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (b) any criminal convictions; (c) any order, judgment, or decree permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; (d) any finding by a court, the SEC or the CFTC to have violated a federal or state securities or commodities law, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud; or (e) any sanction or order of any self-regulatory organization or registered entity or equivalent exchange, association or entity. Further, no such legal proceedings are believed to be contemplated by governmental authorities against any director or executive officer.
Section 16(a) Beneficial Ownership Compliance
As a filer under Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our executive officers, directors and greater than 10% holders are not subject to the reporting requirements under Section 16(a) of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION Executive Compensation Objectives and Practices
We designed our executive officer compensation program to attract, motivate and retain key executives who drive our success. We strive to have pay reflect our performance and alignThe information required by this item will be included in the Proxy Statement, which will be filed with the interests of long-term stockholders, which we achieve with compensation that:
| · | Provides executives with competitive compensation that maintains a balance between cash and stock compensation, encouraging our executive officers to act as owners with an equity stake in our company; |
| · | Enhances retention by having equity compensation subject to multi-year vesting; and |
| · | Does not encourage unnecessary and excessive risk taking. |
The Company evaluates both performanceSecurities and compensation to ensureExchange Commission not later than 120 days after the Company maintains its ability to attract and retain superior employees in key positions and compensation provided to key employee’s remains competitive relative to the compensation paid to similarly situated executives of other companies our size.
Elements of Executive Compensation
Our compensation for senior executive officers may consist of the following elements:base salary; incentive compensation; long-term equity compensation in the form of stock options and restricted stock; and employee benefits that are generally available to all our employees.
Base Salary
The Company provides named executive officers and other employees with base salary to compensate them for services rendered during the fiscal year. It is our policy to set base salary levels taking into account a number of factors, such as annual revenue, the natureend of our business, the structure of other companies’ compensation programs and the availability of compensation information. When setting base salary levels, in a manner consistent with the objectives outlined above, the Company considers our performance, the individual’s breadth of knowledge and performance and levels of responsibility.
Incentive Compensation
Our performance-based incentive compensation program is designed to compensate executives when financial performance goals are achieved. Executives have the opportunity to earn incentive compensation on an annual basis. Mr. Moorhead has an annual incentive compensation target of $100,000 for which the performance objectives are currently in the process of being finalized.
Long-Term Incentive Compensation – Equity Compensation
Our executive officers are eligible for stock awards. We believe that stock awards give executives a significant, long-term interest in our success, help retain key executives in a competitive market, and align executive interests with stockholder interests and long-term performance of the Company. We have granted options as well as restricted stock under our 2017 Stock Incentive Plan and predecessor plans. Stock awards also provide each individual with an added incentive to manage the Company from the perspective of an owner with an equity stake in the business. Moreover, the long-term vesting schedule (which is generally four years for employees and three years for non-employee directors, although this may vary at the discretion of the Company) encourages a long-term commitment to the Company by our executive officers and other participants.
Summary Compensation Table
The following table shows information concerning compensation of our named executive officers during the yearsfiscal year ended December 31, 20172023 and 2016:
| Name and Principal Position | | Year | | | Salary
($) | | | Option
Awards
($) (4) | | | Non-Equity
Incentive Plan
Compensation
($) | | | All Other
Compensation
($) | | | | Total
($) | | | Thomas Sandgaard (1) | | | 2017 | | | | 397,738 | | | | 2,440 | | | | 398,546 | | | | 5,688 | (1 | ) | | | 801,972 | | | | | | 2016 | | | | 380,380 | | | | — | | | | — | | | | 16,402 | (1 | ) | | | 396,582 | | | Daniel Moorhead (2) | | | 2017 | | | | 108,308 | | | | 226,233 | | | | 59,552 | | | | 5,103 | (2 | ) | | | 399,196 | | | Michael Hartberger(3) | | | 2016 | | | | 60,250 | | | | | | | | | | | | | | | | | 60,250 | |
(1) | Mr. Sandgaard’s salary includes $14,250 of deferred compensation, which during January 2016, Mr. Sandgaard elected to receive a stock option* to purchase 203,517 shares of our common stock at a strike price of $.14 per share as payment of the deferred compensation due to Mr. Sandgaard. We pay 100% of Mr. Sandgaard’s health and dental insurance. In addition, one company vehicle and two home telephone lines are provided to Mr. Sandgaard at our expense. | (2) | Mr. Moorhead was hired as Chief Financial officer in June 2017. We pay 100% of Mr. Moorhead’s health and dental insurance | (3) | Mr. Hartberger’s employment as Chief Operating Officer of the Company was discontinued effective May 16, 2016 | (4) | The option awards represent the grant date fair value of stock options granted in accordance with Accounting Standards Codification (ASC) Topic 718. See Note 6 of the Consolidated Financial Statements for additional information. |
Named Executive Officer Employment Arrangements and Option Awards
On June 5, 2017, the Company entered into an employment agreement with Mr. Moorhead which generally provides that in the event the Company terminates his employment, other than for cause, death or disability, he will be paid severance pay. The amount of his severance is nine months of base salary if terminated before the one year anniversary of his hire date or twelve months of severance if terminated on or subsequent to the one year anniversary of his hire date. In exchange for severance, Mr. Moorhead is required to execute a full release of all employment claims with the Company and agree to not compete with us and to not solicit our employees for the period of time during which severance is paid. The employment agreement does not change the "at will" nature of Mr. Moorhead’s employment with the Company. Either the Company or the executive may terminate his employment at any time.incorporated herein by reference.
During January 2016, Mr. Sandgaard elected to receive a stock option to purchase 203,517 shares of our common stock at a strike price of $0.14 per share as payment of deferred salary in the amount of $14,250 due to Mr. Sandgaard. In January 12, 2016, Mr. Hartberger was granted 200,000 options with a strike price of $0.39. The grant was pursuant to the terms of his initial employment arrangement and has expired as a result of his termination of employment.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information concerning unexercised options for each executive officer named in the Summary Compensation Table as of December 31, 2017:
| Name | | Number of
Securities
Underlying
Unexercised
Options
(#) Exercisable(1) | | | Number of
Securities
Underlying
Unexercised
Options
(#) Unexercisable(1) | | | | Option
Exercise
Price | | | Option
Expiration Date | | Thomas Sandgaard | | | 190,000 | | | | - | (2 | ) | | $ | 0.22 | | | October 31, 2023 | | | | | 203,571 | | | | - | (3 | ) | | $ | 0.14 | | | January 2, 2026 | | | | | | | | | 1,000 | (4 | ) | | $ | 2.76 | | | December 14, 2027 | | Daniel Moorhead | | | 0 | | | | 200,000 | (5 | ) | | $ | 0.40 | | | June 5, 2027 | | | | | 0 | | | | 10,000 | | | | $ | 1.39 | | | September 5, 2027 | | | | | 0 | | | | 57,260 | | | | $ | 2.51 | | | December 11, 2027 |
(1) | Options vest at a rate of 25% per year, commencing on the grant date. | (2) | On October 31, 2013, Mr. Sandgaard was granted 285,000 options with a strike price of $0.22, with a vesting contingent on achieving certain financial performance metrics. As of December 31, 2017, 190,000 options remain active. | (3) | On January 2, 2016 Mr. Sandgaard was granted 203,571 options with a strike price of $0.14. | (4) | On December 14, 2017 Mr. Sandgaard was granted 1,000 options with a strike price of $2.76. | (5) | On June 5, 2017 Mr. Moorhead was granted 200,000 options with a strike price of $0.40, 10,000 options with a $1.39 strike price on September 5, 2017 and on December 11, 2017 was granted 57,260 options with strike price of $2.51. |
Mr. Moorhead was awarded the following restricted stock awards grants during 2017, which vest at a rate of 25% per year, commencing on the grant date:
Restricted Stock Awards | | | | | | | | | | | | 6/5/2017 | | | | 10,000 | | | | | 12/11/2017 | | | | 5,000 | |
Director Compensation
During the 2017 fiscal year, the Company’s Chairman was also an employee. Therefore, during 2017 the Company did not provide compensation to any non - employee person serving on its Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The following table contains certain information regarding beneficial ownership of our common stock as of February 22, 2018 by (i) each person who is known by us to own beneficially more than 5% of our common stock, (ii) each of our directors at February 22, 2018, (iii) our executive officers as of February 22, 2018, and (iv) all directors and executive officers named as a group. The information provided regarding beneficial ownership of the principal stockholders is based on publicly available filings and, in the absence of such filings, on the shares held of record by such persons. The address of each person listed in the table is 9555 Maroon Circle, Englewood, CO 80112.
| Name | | Number of Shares
Beneficially
Owned | | | Percent
Of
Class (2) | | | Thomas Sandgaard (2) | | | 17,723,142 | | | | 54.6 | % | | All Directors and Named Executive Officers As a Group | | | 17,723,142 | | | | 54.6 | % |
(1) | Based on 32,871,877 shares of our common stock issued and 32,457,636 outstanding on February 22, 2018. | (2) | Includes 393,571 stock options exercisable within 60 days of February 22, 2018. |
EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of December 31, 20172023 regarding shares of common stock available for issuance under our equity incentive plans (in thousands except exercise price).: | | | Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants
and Rights | | | Weighted
Average Exercise
Price of
Outstanding
Options, Warrants
and Rights | | | Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(excluding securities
reflected in the first
column) | | | Plan Category | | | | | | | | | | | | | | 2005 Stock Option Plan (1) | | | 503 | | | $ | 0.56 | | | | — | | | Equity Compensation Plans not approved by Shareholders (2) | | | 1,117 | | | | 0.32 | | | | — | | | Warrants | | | 200 | | | | 1.86 | | | | | | | 2017 Stock Option Plan (3) | | | 432 | | | | 1.17 | | | | 4,568 | | | Total | | | 2,252 | | | $ | 0.68 | | | | 4,568 | |
| | | | | | | | | | Number of | | | | | Number of Securities | | | Securities to be | | | | | Remaining Available | | | Issued Upon | | Weighted | | for Future Issuance | | | Exercise of | | Average Exercise | | Under Equity | | | Outstanding | | Price of | | Compensation Plans | | | Options, | | Outstanding | | (excluding securities | | | Warrants | | Options, Warrants | | reflected in the first | | | and Rights | | and Rights | | column) | Plan Category | | | | | | | | 2005 Stock Option Plan (1) (2) | | 2 | | $ | 0.39 | | — | Warrants | | 80 | | | 2.43 | | — | 2017 Stock Option Plan (3) | | 347 | | | 1.83 | | 3,389 | Total | | 429 | | $ | 1.94 | | 3,389 |
| (1) | All of these securities are available for issuance under the Zynex, Inc. 2005 Stock Option Plan, approved by the Board of Directors on January 3, 2005 and by our stockholders on December 30, 2005. |
| (2) | As of December 31, 2014, the 2005 Stock Option Plan expired, although persons holding vestedexpired. Expiration of the plan did not affect the rights and obligations of the participants and the company arising under options under the 2005 Stock Option Plan continue to hold those options in accordance with the terms of their contractual agreement(s).previously granted. |
| (3) | The 2017 Stock Option Plan was approved by shareholdersstockholders on June 1, 2017. |
The additional information required by this item will be included in the Proxy Statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year ended December 31, 2023 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item will be included in the Proxy Statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year ended December 31, 2023 and is incorporated herein by reference. We employ Mr. Sandgaard’s sons. The following table sets forthBoard of Directors has determined that Messrs. Cress, Disbrow, and Michaels who together comprise the compensation for services rendered in 2017 and 2016:Audit Committee, are all “independent directors” within the meaning of Rule 5605 of the NASDAQ Listing Rules.
| Name and Principal Position | | Year | | | Salary
($) | | | | Option
Awards
($) | | | All Other
Compensation
($) | | | | Total
($) | | | Joachim Sandgaard - Information systems manager | | | 2017 | | | | 95,833 | (2 | ) | | | — | | | | 5,239 | (1 | ) | | | 101,072 | | | Joachim Sandgaard - Information systems manager | | | 2016 | | | | 95,658 | (2 | ) | | | — | | | | 7,092 | (1 | ) | | | 102,750 | | | Martin Sandgaard—Outside sales, marketing support and website/graphic design | | | 2017 | | | | 74,837 | | | | | 10,438 | (3) | | | 5,695 | (1 | ) | | | 90,970 | | | Martin Sandgaard—Outside sales, marketing support and website/graphic design | | | 2016 | | | | 44,474 | | | | | — | | | | 7,109 | (1 | ) | | | 51,583 | |
(1) | Includes health and dental insurance provided by the Company | (2) | To meet Mr. Sandgaard’s obligation to his former wife under a settlement agreement, the Company, during the fourth quarter of 2016, entered into 3 year employment arrangement totaling $100,000 per year with Mr. Joachim Sandgaard. | (3) | The option awards represent the grant date fair value of stock options granted in accordance with Accounting Standards Codification (ASC) Topic 718. See Note 6 of the Consolidated Financial Statements for additional information. |
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The following presents fees for professional services renderedinformation required by this item will be included in the Proxy Statement, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of our independent registered public accounting firm (EKS&H, LLLP & GHP Horwath, P.C.) for each of the yearsfiscal year ended December 31, 20172023 and 2016.is incorporated herein by reference. | | | 2017 | | | 2016 | | | Audit Fees | | $ | 199,600 | | | $ | 106,300 | | | Tax Fees | | | — | | | | — | | | All Other Fees | | | — | | | | — | | | | | | | | | | | | | Total | | $ | 199,600 | | | $ | 106,300 | |
As discussed above and in the Forms 8-K reporting events of December 31, 2017 and January 16, 2017, GHP Horwath, P.C. served as our independent registered public accounting firm from December 2006 to December 2016.
EKS&H, LLLP has served as our independent registered public accounting firm beginning January 2017.
PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES Consolidated Financial Statements: Exhibits: | | | |
|---|
Exhibit
Number | | | | Description |
|---|
| | |
|---|
2.1 | | Asset Purchase Agreement, dated March 9, 2012, among Zynex NeuroDiagnostics, Inc., NeuroDyne Medical Corp. and the shareholders listed on Schedule A thereto (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K8K filed on March 13, 2012) | | | | 3.1 | | Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K8K filed on October 7, 2008) | | | | 3.2 | | Amended and Restated Bylaws (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K8K filed on October 7, 2008) | | | | 4.1 | | Zynex, Inc 2017 Stock Incentive Plan (incorporated by reference to Exhibit 4.1 to the Company’s Report on form S-8S8 filed on 9/6/September 6, 2017) | | | | 5.14.2 | | OpinionDescription of Clifford L. Neuman PCregistrant’s securities registered pursuant to legalitySection 12 of securities being registeredthe Securities Exchange Act of 1934 (incorporated by reference to Exhibit 5.14.2 to the Company’s Annual Report on form S-8Form 10-K filed on September 6, 2017)March 22, 2022)
| 4.3 | | | 10.2†
| | Offer Letter,Indenture dated August 16, 2010,as of May 9, 2023, between Zynex, Inc. and Anthony ScaleseAnd U.S. Bank Trust Company, National Association, as trustee, (incorporated by reference to Exhibit 10.2 of4.1 to the Company’s Current Report on Form 8-K filed on August 24, 2010)May 9, 2023) | 4.4 | | Form of certificate representing the 5.00% Convertible Senior Notes due 2023 (included as Exhibit A to Exhibit 4.3) | 10.3† | | | 10.1† | | 2005 Stock Option Plan (incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-KSB10KSB for the year ended December 31, 2004) | | | | 10.4†10.2† | | Form of Indemnification Agreement for directors and executive officers (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K8K filed on October 7, 2008) | | | | 10.610.3† | | Loan and Security Agreement, dated December 19, 2011, among Zynex, Inc. Zynex Medical, Inc., Zynex NeuroDiagnostics, Inc., Zynex Monitoring Solutions Inc. and Doral Healthcare Finance (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 20, 2011)
| | | | 10.7 | | Amendment No.1 to Loan and Security Agreement, dated May 31, 2013, among Zynex, Inc. Zynex Medical, Inc. Zynex NeuroDiagnostics, Inc., Zynex Monitoring Solutions, Inc. Zynex Billing and Consulting, LLC and Doral Healthcare Finance (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013). | | | | 10.8 | | Office Lease, effective May 1, 2013, between Public Service Credit Union and Zynex Medical, Inc. (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013). | | | | 10.9 | | Lease Termination Agreement. (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014). | | | | 10.10 | | Park Meadows Corporate Center III and IV Office Lease Between Public Credit Service Credit Union (Landlord) and Zynex Medical, Inc. (Tenant) . (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014). | | | | 10.11 | | Forbearance Agreement, effective December 17, 2014, between Zynex, Inc. and Triumph Community Bank, N.A., dba Triumph Healthcare Finance (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 24, 2014) | | | | 10.12 | | Amendment No. 1 To Forbearance Agreement dated March 27, 2015.(incorporated by reference to Exhibit 10.12 to the Company’s Report on Form 10-K filed on March 31, 2015) | | | | 10.13 | | Amendment No. 2 To Forbearance Agreement dated June 30, 2015. (incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 10-Q filed on August 14, 2015) | | | | 10.14 | | Amendment No. 3 To Forbearance Agreement dated September 30, 2015. (incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 10-Q filed on November 17, 2015) | | | | 10.15 | | Amendment No. 4 To Forbearance Agreement dated December 15, 2015. (incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 8-K filed on December 31, 2015) | | | | 10.16 | | Amendment No.5 To Forbearance Agreement dated March 28, 2016 (incorporated by reference to Exhibit 10.16 to the Company’s Report on Form 10K filed on March 31, 2016) | | | | 10.17 | | Amendment No. 6 to Forbearance Agreement dated June 30, 2016 (incorporated by reference to Exhibit 10.17 to the Company’s Report on Form 10-Q filed on November 14, 2016) | | | | 10.18 | | Amendment No. 7 to Forbearance Agreement dated September 29, 2016 (incorporated by reference to Exhibit 10.18 to the Company’s Report on Form 10-Q filed on November 14, 2016) | | | | 10.19 | | Amendment to Lease Agreement dated August 12, 2016 (incorporated by reference to Exhibit 10.19 to the Company’s Report on Form 10-Q filed on November 14, 2016) | | | | 10.20 | | Amendment No. 8 To Forbearance Agreement dated December 16, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K dated December 16, 2016) | | | | 10.21 | | Amendment No. 9 To Forbearance Agreement dated April 18, 2017 (incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K dated April 17, 2017) | | | | 10.22 | | Employment agreement for Daniel J. Moorhead dated June 5, 2017 ( incorporated(incorporated by reference of Exhibit 10.1 to the Company’s Report on Form 8K filed on June 8, 2017) | | | | 10.2310.4 | | Employment Offer Letter to Michael Hartberger dated January 9, 2016Office Lease, effective October 20, 2017, between CSG Systems, Inc. and Zynex Medical, Inc. (incorporated by reference to Exhibit 11.110.1 of the Company’s Report on Form 8K filed on October 26, 2017).
| | | | 10.5 | | Zynex, Inc. Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8K filed on January 11, 2018) | | | | 10.6 | | Equity Distribution Agreement, dated October 29, 2019 between Zynex, Inc. and Piper Jaffray & Co. (incorporated by reference to Exhibit 1.1 of the Company’s Current Report on Form 8K filed on October 29, 2019) |
| | |
|---|
Exhibit
Number | | Description |
|---|
| | |
|---|
| | | 10.7 | | Amendment to Sublease Agreement, effective January 3, 2020, between CSG Systems, Inc. and Zynex, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Report on Form 8-K filed on January 7, 2020 | | | | 10.8 | | Underwriting Agreement dated July 14, 2020, among certain selling stockholders, Piper Sandler & Co., and Zynex, Inc. (incorporated by reference to Exhibit 1.1 of the Company’s Report on Form 8-K filed on July 17, 2020) | | | | 10.9 | | Lease Agreement, effective September 30, 2020, between GIG CW Compark, LLC and Zynex, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Report on Form 8-K filed on October 6, 2020). | | | | 10.10 | | Sublease Agreement between Zynex, Inc. and Cognizant Trizetto Software Group, Inc. dated April 8, 2021 (incorporated by reference to Exhibit 10.1 of the Company’s Report on Form 8-K filed on April 9, 2021) | | | | 10.11 | | Stock Purchase Agreement by and among Kestrel Labs, Inc., Zynex Monitoring Solutions Inc., Zynex, Inc. and Selling Shareholders named herein dated as of December 22, 2021 (incorporated by reference to Exhibit 10.1 of the Company’s Report on Form 8-K filed on December 23, 2021) | | | | 10.12 | | The Loan Agreement and accompanying documents dated December 22, 2021 among Bank of America N.A., Zynex Medical, Inc., and Zynex Monitoring Solutions (incorporated by reference to Exhibit 10.1 of the Company’s Report on Form 8-K filed on December 30, 2021) | | | | 10.13 | | Amendment to Stock Purchase Agreement by and among Kestrel Labs, Inc., Zynex Monitoring Solutions, Inc. And Selling Shareholders named therein dated as of July 27, 2023 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 11, 2016)July 31, 2023) |
† | Denotes management contract or compensatory plan or arrangement |
ITEM 16. FORM 10-K SUMMARY None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. | | | | | Date: February 28, 2018March 12, 2024 | | By: | /s/ Thomas Sandgaard | | | | Thomas Sandgaard | | | | Chairman, President, Chief Executive Officer and Principal Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date | | | | | Date | | Name and Title | | Signature | | | | | | February 28, 2018March 12, 2024 | | Thomas Sandgaard, | | /s/ THOMAS SANDGAARDThomas Sandgaard | | | | Chairman, President, Chief Executive Officer and Principal Executive Officer | | | | | | | | February 28, 2018March 12, 2024 | | Daniel Moorhead | | /s/ DANIEL MOORHEADDaniel Moorhead | | | Chief Financial Officer and Principal Financial Officer | | | | | | | | February 28, 2018March 12, 2024 | | Barry D. Michaels | | /s/ BARRYBarry D. MICHAELSMichaels | | | Director | | | | | | | | February 28, 2018March 12, 2024 | | Michael Cress | | /s/ MICHAEL CRESSMichael Cress | | | Director | | | | | | | | March 12, 2024 | | Joshua R. Disbrow | | /s/ Joshua R. Disbrow | | | Director | | |
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting To the Shareholders and Board of Directors of Zynex, Inc. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMAdverse Opinion on Internal Control over Financial Reporting
We have audited Zynex, Inc.’s (the "Company") internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in “Management's Annual Report on Internal Control Over Financial Reporting”: It was determined that as of December 31, 2023, the Company's primary change management controls were not designed and implemented effectively to ensure IT program and data changes affecting the Company’s financial IT applications and underlying accounting records, are identified, tested, authorized and implemented appropriately to validate that data produced by its relevant IT system(s) were complete and accurate Other Information Technology General Controls, automated process-level controls, and manual controls that are dependent upon the information derived from such financially relevant systems were also determined to be ineffective as a result of such deficiency. Business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted; Ineffective design and implementation of controls over the valuation of accounts receivable to properly address the risk of material misstatement. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the fiscal December 31, 2023 consolidated financial statements, and this report does not affect our report dated March 12, 2024 on those consolidated financial statements. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and related notes of the Company, and our report dated March 12, 2024 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management Annual Report on Internal Control Over Financial Reporting". Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate. /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2022. New York, NY March 12, 2024. Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Zynex Inc. and subsidiaries Lone Tree, ColoradoOpinion on the Financial Statements
OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS
We have audited the accompanying consolidated balance sheets of Zynex Medical, Inc. and subsidiaries (the "Company"“Company”) as of December 31, 20172023 and 2016, and2022, the related consolidated statements of comprehensive income, stockholders’ equity and cash flows and stockholders' equity for each of the two years in the two-year period ended December 31, 2017,2023, and the related notes (collectively referred to as the "financial statements"“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the two years in the two-year period ended December 31, 2017,2023, in conformity with accounting principles generally accepted in the United States of America. BASIS FOR OPINIONWe also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2023, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 12, 2024, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of material weaknesses.
Basis for Opinion These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Estimation of Transaction Price and Variable Consideration for Revenue Recognition including related Valuation of Accounts Receivable Critical Audit Matter Description The Company’s revenue is derived from sales and leases of electrotherapy devices and sales of related supplies and complementary products. The Company recognizes revenue when control of the product has been transferred to the patient, in the amount that reflects the consideration the Company expects to receive. The Company estimates revenues using the portfolio approach based upon historical rates of collection, aging of receivables, product mix, trends in historical reimbursement rates by third-party payer types, and current relationships and experience with the third-party payers, which includes estimated variable consideration and relevant constraints for third-party payer refund requests, deductions and adjustments. We identified the Company's estimation of transaction price related to variable consideration for revenue recognition, including the related valuation of accounts receivable, as a critical audit matter. Auditing the Company's determination of variable consideration and the related constraint for revenue recognition including the recorded value for accounts receivable was challenging and complex due to the high degree of subjectivity involved in evaluating management’s estimates. This required a high degree of auditor judgment and increased extent of effort to audit and evaluate management’s key judgments. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to revenue recognition and accounts receivable include the following, among others: | /s/ EKS&H LLLP● | | | | February 28, 2018 Denver, Colorado | | | | We have served asgained an understanding of the design of the controls over the Company's auditor since 2017.contracts with customers including those controls over the processes to develop key management estimates. |
| ● | We performed testing throughout the year on a sample of contracts to test the validity of sales transactions and cash receipts application. |
| ● | We evaluated the significant assumptions and the accuracy and completeness of the underlying data used in management’s calculations, including evaluating management’s estimate of historical reimbursement experience as well as expected future payment behavior through a combination of underlying data validation by inspection of source documents, independent recalculation of management’s analysis, review of correspondence with third-party payers, inquiries with management and evaluation of trends in collection rates and refund requests. |
/s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2022. New York, NY
March 12, 2024 ZYNEX, INC.
CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) | | | 2017 | | | 2016 | | | ASSETS | | | | | | | | | | Current assets: | | | | | | | | | | Cash | | $ | 5,565 | | | $ | 247 | | | Accounts receivable, net | | | 2,185 | | | | 3,028 | | | Inventory, net | | | 423 | | | | 107 | | | Prepaid expenses | | | 198 | | | | 40 | | | Total current assets | | | 8,371 | | | | 3,422 | | | Property and equipment, net | | | 188 | | | | 580 | | | Deposits | | | 370 | | | | 55 | | | Amortizable intangible assets, net | | | - | | | | 34 | | | Total assets | | $ | 8,929 | | | $ | 4,091 | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | Current liabilities: | | | | | | | | | | Line of credit | | $ | - | | | $ | 2,771 | | | Current portion of unsecured subordinated promissory notes | | | 231 | | | | - | | | Current portion of capital leases | | | 123 | | | | 118 | | | Accounts payable and accrued expenses | | | 2,243 | | | | 3,244 | | | Accrued payroll and related taxes | | | 538 | | | | 732 | | | Deferred insurance reimbursement | | | 880 | | | | 880 | | | Total current liabilities | | | 4,015 | | | | 7,745 | | | Long-term liabilities: | | | | | | | | | | Capital leases, less current portion | | | - | | | | 136 | | | Warranty liability | | | 12 | | | | 12 | | | Total liabilities | | | 4,027 | | | | 7,893 | | | | | | | | | | | | | Commitments and contingencies | | | | | | | | | | Stockholders' equity (deficit): | | | | | | | | | Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares
issued and outstanding as of December 31, 2017 and December 31, 2016 | | | - | | | | - | | | Common stock, $0.001 par value; 100,000,000 shares authorized; | | | | | | | | | | 32,864,877 issued and 32,778,040 outstanding as of December 31, 2017 | | | | | | | | | | 31,271,234 issued and outstanding as of December 31, 2016 | | | 33 | | | | 31 | | | Additional paid-in capital | | | 7,612 | | | | 6,032 | | | Treasury stock 86,837 and 0 shares, at December 31, 2017 and 2016, respectively, at cost | | | (243 | ) | | | - | | | Accumulated deficit | | | (2,411 | ) | | | (9,776 | ) | | Total Zynex, Inc. stockholders' equity (deficit) | | | 4,991 | | | | (3,713 | ) | | Non-controlling interest | | | (89 | ) | | | (89 | ) | | Total stockholders' equity (deficit) | | | 4,902 | | | | (3,802 | ) | | Total liabilities and stockholders' equity | | $ | 8,929 | | | $ | 4,091 | |
| | | | | | | | | December 31, | | December 31, | | | 2023 | | 2022 | ASSETS | | | | | | | Current assets: | | | | | | | Cash and cash equivalents | | $ | 44,579 | | $ | 20,144 | Accounts receivable, net | | | 26,838 | | | 35,063 | Inventory, net | | | 13,106 | | | 13,484 | Prepaid expenses and other | | | 3,332 | | | 868 | Total current assets | | | 87,855 | | | 69,559 | | | | | | | | Property and equipment, net | | | 3,114 | | | 2,175 | Operating lease asset | | | 12,515 | | | 12,841 | Finance lease asset | | | 587 | | | 270 | Deposits | | | 409 | | | 591 | Intangible assets, net of accumulated amortization | | | 8,158 | | | 9,067 | Goodwill | | | 20,401 | | | 20,401 | Deferred income taxes | | | 3,865 | | | 1,562 | Total assets | | $ | 136,904 | | $ | 116,466 | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | Current liabilities: | | | | | | | Accounts payable and accrued expenses | | | 8,433 | | | 5,617 | Operating lease liability | | | 3,729 | | | 2,476 | Finance lease liability | | | 196 | | | 128 | Income taxes payable | | | 633 | | | 1,995 | Current portion of debt | | | — | | | 5,333 | Accrued payroll and related taxes | | | 5,541 | | | 5,537 | Total current liabilities | | | 18,532 | | | 21,086 | Long-term liabilities: | | | | | | | Long-term portion of debt, less issuance costs | | | — | | | 5,293 | Convertible senior notes, less issuance costs | | | 57,605 | | | — | Contingent consideration | | | — | | | 10,000 | Operating lease liability | | | 14,181 | | | 13,541 | Finance lease liability | | | 457 | | | 188 | Total liabilities | | | 90,775 | | | 50,108 | | | | | | | | Commitments and contingencies (Note 14) | | | | | | | Stockholders’ equity: | | | | | | | Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of December 31, 2023 and December 31, 2022 | | | — | | | — | Common stock, $0.001 par value; 100,000,000 shares authorized; 41,980,166 issued and 32,933,776 outstanding as of December 31, 2023, 41,658,132 issued and 36,825,081 outstanding as of December 31, 2022 | | | 33 | | | 39 | Additional paid-in capital | | | 90,878 | | | 82,431 | Treasury stock of 8,545,044 and 4,253,015 shares at December 31, 2023 and December 31, 2022, respectively, at cost | | | (71,562) | | | (33,160) | Retained earnings | | | 26,780 | | | 17,048 | Total stockholders’ equity | | | 46,129 | | | 66,358 | Total liabilities and stockholders’ equity | | $ | 136,904 | | $ | 116,466 |
See accompanying notes to consolidated financial statements. ZYNEX, INC.
