UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: June 30, 2019March 31, 2020
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number001-38804
Zynex, Inc.
(Exact name of registrant as specified in its charter)
NEVADA | 90-0275169 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
9555 Maroon Cir. Englewood, CO | 80112 | |
(Address of principal executive offices) | (Zip Code) |
(303) 703-4906
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x | |||
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Shares Outstanding as of | |
Common Stock, par value $0.001 |
ZYNEX, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
2 |
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)
(unaudited)
June 30, | December 31, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(as adjusted) | ||||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 10,054 | $ | 10,128 | $ | 14,585 | $ | 14,040 | ||||||||
Accounts receivable, net | 3,540 | 2,791 | ||||||||||||||
Accounts receivable | 6,549 | 5,833 | ||||||||||||||
Inventory, net | 1,325 | 837 | 3,429 | 2,378 | ||||||||||||
Prepaid expenses and other | 833 | 568 | 1,135 | 315 | ||||||||||||
Total current assets | 15,752 | 14,324 | 25,698 | 22,566 | ||||||||||||
Property and equipment, net | 822 | 819 | 1,116 | 858 | ||||||||||||
Operating lease asset | 4,323 | 3,050 | 4,980 | 3,831 | ||||||||||||
Financing lease asset | 9 | 19 | ||||||||||||||
Finance lease asset | 168 | 180 | ||||||||||||||
Deposits | 342 | 314 | 275 | 329 | ||||||||||||
Long term deferred income taxes | 591 | 725 | 985 | 513 | ||||||||||||
Total assets | $ | 21,839 | $ | 19,251 | $ | 33,222 | $ | 28,277 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable and accrued expenses | 1,829 | 1,552 | $ | 2,292 | $ | 2,141 | ||||||||||
Lease liability - operating leases | 965 | 671 | 1,678 | 1,211 | ||||||||||||
Lease liability - financing leases | 14 | 14 | ||||||||||||||
Lease liability - finance leases | 53 | 45 | ||||||||||||||
Income taxes payable | - | 688 | 39 | 52 | ||||||||||||
Dividends payable | 11 | 2,270 | ||||||||||||||
Accrued payroll and related taxes | 1,009 | 908 | 1,772 | 1,748 | ||||||||||||
Deferred insurance reimbursement | - | 880 | ||||||||||||||
Total current liabilities | 3,828 | 6,983 | 5,834 | 5,197 | ||||||||||||
Long-term liabilities: | ||||||||||||||||
Lease liability - operating leases | 3,940 | 2,967 | 3,954 | 3,282 | ||||||||||||
Lease liability - financing leases | 4 | 10 | ||||||||||||||
Lease liability - finance leases | 126 | 145 | ||||||||||||||
Total liabilities | 7,772 | 9,960 | 9,914 | 8,624 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of June 30, 2019 and December 31, 2018 | - | - | ||||||||||||||
Common stock, $0.001 par value; 100,000,000 shares authorized; 33,519,400 issued and 32,448,180 outstanding as of June 30, 2019 and 33,290,587 issued and 32,271,367 outstanding as of December 31, 2018 | 34 | 34 | ||||||||||||||
Stockholders' equity: | ||||||||||||||||
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2020 and December 31, 2019 | - | - | ||||||||||||||
Common stock, $0.001 par value; 100,000,000 shares authorized; 34,348,802 issued and 33,177,582 outstanding as of March 31, 2020 and 33,862,885 issued and 32,791,665 outstanding as of December 31, 2019 | 34 | 34 | ||||||||||||||
Additional paid-in capital | 8,592 | 8,157 | 9,916 | 9,198 | ||||||||||||
Treasury stock 1,071,220 and 1,019,220 shares, at June 30, 2019 and December 31, 2018, respectively, at cost | (3,846 | ) | (3,675 | ) | ||||||||||||
Accumulated earnings | 9,376 | 4,864 | ||||||||||||||
Total Zynex, Inc. stockholders’ equity | 14,156 | 9,380 | ||||||||||||||
Treasury stock 1,071,220 shares, at March 31, 2020 and December 31, 2019, respectively, at cost | (3,846 | ) | (3,846 | ) | ||||||||||||
Retained earnings | 17,293 | 14,356 | ||||||||||||||
Total Zynex, Inc. stockholders' equity | 23,397 | 19,742 | ||||||||||||||
Non-controlling interest | (89 | ) | (89 | ) | (89 | ) | (89 | ) | ||||||||
Total stockholders’ equity | 14,067 | 9,291 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 