CONSOLIDATED STATEMENTSSTATEMENT OF COMPREHENSIVE INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 2017 AND 2016
| | | | | | | | | For the Years Ended December 31, | | | 2023 | | 2022 | NET REVENUE | | | | | | | Devices | | $ | 58,822 | | $ | 43,497 | Supplies | | | 125,500 | | | 114,670 | Total net revenue | | | 184,322 | | | 158,167 | | | | | | | | COSTS OF REVENUE AND OPERATING EXPENSES | | | | | | | Costs of revenue - devices and supplies | | | 38,366 | | | 32,005 | Sales and marketing | | | 86,659 | | | 67,116 | General and administrative | | | 48,517 | | | 36,108 | Total costs of revenue and operating expenses | | | 173,542 | | | 135,229 | | | | | | | | Income from operations | | | 10,780 | | | 22,938 | | | | | | | | Other income (expense) | | | | | | | Gain on sale of fixed assets | | | 39 | | | — | Gain (loss) on change in fair value of contingent consideration | | | 2,854 | | | (300) | Interest expense, net | | | (1,094) | | | (440) | Other income (expense), net | | | 1,799 | | | (740) | | | | | | | | Income from operations before income taxes | | | 12,579 | | | 22,198 | Income tax expense | | | 2,847 | | | 5,150 | Net income | | $ | 9,732 | | $ | 17,048 | | | | | | | | Net income per share: | | | | | | | Basic | | $ | 0.27 | | $ | 0.44 | Diluted | | $ | 0.27 | | $ | 0.44 | | | | | | | | Weighted average basic shares outstanding | | | 35,555 | | | 38,467 | Weighted average diluted shares outstanding | | | 36,142 | | | 39,127 |
| | | For the Years Ended December 31, | | | | | 2017 | | | 2016 | | | NET REVENUE | | | | | | | | | | Product devices | | $ | 8,755 | | | $ | 9,032 | | | Product supplies | | | 14,677 | | | | 4,281 | | | Total revenue | | | 23,432 | | | | 13,313 | | | | | | | | | | | | | COSTS OF REVENUE AND OPERATING EXPENSES | | | | | | | | | | Costs of revenue - product & supply | | | 4,819 | | | | 3,517 | | | Selling, general and administrative expense | | | 9,669 | | | | 9,156 | | | Total costs of revenue and operating expenses | | | 14,488 | | | | 12,673 | | | | | | | | | | | | | Income from operations | | | 8,944 | | | | 640 | | | | | | | | | | | | | Other expense | | | | | | | | | | Other expense | | | - | | | | (204 | ) | | Interest expense | | | (1,450 | ) | | | (352 | ) | | Other expense | | | (1,450 | ) | | | (556 | ) | | | | | | | | | | | | Income from operations before income taxes | | | 7,494 | | | | 84 | | | Income tax expense | | | 129 | | | | 15 | | | Net Income | | | 7,365 | | | | 69 | | | Plus: Net income (loss) - noncontrolling interest | | | - | | | | - | | | Net income - attributable to Zynex, Inc.* | | $ | 7,365 | | | $ | 69 | | | | | | | | | | | | | Net income per share attributable to Zynex, Inc.: | | | | | | | | | | Basic | | $ | 0.23 | | | $ | 0.00 | | | Diluted | | $ | 0.22 | | | $ | 0.00 | | | | | | | | | | | | | Weighted average basic shares outstanding | | | 32,156 | | | | 31,271 | | | Weighted average diluted shares outstanding | | | 33,196 | | | | 31,271 | |
* There is no difference between net income and comprehensive income.
See accompanying notes to consolidated financial statements. ZYNEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) YEARS ENDED DECEMBER 31, 2017 AND 2016
| | | | | | | | | For the Years Ended December 31, | | | 2023 | | 2022 | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | Net income | | $ | 9,732 | | $ | 17,048 | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Depreciation | | | 2,684 | | | 2,197 | Amortization | | | 1,536 | | | 930 | Non-cash reserve charges | | | (91) | | | 82 | Stock-based compensation | | | 2,296 | | | 2,342 | Non-cash lease expense | | | 904 | | | 800 | Benefit for deferred income taxes | | | (2,303) | | | (851) | Change in fair value of contingent consideration | | | (2,854) | | | 300 | Gain on sale of fixed assets | | | (39) | | | — | Change in operating assets and liabilities: | | | | | | | Short-term investments | | | (190) | | | — | Accounts receivable | | | 8,225 | | | (6,430) | Prepaid and other assets | | | (1,150) | | | (180) | Accounts payable and other accrued expenses | | | 269 | | | 1,834 | Inventory | | | (1,445) | | | (4,320) | Deposits | | | 182 | | | (6) | Net cash provided by operating activities | | | 17,756 | | | 13,746 | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | Purchase of property and equipment | | | (1,206) | | | (418) | Purchase of short-term investments | | | (9,810) | | | — | Maturity of short-term investments | | | 10,000 | | | — | Proceeds on sale of fixed assets | | | 50 | | | — | Net cash used in investing activities | | | (966) | | | (418) | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | Payments on finance lease obligations | | | (128) | | | (118) | Cash dividends paid | | | (3) | | | (3,613) | Purchase of treasury stock | | | (37,924) | | | (26,426) | Proceeds from issuance of convertible senior notes, net of issuance costs | | | 57,018 | | | — | Proceeds from the issuance of common stock on stock-based awards | | | 86 | | | 46 | Principal payments on long-term debt | | | (10,667) | | | (5,333) | Taxes withheld and paid on employees’ equity awards | | | (737) | | | (352) | Net cash provided by (used in) financing activities | | | 7,645 | | | (35,796) | | | | | | | | Net increase (decrease) in cash and cash equivalents | | | 24,435 | | | (22,468) | Cash and cash equivalents at beginning of year | | | 20,144 | | | 42,612 | Cash and cash equivalents at end of year | | $ | 44,579 | | $ | 20,144 | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | Cash paid on interest, net | | $ | (739) | | $ | (391) | Cash paid for rent | | $ | (3,055) | | $ | (3,622) | Cash paid for income taxes | | $ | (6,456) | | $ | (6,294) | Supplemental disclosure of non-cash investing and financing activities: | | | | | | | Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 4,214 | | $ | 211 | Right-of-use assets obtained in exchange for new finance lease liabilities | | $ | 464 | | $ | — | Lease incentive | | $ | 1,400 | | $ | — | Vesting of restricted stock awards | | $ | (3) | | $ | — | Inventory transferred to property and equipment under lease | | $ | 1,823 | | $ | 1,592 | Capital expenditures not yet paid | | $ | 366 | | $ | 138 | Treasury Stock not yet paid | | $ | 481 | | $ | 224 | Non-cash dividend adjustment | | $ | (1) | | $ | — | Escrow share lock-up adjustment | | $ | (7,146) | | $ | — | Excise tax accrual | | $ | 347 | | $ | — |
| | | For the Years Ending December | | | | | 2017 | | | 2016 | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | Net income | | $ | 7,365 | | | $ | 69 | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | Depreciation | | | 252 | | | | 395 | | | Amortization of intangible assets | | | 34 | | | | 40 | | | Amortization of debt issuance costs | | | 511 | | | | - | | | Stock based compensation | | | 66 | | | | 200 | | | Non-cash compensation to consultant | | | 228 | | | | - | | | Loss on disposal of product inventory | | | 227 | | | | 30 | | | Loss on disposal of property | | | - | | | | 22 | | | Interest expense related to common stock issued in connection with our private placement | | | 739 | | | | - | | | Changes in operating assets and liabilities: | | | | | | | | | | Accounts receivable | | | 843 | | | | 585 | | | Deferred Revenue | | | - | | | | 845 | | | Prepaid and other assets | | | (473 | ) | | | (14 | ) | | Accounts payable and accrued liabilities | | | (1,216 | ) | | | 569 | | | Inventory | | | (316 | ) | | | 198 | | | Net cash provided by operating activities | | | 8,260 | | | | 1,769 | | | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | Purchase of Property and Equipment | | | (87 | ) | | | (226 | ) | | Net cash used in investing activities | | | (87 | ) | | | (226 | ) | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | Net (repayments) borrowings on line of credit | | | (2,771 | ) | | | (1,232 | ) | | Principal payments on subordinated notes payable | | | (650 | ) | | | - | | | Proceeds from unsecured subordinated promissory notes | | | 1,035 | | | | - | | | Payment of commission and placement agent fees and related expenses | | | (155 | ) | | | - | | | Payments on capital lease obligations | | | (131 | ) | | | (72 | ) | | Purchase of treasury stock | | | (222 | ) | | | - | | | Proceeds from the issuance of stock | | | 39 | | | | - | | | Net cash used in financing activities | | | (2,855 | ) | | | (1,304 | ) | | | | | | | | | | | | Net increase in cash and cash equivalents | | | 5,318 | | | | 239 | | | Cash and cash equivalents at beginning of period | | | 247 | | | | 8 | | | Cash and cash equivalents at end of period | | $ | 5,565 | | | $ | 247 | | | | | | | | | | | | | Supplemental disclosure of cash and non-cash transactions: | | | | | | | | | | Interest paid | | $ | 200 | | | $ | 351 | | | Treasury stock purchased and included in accrued liabilities but not settled | | $ | 21 | | | $ | - | |
See accompanying notes to consolidated financial statements. ZYNEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICITEQUITY YEARS ENDED DECEMBER 31, 20172023 AND 20162022 (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) | | | | | | | | | Additional | | | | | | | | | | | | Total | | | | | Common Stock | | | Paid-in | | | Treasury | | | Accumulated | | | Non-Controlling | | | Stockholders' | | | | | Shares | | | Amount | | | Capital | | | Stock | | | Deficit | | | Interest | | | Equity | | | Balance at January 1, 2016 | | | 31,271,234 | | | $ | 31 | | | $ | 5,832 | | | $ | - | | | $ | (9,845 | ) | | $ | (89 | ) | | $ | (4,071 | ) | | Stock-based compensation expense | | | - | | | | - | | | | 185 | | | | - | | | | - | | | | - | | | | 185 | | | Service provider warrant expense | | | - | | | | - | | | | 15 | | | | - | | | | - | | | | - | | | | 15 | | | Net income | | | - | | | | - | | | | - | | | | - | | | | 69 | | | | | | | | 69 | | | Balance at December 31, 2016 | | | 31,271,234 | | | $ | 31 | | | $ | 6,032 | | | $ | - | | | $ | (9,776 | ) | | $ | (89 | ) | | $ | (3,802 | ) | | Stock option exercises | | | 41,143 | | | | - | | | | 39 | | | | - | | | | - | | | | - | | | | 39 | | | Common stock issued pursuant to the | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | | Private Placement | | | 1,552,500 | | | | 2 | | | | 1,247 | | | | - | | | | - | | | | - | | | | 1,249 | | | Stock-based compensation expense | | | - | | | | - | | | | 66 | | | | - | | | | - | | | | - | | | | 66 | | | Service provider warrant expense | | | - | | | | - | | | | 228 | | | | - | | | | - | | | | - | | | | 228 | | | Treasury stock | | | (86,837 | ) | | | - | | | | - | | | | (243 | ) | | | - | | | | - | | | | (243 | ) | | Net income | | | - | | | | - | | | | - | | | | - | | | | 7,365 | | | | | | | | 7,365 | | | Balance at December 31, 2017 | | | 32,778,040 | | | $ | 33 | | | $ | 7,612 | | | $ | (243 | ) | | $ | (2,411 | ) | | $ | (89 | ) | | $ | 4,902 | |
| | | | | | | | | | | | | | | | | | | | | | | | | Additional | | | | | | | | Total | | | Common Stock | | Paid-in | | Treasury | | Retained | | Stockholders’ | | | Shares | | Amount | | Capital | | Stock | | Earnings | | Equity | Balance at December 31, 2021 | | 39,737,890 | | $ | 41 | | $ | 80,397 | | $ | (6,513) | | $ | — | | $ | 73,925 | Exercised and vested stock-based awards | | 322,237 | | | 1 | | | 45 | | | — | | | — | | | 46 | Stock-based compensation expense | | — | | | — | | | 2,342 | | | — | | | — | | | 2,342 | Shares of common stock withheld to pay taxes on employees’ equity awards | | (83,201) | | | — | | | (353) | | | — | | | — | | | (353) | Purchase of treasury stock | | (3,006,616) | | | (3) | | | — | | | (26,647) | | | — | | | (26,650) | Escrow shares adjustment | | (156,673) | | | — | | | — | | | — | | | — | | | — | Stock dividend adjustments | | 11,444 | | | — | | | — | | | — | | | — | | | — | Net income | | — | | | — | | | — | | | — | | | 17,048 | | | 17,048 | Balance at December 31, 2022 | | 36,825,081 | | $ | 39 | | $ | 82,431 | | $ | (33,160) | | $ | 17,048 | | $ | 66,358 | Exercised and vested stock-based awards | | 459,246 | | | (3) | | | 89 | | | — | | | — | | | 86 | Stock-based compensation expense | | — | | | — | | | 2,296 | | | — | | | — | | | 2,296 | Shares of common stock withheld to pay taxes on employees’ equity awards | | (58,522) | | | — | | | (737) | | | — | | | — | | | (737) | Purchase of treasury stock | | (4,292,029) | | | (3) | | | — | | | (38,402) | | | — | | | (38,405) | Excise tax on net treasury stock purchases | | — | | | — | | | (347) | | | — | | | — | | | (347) | Escrow share adjustment | | — | | | — | | | 7,146 | | | — | | | — | | | 7,146 | Net income | | — | | | — | | | — | | | — | | | 9,732 | | | 9,732 | Balance at December 31, 2023 | | 32,933,776 | | $ | 33 | | $ | 90,878 | | $ | (71,562) | | $ | 26,780 | | $ | 46,129 |
See accompanying notes to consolidated financial statements. ZYNEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 20172023 AND 20162022 (1) (1)ORGANIZATION, NATURE OF BUSINESS AND MANAGEMENT’S PLANS Organization Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado. We operateThe term “the Company” refers to Zynex, Inc. and its active and inactive subsidiaries. The Company operates in one primary business segment, Electrotherapymedical devices which include electrotherapy and Pain Management Products.pain management products. As of December 31, 2017,2023, the Company’s only active subsidiary issubsidiaries are 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 years ended December 31, 2017operations, and 2016 from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation). ZMS has developed a fluid monitoring system which received initial approval by the U.S. Food and Drug Administration (“FDA”) during 2020 and is developing a blood volume monitoring device, but it is not yet developed or ready for market and, as a result,pursuing CE Marking in Europe. ZMS has achieved no revenues to date. ItsThe Company’s inactive subsidiaries include Kestrel Labs, Inc. (“Kestrel,” a wholly-owned Colorado corporation), Zynex Europe, 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”), a wholly-owned Colorado Corporation), which was incorporated in June 2015 as a wholly-owned Colorado corporation.2015. The Company’s compoundcompounding pharmacy operated as a division of ZMI dba as Pharmazy through January 2016. The term “the Company” refersIn December 2021, the Company acquired 100% of Kestrel Labs, Inc. (“Kestrel”), a laser-based, noninvasive patient monitoring technology company. Kestrel’s laser-based products include the NiCO™ CO-Oximeter, a multi-parameter pulse oximeter, and HemeOx™, a total hemoglobin oximeter that enables continuous arterial blood monitoring. Both NiCO and HemeOx are yet to Zynex, Inc. and its active and inactive subsidiaries.
Nature of Business
ZMI designs, manufactures and marketsbe presented to the U.S. Food and Drug Administration (FDA) cleared(“FDA”) for market clearance. All activities related to Kestrel flow through our ZMS subsidiary.
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. ZEU was formed in 2012The Company’s devices are intended for pain management to conduct international salesreduce reliance on medications and marketing for Company products. ZEU produced minimal revenues during 2017provide rehabilitation and 2016. ZMS was formed to developincreased mobility through the utilization of non-invasive muscle stimulation, electromyography technology, interferential current (“IFC”), neuromuscular electrical stimulation (“NMES”) and markettranscutaneous electrical nerve stimulation (“TENS”). All of our medical devices are designed to be patient friendly and designed for non-invasive cardiac monitoring,home use. Our devices are small, portable, battery operated, and include an electrical pulse generator which is connected to the body via electrodes. All of our medical devices are marketed in the U.S. and are subject to FDA regulation and approval. Our products ofrequire a physician’s prescription before they can be dispensed in the U.S. Our primary product is the NexWave device. The NexWave is marketed to physicians and therapists by our field sales representatives. The NexWave requires consumable supplies, such as electrodes and batteries, which are under development. The Company is currently developingshipped to patients on a blood volume monitoring device. ZMS produced no revenues during 2017 or 2016.recurring monthly basis, as needed.
In 2017During the years ended December 31, 2023, and 2016,2022, the Company generated substantially all of its revenue in North America from sales and supplies of its products and suppliesdevices to patients dealers and health carehealthcare providers.
Liquidity
During 2013-2015, the Company suffered operating losses which caused a lack of liquidity and a substantial working capital deficit. This raised substantial doubt about the Company’s ability to continue as a going concern.
During 2016, the Company generated net income during Q3 and Q4 and combined with the profitability in 2017, the Company has recorded six consecutive profitable quarters, paid off its line of credit with Triumph Healthcare Finance, a division of TBK Bank, SSB, formerly known as Triumph Community Bank, (“Triumph”) (Note 9) and generated cash reserves and positive working capital.
In accordance with Accounting Standards Codification (“ASC”) 205-40, Presentation of Financial Statements – Going Concern, as of December 31, 2017, management evaluated whether there are conditions and events that raise doubt about the entity’s ability to continue as a going concern and concluded there is not significant doubt. The Company is currently able to meet its obligationsdeclared a 10% stock dividend on November 9, 2021, which was effective on January 21, 2022. Except as they become due within one year fromotherwise indicated, all related amounts reported in the dateconsolidated financial statements, including common share quantities, earnings per share amounts and exercise prices of options, have been retroactively adjusted for the Company releases its financial statements. Management’s evaluation is based only on relevant conditions and events that are known and reasonably knowable aseffect of the date of these financial statements.this stock dividend.
(2) (2)SIGNIFICANT ACCOUNTING POLICIES 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. F-9 Non-controlling Interest
Non-controlling interest in the equity
Reclassifications
Certain reclassifications have been made to the 2016 financial statements to conform to the consolidated 2017 financial statement presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.
Use of Estimates Preparation of financial statements in conformity with U.S. GAAPgenerally accepted accounting principles in the United States of America (“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 uncollectibleexpected net collectable value of its accounts receivable the reserve for obsolete, excess and damagedrelated revenue, inventory reserves, the life of its rented equipment, valuation ofleased unit devices, stock-based compensation, and valuation of long-lived assets acquired in business combinations, valuation of contingent consideration, and realizability of deferred tax assets. Revenue Recognition, Accounts Receivable, Allowance for Billing Adjustments and Collectability
The Company recognizes revenue when each of the following four conditions are met: 1) a contract or sales arrangement exists, 2) products have been delivered and title has transferred 3) the price of the products or services is fixed or determinable, and 4) collectability is reasonably assured. The Company recognizes revenue for medical units and supplies when we receive notice that the product has been prescribed and delivered to the patient. The Company, prior to recognizing revenue verifies the patient’s insurance coverage or obtains the insurance company preauthorization, when required. Revenue from supplies is recognized upon delivery. Revenue from sales to distributors is recognized when the Company receives notice of receipt by the distributor. Revenue is reported net, after adjustments for estimated insurance company or governmental agency (collectively “Third-party Payors”) reimbursement deductions and, for wholesale customers and patient billings, an allowance for uncollectible accounts. The Third-party Payor reimbursement deductions are 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.
A significant portion of the Company’s revenues are derived, and the related receivables are due, from Third-party Payors. The nature of these receivables within the medical industry has typically resulted in long collection cycles. The process of determining what products will be reimbursed by Third-party Payors and the amounts that they will reimburse is complex and depends on conditions and procedures that vary among providers and may change from time to time. The Company maintains an allowance for billing adjustments and if necessary, an allowance for doubtful accounts. Billing adjustments result from reimbursements from Third-party Payors that are less than amounts claimed and from where the amount claimed by the Company exceeds the Third-party Payors usual, customary and reasonable reimbursement rate. The Company determines the amount of the allowance and adjusts it at the end of each reporting period, based on a number of factors, including historical rates of collection, the aging of the receivables, trends in the historical rates of collection and current relationships and experience with the Third-party Payors. If the rates of collection of past-due receivables recorded for previous fiscal periods changes, or if there is a trend in the rates of collection on those receivables, the Company may be required to change the rate at which it provides for additions to the allowance. A change in the rates of the Company’s collections 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. We believe we have a sufficient history of collection experience to estimate the net collectible amounts by payor. However, changes to the allowance for billing adjustments and uncollectible accounts, which are recorded as a reduction of revenue, have historically fluctuated and may continue to fluctuate significantly from quarter to quarter and year to year.
Due to the nature of the medical industry and the reimbursement environment in which the Company operates, estimates are required to record net revenues and accounts receivable at their net realizable values (also known as net collectible value). Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of third-party billing arrangements and the uncertainty of reimbursement amounts for certain products or services from 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 reimbursement, as well as changes in our billing practices to increase cash collections, it is possible that management’s estimates could change in the near term, 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.
The Company frequently receives refund requests from insurance providers relating to specific patients and dates of service. Billing and reimbursement disputes are very common in the Company’s industry. 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 insurance providers. The Company frequently has offsets against such refund requests, and sometimes amounts are due to the Company in excess of the amounts of refunds requested by the insurance providers. Therefore, at the time of receipt of such refund requests, the Company is generally unable to determine if a refund request is valid. The Company maintains an allowance for estimated future refunds which management believes is sufficient to cover future requests for refunds.
However, no assurances can be given with respect to such estimates of reimbursements and offsets or the ultimate outcome of any refund requests. In addition to the allowance for billing adjustments, the Company records an allowance for uncollectible accounts receivable for wholesale (sales to distributors) sales and certain patient billings when necessary. Uncollectible accounts receivable are primarily a result of non-payment from patients who have been direct billed for co-payments or deductibles, lack of appropriate insurance coverage and disallowances of charges by Third-party Payors. If there is a change to a material insurance provider contract or policy, application by a provider, a decline in the economic condition of providers or a significant turnover of Company billing personnel resulting in diminished collection effectiveness, the estimate of the allowance for billing adjustments and uncollectible accounts receivable may not be adequate and may result in an increase in the future.
As of December 31, 2017, the Company believes its accounts receivable is reasonably stated at its net realizable / collectible value and has an adequate allowance for billing adjustments including all known and estimated insurance disputes and refund requests.
Fair Value of Financial Instruments Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
The Company’s financial instruments at December 31, 2017, include cash, accounts receivable, accounts payable, and income taxes, for which currentaccrued liabilities. The carrying amounts of financial instruments, including cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short-term nature. Financial instrumentsshort maturities. The Company measures its long-term debt at December 31, 2017, also includefair value which approximates book value as the notes payablelong-term debt bears market rates of interest. The Company classified contingent consideration liabilities related to our private placement and capitalized leases,business acquisitions within Level 3 as factors used to develop the carryingestimated fair value were unobservable inputs that are not supported by market activity. The Company estimated the fair value of which approximatescontingent consideration liabilities using a Monte Carlo simulation. Changes in the fair value becauseof contingent liabilities in subsequent periods were recorded as a gain or (loss) in the interest rates on the outstanding borrowings are at rates that approximate market rates for borrowings with similar terms and average maturities. statements of income. Deferred Insurance ReimbursementCash and Cash Equivalents
During the first quarterThe Company considers all highly liquid investments with a maturity of 2016,three months or less when purchased to be cash equivalents. Short-term investments include investments with maturities greater than three months, but not exceeding 12 months, or highly liquid investments with maturities greater than 12 months that the Company collected $880,000 fromintends to liquidate during the next 12 months for working capital needs.
Accounts Receivable, Net The Company’s accounts receivables represent unconditional rights to consideration and are generated when a single insurance company for accounts receivable. The accounts receivable had been previously reducedpatient receives one of the Company’s devices, related supplies, or complementary products. In conjunction with fulfilling the Company’s obligation to zero by the allowance for billing adjustments. Subsequent to March 31, 2016, the insurance company verbally communicated todeliver a product, the Company that this payment was made in error and requested it be refunded tobills the insurance company. The Company recorded this $880,000 insurance reimbursement as a deferred insurance liability. However,patient’s third-party payer or the Company is disputingpatient. Billing adjustments represent the refund request and has initiated an internal review ofdifference between the reimbursement to determine that the original sales arrangement was properly executed, the products had been delivered and title was transferred, the price of the products or serviceslist prices and the reimbursement rate is fixedrates set by third-party payers, including Medicare, commercial payers, and determinable, andamounts billed directly to the patient. Specific amounts, if uncollected over a period of time, may be written off after several appeals, which in some cases may take longer than twelve months. Primarily, all the Company’s ultimate claimreceivables are due from patients with commercial or government health plans and workers’ compensation claims with a small portion related to the reimbursement is reasonably assured. The Company expects to record the appropriate amount as net revenue when such internal review is completeprivate pay individuals, attorney, and the Company’s claim to the amount is reasonably assured. No further communication has been received from the insurance company regarding the payment or requested refund.auto claims. Inventory, Net Inventory, which primarily represents finished goods,Inventories are valuedstated at the lower of cost (average) or market.net realizable value. Cost is computed using standard costs, which approximates actual costs on an average cost basis. Following are the components of inventory as of December 31, 2023 and 2022:
| | | | | | | | | 2023 | | 2022 | Raw materials | | $ | 4,601 | | $ | 3,506 | Work-in-process | | | 530 | | | 1,205 | Finished goods | | | 6,929 | | | 7,750 | Inventory in transit | | | 1,346 | | | 1,291 | | | $ | 13,406 | | $ | 13,752 | Less: reserve | | | (300) | | | (268) | | | $ | 13,106 | | $ | 13,484 |
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 equal to the difference between the costs of inventories on hand and the estimated market value based upon assumptions about future demand. If future demand is less favorable than currently projected by management, additional inventory write-downs may be required. Finished goods at December 31, 2017 and 2016 includes products (finished goods, parts and supplies) held at the Company’s headquarters. During 2016, the Company ramped up the EZ Rx Prescribe program, whereby the NexWave electrotherapy device is sold by prescription and is shipped from the Company manufacturing facilities. On December 31, 2017, the Company did not have open material inventory purchase commitments with vendors.
Allowance for Doubtful AccountsLong-lived Assets
The Company estimates uncollectible amounts,records intangible assets based on estimated fair value on the date of acquisition. Long-lived assets consist of net property and equipment and intangible assets. The finite-lived intangible assets are patents and are amortized on a straight-line basis over the estimated lives of the assets. The Company assesses impairment of long-lived assets when applicable,events or changes in circumstances indicate that their carrying value amount may not be recoverable. Circumstances which could trigger a review include but are not limited to: (i) significant decreases in the market price of the asset; (ii) significant adverse changes in the business climate or legal or regulatory factors; or (iii) expectations that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. If the estimated future undiscounted cash flows, excluding interest charges, from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. Useful lives of finite-lived intangible assets by each asset category are summarized below: | | | | | Estimated | | | Useful Lives | |
| in years | Patents | | 11 |
Property and equipment is recorded at cost. Repairs and maintenance expenditures are charged to expense as incurred. We compute depreciation expense on a straight-line basis over the estimated useful lives of the assets as follows: | | | Classification |
| Estimated Useful Life | Office furniture and equipment | | 5 to 7 years | Assembly equipment | | 7 years | Vehicles | | 5 years | Leasehold improvements | | Shorter of useful life or term of lease | Leased devices | | 9 months |
Leases The Company determines if an arrangement is a lease at inception or modification of a contract. 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 remaining 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 12 - Leases. A significant portion of our device revenue is derived from patients who obtain our devices under month-to-month lease arrangements where the Company is the lessor. Revenue related to devices on lease is recognized in accordance with Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”). Using the guidance in ASC 842, we concluded our transactions should be accounted for as operating leases based on the following criteria: | ● | 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. |
| ● | 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. |
| ● | 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 Revenue is derived from sales and leases of the Company’s electrotherapy devices and sales of related supplies and complementary products. Device sales can be in the form of a purchase or a lease. Supplies needed for the device can be set up as a recurring shipment or ordered through the customer support team or online store as needed. The Company recognizes revenue when control of the product has been transferred to the patient, in the amount that reflects the consideration the Company expects to receive. In general, revenue from sales of devices and supplies is recognized once the product is delivered to the patient, which is when control is deemed to have transferred to the patient. Sales of devices and supplies are primarily 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. 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 Accounting Standards Codification (“ASC”) 606 – “Revenue from Contracts with Customers” (“ASC 606”) and leases subject to ASC 842 (in thousands): | | | | | | | | | For the Years Ended December 31, | | | 2023 | | 2022 | Device revenue | | | | | | | Purchased | | $ | 23,971 | | $ | 14,393 | Leased | | | 34,851 | | | 29,104 | Total device revenue | | $ | 58,822 | | $ | 43,497 | Supplies revenue | | | 125,500 | | | 114,670 | Total revenue | | $ | 184,322 | | $ | 158,167 |
Revenues are estimated using the portfolio approach by third-party payer type based upon historical bad debts, current customer receivable balances, the agerates of customer receivable balances, the customer’s financial conditioncollection, aging of receivables, trends in historical reimbursement rates by third-party payer types, and current economic trends.relationships and experience with the third-party payers, which includes estimated constraints for third-party payer refund requests, deductions, allowance for uncollectible accounts and billing allowance adjustments. Inherent in these estimates is the risk they will have to be revised as additional information becomes available and constraints are released. If initial estimates are updated these changes are accounted for as increases or decreases in the transaction price. Assuming the underlying performance obligation to which the change in price relates has already been satisfied, those changes in transaction price are immediately recognized as increases or decreases in revenue (not credit losses (bad debt expense)) in the period in which the estimate changes. Additionally, the complexity of third-party payer billing arrangements, 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. Settlements with third-party payers for retroactive revenue adjustments due to audits, reviews, or investigations are considered variable consideration and are included in the determination of the estimated transaction price using the expected amount method. These adjustments to transaction price are estimated based on the terms of the payment agreement with the payer, correspondence from the payer, and historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Due to continuing changes in the healthcare industry and third-party payer reimbursement, it is possible the Company’s forecasting model to estimate collections could change, which could have an impact on the Company’s results of operations and cash flows. Any differences between estimated and actual collectability are reflected in the period in which payment is received. The Company monitors the variability and uncertain timing over third-party payer types in the portfolios. If there is a change in the Company’s third-party payer mix over time, it could affect net revenue and related receivables. The Company believes it has a sufficient history of collection experience to estimate the net collectible amounts by third-party payer type. However, changes to constraints related to billing adjustments and refund requests have historically fluctuated and may continue to fluctuate significantly from quarter-to-quarter and year-to-year. Goodwill Goodwill is recorded as the difference between the fair value of the purchase consideration and the estimated fair value of the net identifiable tangible and intangible assets acquired. Goodwill is not subject to amortization but is subject to impairment testing. The Company tests goodwill at least annually for impairment. The Company tests more frequently if indicators are present or changes in circumstances suggest that impairment may exist. These indicators include, among others, declines in sales, earnings, cash flows, or the development of a material adverse change in the business climate. The Company assesses goodwill for impairment at the reporting unit level. The estimates of fair value and the determination of reporting units requires management judgment. Debt Issuance Costs Debt issuance costs are costs incurred to obtain new debt financing. Debt issuance costs are presented in the accompanying consolidated balance sheets as a reduction in the carrying value of the debt and are accreted to interest expense using the effective interest method. Advertising and Marketing Costs Advertising and marketing costs are expensed as incurred. Advertising and marketing costs are included in Sales and marketing expense in the Company's Consolidated Statements of Income. Segment Information We defineThe Company defines operating segments as components of ourthe business enterprise for which separate financial information is reviewed regularly by the chief operating decision-makersChief Operating Decision-Makers to evaluate performance and to make operating decisions. We haveThe Company has identified our Chief Executive Officer, and Chief Financial Officer, and Chief Operating Officer as our chief operating decision-makersChief Operating Decision-Makers (“CODM”CODMs”).
WeThe Company currently operate ouroperates business as one operating segment which includes two revenue types: Product devicesDevices and Product supplies.
Supplies. Property and Equipment
Property and equipment are stated at cost. The Company removes the cost and the related accumulated depreciation from the accounts of assets sold or retired, and the resulting net gains or losses are included in the results of operations. Depreciation is computed using the straight-line method over the useful life of the asset ranging from three to seven years.
Repairs and maintenance costs are charged to expense as incurred.
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. AdvertisingEarnings Per Share
The Company expenses advertising costs as they are incurred. Advertising expense for eachcalculates basic earnings per share on the basis of the years ended December 31, 2017weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated using the weighted-average number of shares of common stock outstanding for the period plus the effect of potential dilutive common shares during the period using the treasury stock method and 2016 was approximately $0.1 million. if-converted method. Potential shares of common stock outstanding include unvested restricted stock awards, vested and unvested unexercised stock options, common stock purchase warrants, and convertible notes. Research and Development Research and developmentDevelopment costs are expensed when incurred. During 2023 and 2022, we incurred approximately $9.2 million and $7.1 million in operating expenses, respectively, related to our ZMS operations. During 2023 and 2022, approximately $7.7 million and $6.0 million of the expenses, respectively, required capitalization under Section 174 - “Amortization of Research and development expense for the years ended December 31, 2017 and 2016 was approximately $0.1 million and $0.3 million, respectively. Research and development costs as well as salaries related toExperimental Expenditures” tax treatment. We expect our research and development are includedexpenses to increase in selling, general and administrative expenses. 2024 as our ZMS business expands. Income Taxes We recordThe Company records 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 condensed consolidated balance sheets, as well as operating loss and tax credit carry-forwards. We measure deferredsheets. Deferred tax assets and liabilities are measured 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 deferredDeferred tax assets are reduced 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 ofTax benefits are recognized from uncertain tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must beif it is more likely than not tothat the tax position will be sustained uponon examination by the taxing authorities.
On December 22, 2017,authorities based on 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.
The Company is subject to the provisionstechnical merits of the Financialposition.
Recently Issued 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. Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined. Pursuant to the SAB118, the Company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The final impact on the Company from the Tax Act’s transition tax legislation may differ from the aforementioned estimates due to the complexity of calculating and supporting with primary evidence such U.S. tax attributes such as accumulated foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations for prior years back to 1998. Such differences could be material, due to, among other things, changes in interpretations of the Tax Act, future legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition tax's reasonable estimate. The Company will continue to evaluate the impact of the U.S. Tax Act and will record any resulting tax adjustments during 2018.
Foreign Currency TransactionsPronouncements
Foreign currency transaction gains and losses are included in other income (expense) in the accompanying consolidated statements of comprehensive income. Foreign currency transaction gains for the years ended December 31, 2017 and 2016 were insignificant.
Recent Accounting Pronouncements
In August 2017,October 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative” (“ASU 2023-06”). This ASU incorporates certain SEC disclosure requirements into the FASB Accounting Standards UpdateCodification (“ASU”ASC”) 2017-12, Derivatives. The amendments in the ASU are expected to clarify or improve disclosure and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which amends and simplifies existing guidance in order topresentation requirements of a variety of ASC Topics, allow companiesusers to more accurately presenteasily compare entities subject to the economic effects of risk management activitiesSEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the financial statements.ASC with the SEC’s regulations. The ASU 2017-12has an unusual effective date and transition requirements since it is contingent on future SEC rule setting. If the SEC fails to enact required changes by June 30, 2027, this ASU is not 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.any entities. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We arenot permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-13this standard will have on ourits consolidated financial condition, results of operations and cash flows.
statements. In February 2016,November 2023, the FASB issued ASU 2016-02, “Leases2023-07, Segment Reporting (Topic 842)”280): “Improvements to Reportable Segment Disclosures” (“ASU 2016-02”2023-07”). These amendments require to update reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and information used to assess segment performance. This update is effective beginning with the recognitionCompany’s 2024 fiscal year annual reporting period, with early adoption permitted. The Company is currently evaluating the impact that the adoption of lease assetsthis standard will have on its consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, “Improvements to Income Tax Disclosures” (“ASU 2023-09”) to enhance the transparency and lease liabilities ondecision-usefulness of income tax disclosures, particularly in the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases”. These amendments also require qualitativerate reconciliation table and disclosures along with specific quantitative disclosures. These amendments areabout income taxes paid. This ASU applies to all entities subject to income taxes. This ASU will be effective for fiscal yearspublic companies for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application2024. The Company is permitted. Entities are required to applycurrently evaluating the amendments at the beginning of the earliest period presented using a modified retrospective approach. We will adopt the new standard effective January 1, 2019. While we continue to evaluate the effect of adopting this guidance on our consolidated financial statements and related disclosures, we expect our operating leases, as disclosed in Note 11 — Commitments and Contingencies, will be subject to the new standard. We will recognize right-of-use assets and operating lease liabilities on our consolidated balance sheets upon adoption, which will increase our total assets and liabilities. In May 2014, the FASB issued ASU No. 2014-09—“Revenue from Contracts with Customers” (Topic 606) which amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amountimpact that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2018, using one of two prescribed retrospective methods. We will adopt the new standard effective January 1, 2018, using the modified retrospective transition method. We finalized our analysis and the adoption of this guidancestandard will not have a material impact on ourits consolidated financial statementsstatements.
(3) BUSINESS COMBINATIONS On December 22, 2021, the Company and our internal controls over financial reporting.its wholly-owned subsidiary Zynex Monitoring Solutions, Inc., entered into a Stock Purchase Agreement (the “Agreement”) with Kestrel and each of the shareholders of Kestrel (collectively, the “Selling Shareholders”). Under the Agreement, the Selling Shareholders agreed to sell all of the outstanding common stock of Kestrel (the “Kestrel Shares”) to the Company. The consideration for the Kestrel Shares consisted of $16.1 million cash and 1,467,785 shares of the Company’s common stock (the “Zynex Shares”). All of the Zynex Shares were subject to a lock-up agreement for a period of one year from the closing date under the Agreement (the “Closing Date”). The Agreement provides the Selling Shareholders with piggyback registration rights. 978,524 of the Zynex Shares were deposited in escrow (the “Escrow Shares”). The number of Escrow Shares were subject to adjustment on the one-year anniversary of the Closing Date (or in connection with any Liquidation Event (as defined in the Agreement) that occurs prior to such anniversary date) based on the number of shares equal to $10.0 million divided by a 30-day volume weighted average closing price of the Company’s common stock. The Escrow Shares were adjusted on the anniversary date, which resulted in the cancellation of 156,673 Escrow Shares. Half of the Escrow Shares were to be released on submission of a dossier on a laser-based photoplethysmographic device (the “Device”) to the FDA for permission to market and sell the Device in the United States. The other half of the Escrow Shares were to be released upon determination by the FDA that the Device can be marketed and sold in the United States. On July 27, 2023, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16),Company, ZMS, Kestrel, and the Selling Shareholders, entered into an amendment to the Stock Purchase Agreement (the “Amendment”). The parties entered into the Amendment to modify certain terms of the Agreement related to the conditions to be satisfied for the release of the Escrow Shares to the Selling Shareholders. The Escrow Shares were released from escrow, and simultaneously, the selling stockholders entered into a lock-up agreement. The lock-up agreement includes two lock-up periods which requires companies to recognizerelease certain restrictions on the income-tax consequencesSelling Shareholders on December 31, 2023 and June 30, 2024, respectively. The Escrow Shares are included in the Company’s calculation of an intra-entity transferbasic earnings per share for both years ended December 31, 2023 and 2022. The acquisition of an asset other than inventory when the transfer occurs, rather than when the assetKestrel has been sold to an outside party. We will adopt the new standard effective January 1, 2018, using the modified retrospective transition approach throughaccounted for as a cumulative-effect adjustment to retained earningsbusiness combination under ASC 805 – “Business Combinations” (“ASC 805”). Under ASC 805, assets acquired, and liabilities assumed in a business combination must be recorded at their fair values as of the effectiveacquisition date. A cumulative-effect adjustment will capture the write-off of income tax consequences deferred from past intra-entity transfers involving assets other than inventory, new deferred tax assets, and other liabilities for amounts not currently recognized under U.S. GAAP. Based on transactions up to December 31, 2017, we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We will adopt the new standard effective January 1, 2018, using the retrospective transition approach for all periods presented. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. We will adopt the new standard effective January 1, 2018, on a prospective basis and do not expect the standard to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. This guidance will be effective for us in the first quarter of 2020 on a prospective basis, and early adoption is permitted. We do not expect the standard to have a material impact on our consolidated financial statements.
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.
(4) (3) BALANCE SHEET COMPONENTSPROPERTY AND EQUIPMENT The components of certain balance sheet line itemsproperty and equipment are as follows (in thousands): | | | December 31, | | | | | | | 2017 | | | | 2016 | | | | Property and equipment: | | | | | | | | | | | | | | | | | | | | | December 31, 2023 | | December 31, 2022 | Property and equipment | | | | | | | | | Office furniture and equipment | | $ | 998 | | | $ | 911 | | | $ | 2,768 | | $ | 2,819 | | Rental inventory | | | - | | | | 1,411 | | | | Assembly equipment | | | 128 | | | | 125 | | | | 178 | | | 110 | | Vehicles | | | 76 | | | | 76 | | | | 75 | | | 203 | | | | | 1,202 | | | | 2,523 | | | Leasehold improvements | | | | 1,174 | | | 1,173 | Leased devices | | | | 796 | | | 1,162 | Capital projects | | | | 869 | | | — | | | | $ | 5,860 | | $ | 5,467 | | Less accumulated depreciation | | | (1,014 | ) | | | (1,943 | ) | | | (2,746) | | | (3,292) | | | | $ | 188 | | | $ | 580 | | | | | | $ | 3,114 | | $ | 2,175 |
| | | December 31, | | | | | 2017 | | | 2016 | | | Assets acquired under capital lease: | | | | | | | | | | Original book value | | $ | 461 | | | $ | 461 | | | Accumulated depreciation | | | (379 | ) | | | (287 | ) | | Net book value | | $ | 82 | | | $ | 174 | |
DepreciationTotal depreciation expense recordedrelated to our purchased property and equipment was $0.3$0.8 million and $0.4$0.7 million for the years ended December 31, 20172023 and 2016,2022, respectively.
Included in computer and office & manufacturing equipment at December 31, 2017 and 2016 are assets under capital lease. Depreciation Total depreciation expense related to assets under capital leasesdevices out on lease was $0.1$1.9 million and $1.5 million for the years ended December 31, 20172023 and 2016,2022, respectively. Depreciation on leased units is reflected on the income statement as cost of revenue.
(5) GOODWILL AND OTHER INTANGIBLES DuringOn December 22, 2021, the year endingCompany completed the acquisition of Kestrel, which resulted in goodwill of $20.4 million (see Note 3).
As of December 31, 2017 Rental inventory was written off and going forward, units will be fully expensed when they leave2023, there were no impairment indicators of the facility onCompany’s net asset value. The following table provides the initial purchase. Depreciation expense related to rental inventory was $0.1 million and $0.3 million forsummary of the years endedCompany’s intangible assets as of December 31, 2017 and 2016, respectively.2023. | | | | | | | | | | | | | | | | | | | | | | | Weighted- | | | | | | | | | | | | Average | | | Gross | | | | | | | | Remaining | | | Carrying | | Accumulated | | Net Carrying | | Life (in | | | Amount | | Amortization | | Amount | | years) | Acquired patents at December 31, 2022 | | $ | 10,000 | | $ | (933) | | $ | 9,067 | | 10.00 | Amortization expense | | | | | | (909) | | | (909) | | | Acquired patents at December 31, 2023 | | $ | 10,000 | | $ | (1,842) | | $ | 8,158 | | 9.00 |
| | | Amortization | | | | | | | | | | | Life Years | | | 2017 | | | 2016 | | | Software and development costs | | 3 | | | $ | 325 | | | $ | 325 | | | Less: accumulated amortization | | | | | | (325 | ) | | | (291 | ) | | Total intangible assets, net | | | | | | $ | 0 | | | $ | 34 | |
The software and development costs are amortizedfollowing table summarizes the estimated future amortization expense to be recognized over 3 years. Amortization expense totaled $34,000 and $40,000 for 2017 and 2016, respectively.the next five years: | | | | | | December 31, | | | (In thousands) | 2024 | | | 911 | 2025 | | | 908 | 2026 | | | 908 | 2027 | | | 908 | 2028 | | | 911 | Thereafter | | | 3,612 | Total future amortization expense | | $ | 8,158 |
(6) (5)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.
The calculation of basic and diluted earnings per share for the years ended December 31, 20172023 and 2016 is2022 are as follows:follows (in thousands, except per share data): | | | For the Years Ended December 31, | | | | | 2017 | | | 2016 | | | Basic income per share: | | | | | | | | Net income available to common stockholders | | $ | 7,365 | | | $ | 69 | | | Basic weighted average shares outstanding | | | 32,156 | | | | 31,271 | | | Basic income per share: | | $ | 0.23 | | | $ | 0.00 | | | | | | | | | | | | | Diluted income per share: | | | | | | | | | | Net income available to common stockholders | | $ | 7,365 | | | $ | 69 | | | Weighted average shares outstanding | | | 32,156 | | | | 31,271 | | | Effect of dilutive securities - options and restricted stock | | | 1,040 | | | | - | | | Diluted weighted average shares outstanding | | | 33,196 | | | | 31,271 | | | Diluted income per share: | | $ | 0.22 | | | $ | 0.00 | |
| | | | | | | | | For the Years Ended December 31, | | | 2023 | | 2022 | Basic earnings per share | | | | | | | Net income | | $ | 9,732 | | $ | 17,048 | Basic weighted average shares outstanding | | | 35,555 | | | 38,467 | | | | | | | | Basic earnings per share | | $ | 0.27 | | $ | 0.44 | | | | | | | | Diluted earnings per share | | | | | | | Net income | | $ | 9,732 | | $ | 17,048 | Weighted average shares outstanding | | | 35,555 | | | 38,467 | Effect of dilutive securities - options and restricted stock | | | 587 | | | 660 | Diluted weighted-average shares outstanding | | | 36,142 | | | 39,127 | | | | | | | | Diluted earnings per share | | $ | 0.27 | | $ | 0.44 |
For the yearyears ended December 31, 2017, 0.32023 and 2022, 36,000 and 0.1 million shares of common stock, respectively, were excluded from the dilutive stock calculation because their exercise prices were greater than the average fair value of our common stock for the period.effect would have been anti-dilutive. For the year ended December 31, 2016, 2.22023, convertible notes to purchase 3.6 million shares of common stockresulting from the 2023 Convertible Senior Notes, were excluded from the dilutive stock calculation because their effect would have been anti-dilutive (see Note 8 – Convertible Senior Notes). (7) NOTES PAYABLE The Company entered into a loan agreement (the “Loan Agreement”) with Bank of America, N.A. (the “Bank”) in December 2021. Under this Loan Agreement, the Bank extended two facilities to the Company. Specified assets were pledged as collateral. One facility was a line of credit in the amount of $4.0 million available until December 1, 2024 (the “Facility 1”). Interest on Facility 1 was due on the first day of each month beginning January 1, 2022. The interest rate was an annual rate equal to the sum of (i) the greater of the BSBY Daily Floating Rate or (ii) the Index Floor (as defined in the Loan Agreement), plus 2.00%. The Company did not utilize the facility during the years ended December 31, 2023 and December 31, 2022. During May 2023, the facility was terminated. The other facility extended by the Bank to the Company was a fixed rate term loan in the amount of up to $16.0 million (the “Facility 2”). Facility 2 was entered into and funded in conjunction with the purchase of Kestrel Labs at an interest rate equal to 2.8% per year. The Company had to pay interest on the first day of each month which began January 1, 2022, and the Company also repaid the principal amount in equal installments of $444,444 per month. All unpaid interest and principal on Facility 2 was fully paid off and the Facility was terminated during May 2023. (8) CONVERTIBLE SENIOR NOTES In May 2023, the Company issued $52.5 million aggregate principal amount of 5.00% Convertible Senior Notes due May 15, 2026 (the “2023 Convertible Senior Notes”). In May 2023, the Company issued an additional $7.5 million aggregate principal amount of the 2023 Convertible Senior Notes upon the exercise prices were greater thanby the average fair valueinitial purchasers of ourtheir over-allotment option. Interest on the 2023 Convertible Senior Notes is payable semiannually in arrears, beginning November 15, 2023. The 2023 Convertible Senior Notes will mature on May 15, 2026, unless earlier converted or repurchased, and are redeemable at the option of the Company on or after May 20, 2025. The 2023 Convertible Senior Notes are direct, unsecured, and unsubordinated obligations of the Company, ranking equally with all of the Company’s other unsecured and unsubordinated indebtedness from time to time outstanding, and are effectively subordinated to all secured indebtedness of the Company. Holders may convert their 2023 Convertible Senior Notes at their option prior to the close of business on the business day preceding September 30, 2023, but only under the following circumstances: during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least twenty trading days (whether or not consecutive) during the period.period of thirty consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day as determined by the Company; during the five business day period after any ten consecutive trading day period (the “Measurement Period”) in which the trading price per $1,000 principal amount of 2023 Convertible Senior Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; or upon the occurrence of certain corporate events specified in the indenture governing the 2023 Convertible Senior Notes. On or after February 15, 2026, a holder may convert all or any portion of its 2023 Convertible Senior Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions. PriorThe Company will settle conversions of the 2023 Convertible Senior Notes by paying cash up to their issuance on August 28, 2017, the dilutive securities calculation included 776,250aggregate principal amount of the 2023 Convertible Senior Notes to be converted and paying or delivering, as the case may be, cash, shares of common stock, issuable relatedor a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of the Company's conversion obligation in excess of the aggregate principal amount of the 2023 Convertible Senior Notes being converted. The 2023 Convertible Senior Notes are initially convertible at a rate of 92.8031 shares of common stock per $1,000 principal amount converted, which is approximately equal to $10.78 per share of common stock. The conversion rate will be subject to adjustment upon the private placementoccurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change, which was completed on February 28, 2017. Theincludes certain change in control transactions, the approval by Zynex’s stockholders of any plan or proposal for the liquidation or dissolution of Zynex and certain de-listing events with respect to Zynex’s common stock, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares were issuable six months fromof common stock for conversions in connection with the make-whole fundamental change. On December 31, 2023, the closing price of the shareholder notes. Company’s common stock was $10.89 and the conversion feature of our outstanding convertible senior notes allows their holders to convert principal at a conversion price of $10.78. Under such circumstances, if all outstanding principal of $60.0 million would have been converted into conversion shares, the market value of such shares would have been $60.6 million.
Upon the occurrence of a fundamental change, holders of the 2023 Convertible Senior Notes may require the Company to purchase all or a portion of their 2023 Convertible Senior Notes, in principal amounts equal to $1,000 or an integral multiple thereof, for cash at a price equal to 100% of the principal amount of the 2023 Convertible Senior Notes to be purchased plus any accrued and unpaid interest. $1.9 million of coupon interest expense and $0.6 million of bond amortization costs were included in interest expense, net in the consolidated statement of income for the year ended December 31, 2023. The following table summarizes the minimum interest payments over the next three years until maturity in May 2026. | | | | | | (In thousands) | 2024 | | $ | 3,000 | 2025 | | | 3,000 | 2026 | | | 1,500 |
(6)
(9) STOCK-BASED COMPENSATION PLANS Zynex, Inc. 2017 Stock Incentive Plan In June 2017, our stockholders approved the 2017 Stock Incentive Plan (the “2017 Stock Plan”) with a maximum of 5,000,0005,500,000 shares reserved for issuance. Awards permitted under the 2017 Stock Plan include: Stock Optionsinclude stock options and Restricted Stock. restricted stock. Awards issued under the 2017 Stock Plan are at the discretion of the Board of Directors. As applicable, awards areThe 2017 Stock Plan mandates a maximum award term of 10 years and stipulates that stock options be granted with an exercise price equal to the closing price of our common stockprices not less than fair market value on the date of grant andgrant. Stock option awards generally vest over four years. During the year ended December 31, 2017, 0.4 millionRestricted stock awards have beentypically vest quarterly over three years for grants issued to members of our Board of Directors and quarterly or annually over two to four years for grants issued to employees. For stock option awards, all awards granted under the 2017 Stock Plan.Plan are stock-settled with common stock issued upon exercise. For restricted stock awards, shares are issued to the recipient upon grant with a restrictive legend and are not included in the calculation of outstanding shares until vesting occurs. At December 31, 2023, there were 3.4 million shares available for future grants under the 2017 0.4 million remain Issued and outstanding.Stock Plan. During the years ended December 2017 and 2016, the Company awarded 15,000 and 0 shares of restricted stock to management, respectively. During the year ended December 31, 2017 and 2016, no shares of restricted stock vested or were forfeited.
Zynex, Inc. 2005 Stock Option Plan The Company previously reserved 3,000,000 shares of common stock for issuance under its 2005 Stock Option Plan (the “2005 Stock Plan”). The 2005 Stock Plan expired as of December 31, 2014. Vesting provisions of the expired plan were to be determined by the Board of Directors. All stock options under the 2005 Stock Plan expire no later than ten years from the date of grant. Options granted in 2015, 2016, and through May 2017 prior to the approval of the 2017 Stock Incentive Plan were approved by and certified by the boardBoard of directorsDirectors on September 6, 2017 under the existing 2005 Stock Plan. As of December 31, 2023, the Company had the following stock options outstanding and exercisable: | | | | | | | | | | | | | | | | | Outstanding Number of Options | | Exercisable Number of Options | | | (in thousands) | | (in thousands) | Plan Category | | | | | 2005 Stock Option Plan | | 2 | | 2 | 2017 Stock Option Plan | | 347 | | 347 | Total | | 349 | | 349 |
The Company received $0.1 million cash proceeds related to option plan. Forexercises during the yearsyear ended December 31, 2017 and 2016, the2023. The Company recorded compensation expensereceived cash proceeds of $0.1 million related to option exercises during the year ended December 31, 2022.
During the year ended December 31, 2023, no stock options, restrictedoption awards were granted under the 2017 Stock Plan. During the year ended December 31, 2022, 0.2 million stock and warrants of $0.3 million and $0.2 million, respectively, in selling, general and administrative expenses. option awards were granted under the 2017 Stock Plan. The Company usesused the Black Scholes option pricing model to determine the fair value of stock option grants, using the following assumptions during the yearsyear ended December 31, 2017 and 2016:2022. | | | 2017 | | | 2016 | | | Weighted average expected term | | | 6.25 years | | | | 6.25 years | | | Weighted average volatility | | | 124 | % | | | 122 | % | | Weighted average risk-free interest rate | | | 1.83 | % | | | 1.48 | % | | Dividend yield | | | 0 | % | | | 0 | % |
| | | | Weighted average expected term | | 3 years | | Weighted average volatility | | 73 | % | Weighted average risk-free interest rate | | 2.81 | % | Dividend yield | | 0 | % |
The weighted average expected term of stock options represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The weighted average expected volatility is based on the historical price volatility of the Company’s common stock. The weighted average risk-free interest rate represents the U.S. Treasury bill rate for the expected term of the related stock options. The dividend yield represents the Company’s anticipated cash dividend over the expected term of the stock options. Forfeitures are accounted for as they occur. The following table summarizes stock-based compensation expenses recorded in the condensed consolidated statements of income (in thousands): A summary of activity under the 2005 and 2017 Stock Plans
| | | | | | | | | For the Years Ended December 31, | | | 2023 | | 2022 | Cost of Revenue | | $ | 34 | | $ | 47 | Sales and marketing expense | | | 253 | | | 191 | General, and administrative | | | 2,009 | | | 2,104 | Total stock-based compensation expense | | $ | 2,296 | | $ | 2,342 |
The excess tax benefit associated with our stock-based compensation plans for the years ended December 31, 20172023 and 2016 are presented below:2022 was minimal in both periods. | | | Number of Shares
(in thousands) | | | Weighted
Average
Exercise
Price | | | Weighted
Average
Remaining
Contractual
Life (Years) | | | Aggregate
Intrinsic
Value
(in thousands) | | | Outstanding at December 31, 2015 | | | 1,685 | | | $ | 0.46 | | | | | | | $ | 235 | | | Granted | | | 877 | | | $ | 0.26 | | | | | | | | | | | Exercised | | | (1 | ) | | | 0.15 | | | | | | | | | | | Forfeited | | | (330 | ) | | $ | 0.36 | | | | | | | | | | | Outstanding at December 31, 2016 | | | 2,231 | | | $ | 0.40 | | | | 6.7 | | | $ | 135 | | | | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2016 | | | 2,231 | | | $ | 0.40 | | | | | | | | | | | Granted | | | 662 | | | $ | 0.86 | | | | | | | | | | | Exercised | | | (38 | ) | | $ | 1.02 | | | | | | | | | | | Forfeited/Canceled | | | (803 | ) | | $ | 0.33 | | | | | | | | | | | Outstanding at December 31, 2017 | | | 2,052 | | | $ | 0.56 | | | | 6.5 | | | $ | 5,334 | | | Exercisable at December 31, 2017 | | | 1,460 | | | $ | 0.40 | | | | 5.3 | | | | | |
The following is aA combined summary of stock options outstanding under theoption activity for all plans as of December 31, 2017:
Range | | | Outstanding
Number of Shares
(in thousands) | | | WA
Remaining
Contractual
Life (years) | | | WA Outstanding
Strike Price | | | Exercisable Number of
Shares (in thousands) | | | Remaining Exercisable
Contractual Life (years) | | | WA
Exercisable
Strike Price | | | | $0 to $.50 | | | | 1,540 | | | | 6.96 | | | $ | 0.27 | | | | 1,155 | | | | 6.25 | | | $ | 0.24 | | | | $.51 to $1.00 | | | | 283 | | | | 3.59 | | | $ | 0.89 | | | | 233 | | | | 2.29 | | | $ | 0.93 | | | | $1.01 to $1.50 | | | | 69 | | | | 3.09 | | | $ | 1.24 | | | | 54 | | | | 1.19 | | | $ | 1.19 | | | | $1.51 to $2.00 | | | | 30 | | | | 4.19 | | | $ | 1.73 | | | | 18 | | | | 0.49 | | | $ | 1.68 | | | | $2.00 to $3.00 | | | | 130 | | | | 9.95 | | | $ | 2.65 | | | | - | | | | 0.00 | | | $ | - | | | | | | | | 2,052 | | | | 6.52 | | | $ | 0.56 | | | | 1,460 | | | | 5.36 | | | $ | 0.40 | |
A summary of status of the Company’s non-vested share awards as of and for the years ended December 31, 2023 and 2022 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, 2021 | | 765 | | $ | 1.36 | | 4.68 | | | 5,896 | Granted | | 200 | | $ | 6.23 | | | | | | Exercised | | (157) | | $ | 0.66 | | | | | | Forfeited | | (15) | | $ | 4.18 | | | | | | Outstanding at December 31, 2022 | | 793 | | $ | 2.67 | | 5.03 | | $ | 8,908 | | | | | | | | | | | | Granted | | — | | $ | — | | | | | | Forfeited | | (206) | | $ | 6.30 | | | | | | Exercised | | (238) | | $ | 0.79 | | | | | | Outstanding at December 31, 2023 | | 349 | | $ | 1.82 | | 4.12 | | $ | 3,163 | | | | | | | | | | | | Exercisable at December 31, 2023 | | 349 | | $ | 1.82 | | 4.12 | | $ | 3,163 |
| | | | | | | | | | | | | | | | | Outstanding | | Weighted average | | | | | | | Remaining | | | | | | Number of | | Remaining | | | | | Exercisable | | Exercisable | | Weighted Average | | | Options | | Contractual | | Weighted Average | | Number of | | Contractual | | Exercisable | Range | | (in thousands) | | Life (years) | | Strike Price | | Options (in thousands) | | Life (years) | | Strike Price | $0 to $2.00 | | 145 | | 3.43 | | | 0.43 | | 145 | | 3.43 | | | 0.43 | | | | | | | | | | | | | | | | $2.01 to $4.00 | | 198 | | 4.59 | | | 2.66 | | 198 | | 4.59 | | | 2.66 | | | | | | | | | | | | | | | | $4.01 to $10.00 | | 6 | | 5.72 | | | 8.13 | | 6 | | 5.72 | | | 8.13 | | | | | | | | | | | | | | | | | | 349 | | 4.12 | | $ | 1.82 | | 349 | | 4.12 | | $ | 1.82 |
A summary of our unvested stock options as of December 31, 2023 and 2022 and related activity is presented below: | | | | | | | | Non-vested | | | | | | Shares | | Weighted | | | Under | | Average | | | Option | | Grant Date | | | (in thousands) | | Fair Value | Non-vested at December 31, 2021 | | 95 | | $ | 3.85 | Granted | | 200 | | | 6.23 | Vested | | (49) | | | 4.12 | Forfeited | | (9) | | | 5.49 | Non-vested at December 31, 2022 | | 237 | | $ | 5.90 | Granted | | — | | | — | Vested | | (31) | | | 3.18 | Forfeited | | (206) | | | 6.30 | Non-vested at December 31, 2023 | | — | | $ | — |
A summary of restricted stock award activity under the 2017 Stock Plan for the years ended December 2023 and 20162022 are presented below: | | | Non-vested
Shares
Under
Option | | | Weighted
Average
Grant Date
Fair Value | | | | Non-vested at December 31, 2016 | | | 572 | | | $ | 0.24 | | | | | | | | | | | | | Number of | | | | | | Shares | | Weighted Average | | | | (in thousands) | | Grant Date Fair Value | Outstanding at December 31, 2021 | | | 454 | | $ | 13.69 | | Granted | | | 897 | | | $ | 0.70 | | | 194 | | | 8.52 | Forfeited | | | (165) | | | 12.90 | | Vested | | | (267 | ) | | $ | 0.25 | | | (52) | | | 10.60 | | Exercised | | | - | | | $ | - | | | Outstanding at December 31, 2022 | | | 431 | | $ | 11.92 | Granted | | | 286 | | | 9.54 | | Forfeited | | | (610 | ) | | $ | 0.29 | | | (13) | | | 11.13 | | Non-vested at December 31, 2017 | | | 592 | | | $ | 0.88 | | | Vested | | | (202) | | | 11.56 | Outstanding at December 31, 2023 | | | 502 | | $ | 10.73 |
The weighted-average grant-date fair market value of restricted shares for share-based compensation expensing is equal to the closing price of our common stock options granted duringon the date of grant. The vesting on the Restricted Stock Awards typically occurs quarterly over three years ended December 31, 2017for the Board of Directors and 2016 were $0.70, and $0.32 respectively. quarterly or annually over two to four years for employees. As of December 31, 2017,2023, there werewas approximately $0.5$4.4 million of total unrecognized compensation costs related to unvested stock options and restricted stock. These costs are expected to be recognized over a weighted average period of 3.32.3 years. The total intrinsic value of stock option exercises for the years ended December 31, 20172023 and 20162022 was $0.1$1.9 million and $0,$1.1 million, respectively. The total fair value of restricted stock awards vested during the years ended December 31, 2017,2023 and 20162022 was $0.1$2.1 million and $0.2$1.4 million, respectively. Cash received from stock option exercises was $39,000 and $0 for the years ended December 31, 2017 and 2016, respectively
(10) (7)STOCKHOLDERS’ EQUITYEQUITYs Common Stock Dividend The Company’s Board of Directors declared a cash dividend of $0.10 per share and a stock dividend of 10% per share on November 9, 2021. The cash dividend of $3.6 million was paid out on January 21, 2022 to stockholders of record as of January 6, 2022. The 10% stock dividend declaration resulted in the issuance of an additional 3.6 million shares on January 21, 2022 to stockholders of record as of January 6, 2022. Treasury Stock Beginning on December 6, 2017, and continuing through December 5, 2018, we haveOn April 11, 2022, the ability through our stock purchaseCompany’s Board of Directors approved a program to re-purchase ourrepurchase up to $10.0 million of its common stock at prevailing market prices either in the open market or through privately negotiated transactions through April 11, 2023. From the inception of the plan through May 31, 2022 the Company purchased 1,419,874 shares of its common stock for $10.0 million or an average price of $7.04 per share, which completed this program.
On June 9, 2022, the Company’s Board of Directors approved a program to repurchase up to $2.0 million. The size and timing$10.0 million of such purchases, if any, was based onthe Company’s common stock at prevailing market and business conditions as well as other factors. We are not obligatedprices either in the open market or through privately negotiated transactions through June 9, 2023. From the inception of the plan through October 4, 2022, the Company purchased 1,091,604 shares of its common stock for $10.0 million or an average price of $9.16 per share, which completed this program. On October 31, 2022, the Company’s Board of Directors approved a program to purchase any shares. repurchase up to $10.0 million of the Company’s common stock at prevailing market prices either in the open market or through privately negotiated transactions through October 31, 2023. From the inception of the plan through December 31, 2017, we2022, the Company purchased 86,837495,138 shares of ourits common stock for $0.2$6.6 million or an average price of $2.86$13.43 per share. Warrants
In October 2017, 150,000 During 2023, the Company purchased 232,698 shares of its common stock warrants were issued in exchange for professional services.$3.3 million or an average price of $14.41 per share, which completed this program.
In connection withOn May 10, 2023, the agreement entered into on March 28, 2016, with Triumph Bank,disinterested members of the Lender suspended this monthly payment requirement for February, MarchBoard of Directors and AprilAudit Committee approved the purchase of 2016 up to an aggregate cap of $250,000, in exchange for the issuance of a common stock warrant to purchase 50,000300,000 shares of the Company’s common stock.stock from Thomas Sandgaard, Chairman, President, Chief Executive Officer and Principal Executive Officer, at the closing market price on May 10, 2023 of $9.61 per share for $2.9 million. See Note 17 - Related Parties for additional information.
On June 13, 2023, the disinterested members of the Board of Directors and Audit Committee approved the purchase of 300,000 shares of the Company’s common stock from Thomas Sandgaard, Chairman, President, Chief Executive Officer and Principal Executive Officer, at the closing market price on June 13, 2023, of $8.62 per share for $2.6 million. See Note 17 - Related Parties for additional information. On June 13, 2023 the Company announced that its Board of Directors approved a program to repurchase up to $10.0 million of the Company’s common stock at prevailing market prices either in the open market or through privately negotiated transactions through June 13, 2024. From the inception of the plan through September 13, 2023, the Company purchased 1,242,892 shares of its common stock for $10.0 million or an average price of $8.05 per share, which completed this program. On September 11, 2023, the Company announced that its Board of Directors approved a program to repurchase up to $10.0 million of the Company’s common stock at prevailing market prices either in the open market or through privately negotiated transactions through September 13, 2024. From the inception of the plan through October 19, 2023, the Company purchased 1,204,239 shares of its common stock for $10.0 million or an average price of $8.30 per share, which completed this program. On November 1, 2023, the Company announced that its Board of Directors approved a program to repurchase up to $20.0 million of the Company’s common stock at prevailing market prices either in the open market or through privately negotiated transactions through October 31, 2024. From the inception of the plan through December 31, 2023, the Company purchased 1,012,200 shares of its common stock for $9.6 million or an average price of $9.47 per share. Warrants A summary of stock warrant activity for the years ended December 31, 20172023 and 20162022 are presented below: | | | Number of
Warrants
(in thousands) | | | Weighted
Average
Exercise
Price | | | Weighted
Average
Remaining
Contractual
Life (Years) | | | Aggregate
Intrinsic
Value
(in thousands) | | | Outstanding at December 31, 2015 | | | - | | | $ | - | | | | | | | $ | - | | | Granted | | | 52 | | | $ | 0.21 | | | | | | | | | | | Exercised | | | - | | | | - | | | | | | | | | | | Forfeited | | | - | | | $ | - | | | | | | | | | | | Outstanding at December 31, 2016 | | | 52 | | | $ | 0.21 | | | | 4.37 | | | $ | 5 | | | | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2016 | | | 52 | | | $ | 0.21 | | | | | | | | | | | Granted | | | 150 | | | $ | 2.42 | | | | | | | | | | | Exercised | | | (2 | ) | | $ | 0.35 | | | | | | | | | | | Forfeited/Canceled | | | - | | | $ | - | | | | | | | | | | | Outstanding at December 31, 2017 | | | 200 | | | $ | 1.86 | | | | 5.80 | | | $ | 264 | | | Exercisable at December 31, 2017 | | | 200 | | | $ | 1.86 | | | | 5.80 | | | | | |
The weighted-average grant-date fair value of common stock warrants granted during the years ended December 31, 2017 and 2016 were $1.40, and $.28 respectively
| | | | | | | | | | | | | | | | | | | Weighted | | | | | | | | Weighted | | Average | | Aggregate | | | Number of | | Average | | Remaining | | Intrinsic | | | Warrants | | Exercise | | Contractual | | Value | | | (in thousands) | | Price | | Life (Years) | | (in thousands) | Outstanding at December 31, 2021 | | 99 | | $ | 2.39 | | | 2.76 | | $ | 660 | Granted | | — | | $ | — | | | | | | | Exercised | | — | | $ | — | | | | | | | Forfeited | | — | | $ | — | | | | | | | Outstanding and exercisable at December 31, 2022 | | 99 | | $ | 2.39 | | | 1.76 | | $ | 1,140 | Granted | | — | | $ | — | | | | | | | Exercised | | (15) | | $ | 2.27 | | | | | | | Forfeited(1) | | (4) | | $ | 2.27 | | | | | | | Outstanding and exercisable at December 31, 2023 | | 80 | | $ | 2.43 | | | 0.76 | | $ | 677 |
| (1) | F-13 | Warrants were exercised under a net exercise provision in the warrant agreement. As a result, approximately 4,000 warrants were forfeited in lieu of cash payment for shares during 2023. |
The Company uses the Black Scholes option pricing model to determine the fair value of common stock warrants, using the following assumptions during the years ended December 31, 2017 and 2016:
| | | 2017 | | | 2016 | | | Weighted average expected term | | | 4.38 years | | | | 5.0 years | | | Weighted average volatility | | | 136.62 | % | | | 122.44 | % | | Weighted average risk-free interest rate | | | 1.51 | % | | | 1.48 | % | | Dividend yield | | | 0 | % | | | 1.44 | % |
(11) (8) INCOME TAXES The pre-tax income from continuing operations on which the provision for income taxes was computed is as follows for the years ended December 31, 2023 and 2022 (in thousands): | | | 2017 | | | 2016 | | | | Domestic | | $ | 7,494 | | | $ | 84 | | | | | | | | | | | | | | 2023 | | 2022 | United States | | | $ | 12,579 | | $ | 22,220 | | Foreign | | | — | | | | — | | | | — | | | (22) | | Total | | | 7,494 | | | | 84 | | | | 12,579 | | | 22,198 |
Income tax (benefit) expense consists of the following for the years ended December 31, 20172023 and 20162022 (in thousands): | | | | | | | | | 2023 | | 2022 | Current tax expense: | | | | | | | Federal | | $ | 3,433 | | $ | 4,891 | State | | | 1,717 | | | 1,110 | Total tax expense: | | | 5,150 | | | 6,001 | Deferred tax benefit | | | | | | | Federal | | | (1,873) | | | (730) | State | | | (430) | | | (121) | Total deferred tax benefit | | $ | (2,303) | | $ | (851) | Total | | $ | 2,847 | | $ | 5,150 |
F-23 | | | 2017 | | | 2016 | | | Current tax (benefit) expense: | | | | | | | | | | Federal | | $ | 119 | | | $ | 15 | | | State | | | 10 | | | | — | | | Foreign | | | — | | | | — | | | Total tax (Benefit) expense: | | | 129 | | | | 15 | | | Deferred tax (benefit) expense: | | | | | | | | | | Federal | | | — | | | | — | | | State | | | — | | | | — | | | Foreign | | | — | | | | — | | | Total Deferred tax (benefit) expense: | | $ | 129 | | | $ | 15 | | | | | | | | | | | |
A reconciliation of income tax computed at the U.S. statutory rate of 34%21% to the effective income tax rate is as follows: | | | | | | | | | 2023 | | | 2022 | | Statutory rate | | 21 | % | | 21 | % | State taxes | | 7 | % | | 3 | % | Meals and entertainment | | 3 | % | | — | % | Excess officer's compensation | | 3 | % | | — | % | Stock based compensation | | (7) | % | | — | % | Research and development credit | | (4) | % | | (1) | % | Effective rate | | 23 | % | | 23 | % |
| | | 2017 | | | 2016 | | | Statutory rate | | | 34 | % | | | 34 | % | | State taxes | | | 3 | | | | 3 | | | Permanent differences and other | | | 0 | | | | 2 | | | Change in valuation allowance | | | (54 | ) | | | 708 | | | Other (true – up) | | | 7 | | | | (729 | ) | | Rate Adjustment | | | 12 | | | | — | | | Effective rate | | | 2 | % | | | 18 | % |
The tax effects of temporary differences that give rise to deferred tax assets (liabilities) at December 31, 20172023 and 20162022 are as follows ( in(in thousands): | | | | | | | | | 2023 | | 2022 | Deferred tax assets: | | | | | | | Accrued expenses | | $ | 34 | | $ | 31 | Lease liability | | | 4,540 | | | 3,955 | Accounts receivable | | | — | | | 18 | Inventory | | | 261 | | | 198 | Stock based compensation | | | 371 | | | 253 | Section 174 costs | | | 2,829 | | | 991 | | | | 8,035 | | | 5,446 | | | | | | | | Deferred tax assets | | $ | 8,035 | | $ | 5,446 | Deferred tax liabilities: | | | | | | | Property and equipment | | | (469) | | | (519) | Finance lease | | | (149) | | | (67) | Prepaid expenses | | | (198) | | | (116) | Right-of-use asset | | | (3,172) | | | (3,170) | Amortization | | | (182) | | | (12) | Deferred tax liabilities | | $ | (4,170) | | $ | (3,884) | | | | | | | | Net deferred tax assets | | $ | 3,865 | | $ | 1,562 |
| | | 2017 | | | 2016 | | | Long-term deferred tax assets (liabilities): | | | | | | | | | | Accrued expenses | | $ | 25 | | | $ | 51 | | | Deferred Revenue | | | 217 | | | | 322 | | | Accounts receivable | | | 19 | | | | 907 | | | Prepaid Expenses | | | (9 | ) | | | (15 | ) | | Inventory | | | 92 | | | | 20 | | | Stock based compensation | | | 137 | | | | 108 | | | Tax Credits and NOL Carryforward | | | 1,141 | | | | 4,314 | | | Other | | | 6 | | | | 9 | | | Property and equipment | | | 35 | | | | (115 | ) | | Amortization | | | 64 | | | | 105 | | | Tax Credits and NOL Carryforward | | | | | | | | | | | | | 1,727 | | | | 5,706 | | | Less: Valuation allowance | | | (1,727 | ) | | | (5,706 | ) | | Net deferred tax assets (liabilities) | | $ | - | | | $ | - | |
The Tax Act reduces the U.S. statutory corporate tax rate from 35% to 21% for our tax years beginning in 2018, which resulted in the
re-measurement of the federal portion of our deferred tax assets as of December 31, 2017 from 35% to the new 21% tax rate.
The Company has generated a net operating loss carryforward (NOL) for federal income tax purposes of approximately $2.9 million as of December 31, 2017, which is available to offset taxable income in the future at various dates through 2037. The company also has available NOL carryforwards of approximately $4.9 million for state purposes, which expire at various dates ranging from five to seven years.
As of December 31, 2017 and 2016, the Company has a valuation allowance of approximately $1.8 million and $5.7 million, respectively. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers past history, the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, projected future taxable income projections and tax planning strategies in making this assessment. The Company has generated taxable income in 2017 and projects income in future periods. Based on these factors, the Company is currently evaluating the realization of its deferred tax assets and may have an adjustment to its valuation allowance in the future.
The accounting standard related to income taxes applies to all tax positions and defines the confidence level that a tax position must meet in order to be recognized in the financial statements. The accounting standard requires that the tax effects of a position be recognized only if it is "more-likely-than-not"“more-likely-than-not” to be sustained by the taxing authority as of the reporting date. If a tax position is not considered "more-likely-than-not"“more-likely-than-not” to be sustained, then no benefits of the position are to be recognized. Differences between financial and tax reporting which do not meet this threshold are required to be recorded as unrecognized tax benefits. This standard also provides guidance on the presentation of tax matters and the recognition of potential IRS interest and penalties. As of December 31, 20172023 and 2016,2022, the Company does not have an unrecognized tax liability. The Company classifiesdoes not classify penalty and interest expense related to income tax liabilities as an income tax expense. The Company did not incur anyPenalties and interest are included within general and penalties foradministrative expenses on the fiscal year ended December 31, 2017 and 2016. consolidated statements of income. The Company files income tax returns in the U.S. and various state jurisdictions, and there are open statutes of limitations for taxing authorities to audit our tax returns from 20102020 through the current period. (12) (9) LINE OF CREDITLEASES The Company hadcategorizes leases at their inception as either operating or financing leases. Leases include various office and warehouse facilities which have been categorized as operating leases, while certain equipment is leased under financing leases. During March 2022, the Company entered into a lease agreement for approximately 4,162 square feet of office space for the operations of ZMS in Boulder, Colorado. The lease began on April 1, 2022 and will run through April 1, 2025. The rent and common area maintenance charges are equal to $17.00 per square foot with annual increases of 3%. Upon lease commencement, the Company recorded an asset-backed revolving credit facility underoperating lease liability and corresponding right-of-use asset for $0.2 million each. During February 2023, the Company entered into a Loanlease agreement for approximately 41,427 square feet of office space for the operations of ZMS in Englewood, CO. The lease commences on July 1, 2023 and Security Agreement as amended, (the “Triumph Agreement”) with Triumph Healthcare Finance. This credit facility was paid in full on June 30, 2017. The Triumph Agreement contained certain customary restrictive and financial covenantsruns through December 31, 2028. At the expiration of the lease term the Company has the option to renew the lease for asset-backed credit facilities.one additional five-year period. The Company had not beenis entitled to rent abatements for the first six months of the lease and tenant improvement allowances. Payments based on the initial rate of $24.75 per square foot begin in compliance withJanuary 2024. The price per square foot increases by an additional $0.50 during each subsequent twelve-month period of the financial covenants underlease after the Triumph Agreement since July 2014.
On July 14, 2014,abatement period. Upon lease commencement, the Company received notice fromrecorded an operating lease liability of $4.2 million and a corresponding right-of-use asset for $2.8 million.
The Company’s operating leases do not provide an implicit rate, and therefore the LenderCompany 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 event of default under the Triumph Agreement. The notice relatesamount equal to the lease payments on a collateralized basis over the term of a lease. The Company’s default under the minimum debt service coverage ratio requirementweighted average borrowing rate was determined to be 4.78% for the quarter ended March 31, 2014 and certain other alleged defaults.its operating lease liabilities. The Lender notified the Company that itCompany’s equipment lease agreements have a weighted average rate of 2.72% which was exercisingused to measure its default remedies under the Triumph Agreement, including, among others, accelerating the repayment of all outstanding obligations under the Triumph Agreement (outstanding principal and accrued interest) and collecting the Company’s bank deposits to apply towards the outstanding obligations. finance lease liability. As of December 31, 2017, $0 was outstanding2023, the Company’s operating and financing leases have a weighted average remaining term of 4.32 years and 3.98 years, respectively. The table below reconciles the undiscounted future minimum lease payments under the Triumph AgreementCompany’s operating and finance leases to the total operating and capital lease liabilities recognized on the consolidated balance sheets as compared to $2.8 million atof December 31, 2016. Subsequent to2023 (in thousands): | | | | | | | | | Operating Lease Liability | | Finance Lease Liability | 2024 | | | 4,511 | | | 209 | 2025 | | | 4,632 | | | 169 | 2026 | | | 4,428 | | | 108 | 2027 | | | 4,237 | | | 93 | 2028 | | | 2,172 | | | 93 | Thereafter | | | — | | | — | Total undiscounted future minimum lease payments | | $ | 19,980 | | $ | 672 | Less: difference between undiscounted lease payments and discounted lease liabilities: | | | (2,070) | | | (19) | Total lease liabilities | | $ | 17,910 | | $ | 653 |
Operating and finance lease costs were $4.2 million and $4.6 million for years ended December 31, 2023 and 2022, respectively, which were included in the default and prior to the pay off, the effective interest rateconsolidated statement of income under the Triumph Agreement was approximately 11.0% (6.75% interest rate plus 3% additional default interest ratefollowing headings (in thousands): | | | | | | | | | For the years ended December 31, | Operating Lease expense | | 2023 | | 2022 | Costs of revenue - devices and supplies | | $ | 367 | | $ | 359 | Sales and marketing expense | | | 1,105 | | | 1,456 | General and administrative | | | 2,542 | | | 2,643 | Total operating lease expense | | $ | 4,014 | | $ | 4,458 | | | | | | | | Finance Lease expense | | | | | | | Amortization of right-of-use asset: | | | | | | | Selling, general and administrative | | $ | 116 | | $ | 117 | General and administrative | | | 31 | | | 2 | Total amortization of right-of-use asset | | | 147 | | | 119 | Interest expense and other | | | 24 | | | 36 | Total finance lease expense | | $ | 171 | | $ | 155 |
(13) FAIR VALUE CONSIDERATION The Company’s asset and 1.25% fees).liability classified financial instruments include cash, accounts receivable, accounts payable, accrued liabilities, and contingent consideration. The Triumph Agreement required monthly interest paymentscarrying amounts of financial instruments, including cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short maturities. The Company measures its long-term debt at fair value which approximates book value as the long-term debt bears market rates of interest. The fair value of acquisition-related contingent consideration is based on a Monte Carlo models. The valuation policies are determined by management, and the Company’s Board of Directors is informed of any policy change. Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in arrearsan orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the first day of each month.best information available in the circumstances. The Triumph Agreement originally maturedhierarchy is broken down into three levels based on December 19, 2014. Triumph had agreed to forbear from the exercise of its rights and remedies under the termsreliability of the Triumph Agreement through June 30, 2017, pursuantinputs as follows: Level I: Inputs that reflect unadjusted quoted prices in active markets that are accessible to Zynex for identical assets or liabilities; Level II: Inputs include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the termsasset or liability either directly or indirectly; and Level III: Unobservable inputs that are supported by little or no market activity. The Company’s assets and liabilities, which are measured at fair value, on a recurring basis, are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy as of the March 31, 2017 forbearance agreement. Indate in which the event or change in circumstances caused the transfer. The Company has consistently applied the valuation techniques discussed below in all periods presented. The Company classified its contingent consideration liability in connection with the agreement entered intoacquisition of Kestrel within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. The contingent consideration related to Kestrel was valued at $9.7 million using a Monte Carlo simulation as of December 22, 2021. As of December 31, 2022, the contingent consideration was estimated at $10.0 million, and the adjustment of $0.3 million during 2022 was recorded as a loss on March 28, 2016, the Lender suspended this monthly payment requirement for February, March and April of 2016 up to an aggregate cap of $250,000,change in exchange for the issuance of a warrant to purchase 50,000 shares of the Company’s common stock. The Company used the Black Scholes option pricing model to determine the fair value of the stock warrant, using the following assumptions:
Contractual term | | 5.0 years | | Volatility | | | 122.44 | % | Risk-free interest rate | | | 1.48 | % | Dividend yield | | | 1.44 | % |
During the three months ended March 31, 2016, the Company recorded bank fee expense related to this stock warrant of $15,000.
(10) PRIVATE PLACEMENT MEMORANDUM
Commencingcontingent consideration in November of 2016, the Company conducted a private placement on a “best efforts, minimum-maximum” basis of 12% unsecured subordinated promissory notes, for a minimum of $1,000,000 and a maximum of $1,500,000 pursuant to Sections 4(a)(2) and 4(a)(5) of the Securities Act of 1933, as amended (the “1933 Act”) and Rule 506(b) of the 1933 Act (the “Offering”). The Offering was conducted through a FINRA registered broker, Newbridge Securities Corporation (“Newbridge”). On February 28, 2017, the Company conducted a closing under the Offering and issued promissory notes totaling $1,035,000, with a maturity date of August 28, 2018, with the remaining unpaid principal balance due. The Offering requires the Company to make monthly repayment commencing on July 1, 2017, until the Senior Lender has been paid in full, the private placement memorandum limits the funds available for repayment to the note holders to an amount equal to 5% of the Company’s collections received by the Senior Lender during that month. Newbridge was compensated in connection with sales made in the Offering consistingConsolidated Statements of (i) a cash amount equaling 10% commissions, a 3% non-accountable expense allowance, and related expenses totaling $155,000 (ii) 776,250 shares of our Common Stock were issued to the placement agent as additional commission and fees totaling $255,000, and (iii) the Company had an obligation to issue 776,250 shares of the common stock, six months after issuance of the notes to the noteholders which had initially been recorded as a liability totaling $255,000.Income. The shares were issued on August 28, 2017. In connection with the Offering, we also paid our Lender $342,000 as repayment of principal and interest on the outstanding obligations. The common stock issued to the note holders represents additional interest expense and was initially recorded as a liability and was adjusted each reporting period based upon the fair value of acquisition-related contingent consideration was based on a Monte Carlo model prior to December 31, 2023. See Note 3 - Business Combinations for additional details on the underlying stock until issued on August 28, 2017. Duringremoval of contingent consideration during the year ended December 31, 2017,2023. The following table presents the Company recognized $0.5 million in debt issuance costs and debt discount amortization expenseCompany’s financial liabilities that were accounted for at fair value on a recurring basis prior to December 31, 2023, which were included in interest expense, respectively. Also, included in interest expense is the increase in valuewithin Level III of the common shares issued to the private placement noteholders from the date of issue of approximately $739,000 for the year ended December 31, 2017, respectively.fair value hierarchy:
| | | | | | Contingent Consideration | Balance as of December 31, 2022 | | $ | 10,000 | Change in fair value of contingent consideration | | | (2,854) | Escrow share adjustment | | | (7,146) | Balance as of December 31, 2023 | | $ | — |
The table below summarizes the cash and non-cash components of the private placement memorandum (in thousands):
| | | December 31, 2017 | | | Proceeds from unsecured subordinated promissory notes | | $ | 1,035 | | | Less debt issuance costs and discount | | | | | | Payment of commission and placement agent fees and related expenses | | | (155 | ) | | Principal payments on promissory notes | | | (650 | ) | | | | | | | | Non-cash activity | | | | | | Common stock issued to placement agent | | | (255 | ) | | Obligation to issue common stock to private placement noteholders | | | (255 | ) | | Amortization of issuance costs and debt discount | | | 511 | | | Unsecured subordinated promissory notes, net of issuance and debt discount | | | 231 | | | | | | | | | Current portion of unsecured subordinated promissory notes | | | (231 | ) | | Long-term portion of unsecured subordinated promissory notes | | $ | - | |
(14) (11) COMMITMENTS AND CONTINGENCIES (a) – Lease Commitments
We lease office and operating facilities and equipment under non-cancelable operating leases. Current facility leases include our new headquarters in Englewood, Colorado and a small warehouse/office in Denmark. Rent expense was $0.5 million and $0.6 millionSee Note 12 for the years ended December 31, 2017 and 2016, respectively.
We signed a new headquarters facility lease in October 2017 with a term from January 1, 2018 through June 30, 2023 and includes an option to extend the lease for an additional two years through 2025. The lease rate increases annually as of November 1. We account for the effect of such escalating lease payments as if the lease rate were consistent over the lease term.
Our prior headquarters lease in Lone Tree, Colorado contained a termination clause which allowed the Company to terminate the lease at any time with three months written notice. We provided notice to the landlord at the end of October 2017.
The Company also leases certain equipment under capital leases which expire on various dates through 2018. Imputed interest rates on the leases range from approximately 5% to 10%. At December 31, 2017 and 2016, the total recorded cost of assets under capital leases was $0.5 million and the accumulated depreciation related to these assets totaled approximately $0.4 million and $0.3 million, respectively.
Future minimumdetails regarding commitments under non-cancelable operating leases and capital leases as of December 31, 2017 are as follows (in thousands):the Company’s long-term leases.
| | Operating
Leases | | | Capital
Leases | | | 2018 | | $ | 463 | | | $ | 125 | | | 2019 | | | 830 | | | | - | | | 2020 | | | 873 | | | | - | | | 2021 | | | 914 | | | | - | | | 2022 | | | 956 | | | | | | | Thereafter | | | 495 | | | | - | | | Total minimum lease payments | | $ | 4,531 | | | | 125 | | | Less: Amount representing interest | | | | | | | (2 | ) | | Principal balance of capital lease obligation | | | | | | | 123 | | | Less: Current portion of capital lease obligation | | | | | | | (123 | ) | | Long-term portion of capital lease obligation | | | | | | $ | - | |
(b) - 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 provideprovides for them if losses are determined to be both probable and estimable. On occasion, the Company engages outside counsel related to a broad range of topics including employment law, third-party payer matters, intellectual property, and regulatory and compliance matters. The Company is currently not a party to any material pending legal proceedings.proceedings that would give rise to potential loss contingencies. (15) (12)CONCENTRATIONS The Company’sCompany is exposed to concentration of credit risk related primarily to its cash balances. The Company maintains its cash atbalances in major financial institutions.institutions that exceed amounts insured by the FDIC (up to $250,000, per financial institution). The Company has not experienced any realized losses in such accounts and believes it is not exposed to any significant credit risk related to its cash. The Company has onehad four major vendor thatvendors from which it sourced for approximately 45% and two major vendors from which it sourced approximately 28%, respectively, of supplies and components for its electrotherapy products for the yearyears ended December 31, 2017. Two significant vendors sourced approximately 51% (37%2023 and 14%) of supplies and components for the year ended December 31, 2016.2022. Management believes that itsthe Company’s relationships with its suppliers are good; however, the Company has delayed and extended payments to many of its vendors for cash flow reasons in prior years, which has caused many of its vendors to require pre-payment for products or services.good. If the relationships were to be replaced, there may be a short-term disruption to operations,for a period of time in which products may not be available and additional expenses may be incurred. incurred as the Company locates additional or replacement suppliers. The Company had gross receivables from a private health insurance carrierno third-party payers which made up 10% of the accounts receivable balance at December 31, 2017 and 2016 that2023. The Company had gross receivables from one third-party payer at December 31, 2022, which made up approximately 24% and 10%, respectively,14% of the net accounts receivable balance. (16) (13)RETIREMENT PLAN TheIn 2012, the Company has adoptedestablished a defined contribution retirement plan with afor its employees under section 401(k) deferred compensation provision effective July 1, 2012. Substantiallyof the Internal Revenue Code (the “401(k) Plan”) that is available to all full-time employees are eligible to participate in the 401(k) plan as long as they are at least 18 years of age and have completedor older with at least three months of employment. The 401(k) plan provides forservice. All employee contributions by the Company at management’s discretion.are fully vested immediately and employer contributions vest over a period of four years. The Company made no contributions to this plan in 2017 or 2016.
(14) RELATED PARTY TRANSACTIONS
The Company employs Mr. Martin Sandgaardhas a discretionary employee match program and Mr. Joachim Sandgaard, both sons of Thomas Sandgaard. Compensation for 2017 and 2016 totaled $0.2 million and $0.1 million, 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 3 year employment arrangement totaling $100,000 per year with Mr. Joachim Sandgaard.
Related party payables primarily consist of advances made to the Company and inventory purchases made on behalfcurrently matches 35% of the Company. Accrued liabilities asfirst 6% of December 31, 2016 included a net payable to Thomas Sandgaard and an employee of $0.2 million. employee’s contributions.
During the yearyears ended December 31, 20172023 and 2022, the Company maderecorded an expense of $0.8 million and $0.7 million, respectively, under the aforementioned plan associated with the Company match. (17) RELATED PARTIES On May 10, 2023, the disinterested Board and Audit Committee approved the purchase of 300,000 common shares of ZYXI from Mr. Sandgaard, Chairman, President, Chief Executive Officer and Principal Executive Officer, at the closing market price on May 10, 2023 of $9.61 per share, resulting in a total transactional value of $2,883,000. On June 13, 2023, the disinterested Board and Audit Committee approved the purchase of 300,000 common shares of ZYXI from Mr. Sandgaard at the closing market price on June 13, 2023 of $8.62 per share, resulting in a total transactional value of $2,586,000. At the time of each aforementioned transaction, the disinterested Board and Audit Committee Members deemed it to be in the best interest of the Company to purchase the shares as they believe the current market price for the Company’s stock is undervalued and the Company’s cash position is such that the purchase of shares from Mr. Sandgaard is a good use of the Company’s funds at the time of each transaction. For each transaction, the following impacts were discussed before approval of the sale: (i) the Company’s cash position and capital needs for its continuing operations; (ii) the alternative uses for the cash used to purchase the Sandgaard Shares, including repayment of outstanding indebtedness; (iii) the possible effect on earnings per share and book value per share; and (iv) and the potential effect of the trading of the Company’s shares, if Mr. Sandgaard were to Thomas Sandgaardsell the shares in the open market. (18) SUBSEQUENT EVENTS On February 6, 2024, the Company announced that it has received clearance from the FDA for the next generation M-Wave Neuromuscular Electrical Stimulation ("NMES") device. NMES treatments have several uses, including aiding recovery from surgery, managing chronic conditions, and aneven enhancing exercise performance in healthy individuals. The M-Wave replaces its predecessor, the E-Wave, which has been fundamental in NMES treatments across the U.S. since 1998. The E-Wave was the most powerful and versatile muscle stimulation device on the market for over two decades and the M-Wave builds on that history of performance with a more intuitive design and additional functionality. As of March 12, 2024, the Company does not anticipate a material financial impact of the M-Wave on the Company’s consolidated financial statements. (19) 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 2020 and 2021, 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 COVID-19 had on employee of $0.1 million each. Accrued liabilities related to net payables for Thomas Sandgaard and an employee were $0 as ofsupply chain issues. While the Company did not see a significant impact on its operating results or financial position during the years ended December 31, 2017.2023 and 2022 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. F-28 (15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information is as follows (in thousands, except per share data):
| | | First | | | Second | | | Third | | | Fourth | | | | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Year Ended December 31, 2016 | | | | | | | | | | | | | | Total revenue | | $ | 3,477 | | | $ | 3,286 | | | $ | 3,627 | | | $ | 2,922 | | | Less: cost of revenue and operating expenses | | | 3,827 | | | | 3,436 | | | | 3,005 | | | | 2,404 | | | | | | | | | | | | | | | | | | | | | Income (loss) from operations | | | (350 | ) | | | (150 | ) | | | 622 | | | | 518 | | | | | | | | | | | | | | | | | | | | | Income (loss) before income taxes | | | (444 | ) | | | (227 | ) | | | 532 | | | | 223 | | | | | | | | | | | | | | | | | | | | | Net income (loss) | | $ | (444 | ) | | $ | (227 | ) | | $ | 532 | | | $ | 208 | | | Net income per common share: | | | | | | | | | | | | | | | | | | Basic income per common share - net income | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | 0.02 | | | $ | 0.01 | | | Diluted income per common share - net income | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | 0.02 | | | $ | 0.01 | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | | | | | | | | | | | | | | | | | Total revenue | | $ | 3,436 | | | $ | 5,042 | | | $ | 6,820 | | | $ | 8,134 | | | Less: cost of revenue and operating expenses | | | 2,953 | | | | 3,108 | | | | 3,885 | | | | 4,542 | | | | | | | | | | | | | | | | | | | | | Income from operations | | | 483 | | | | 1,934 | | | | 2,935 | | | | 3,592 | | | | | | | | | | | | | | | | | | | | | Income before income taxes | | | 362 | | | | 1,540 | | | | 2,244 | | | | 3,348 | | | Net income | | $ | 353 | | | $ | 1,504 | | | $ | 2,200 | | | | 3,308 | | | Net income per common share: | | | | | | | | | | | | | | | | | | Basic income per common share - net income | | $ | 0.01 | | | $ | 0.05 | | | $ | 0.07 | | | $ | 0.10 | | | Diluted income per common share - net income | | $ | 0.01 | | | $ | 0.05 | | | $ | 0.07 | | | $ | 0.10 | |
(16) SUBSEQUENT EVENTS
On January 10, 2018, the Company appointed Barry D. Michaels and Michael Cress to the Board of Directors and the Audit Committee. Mr. Michaels will serve as the Audit Committee Chairman.
|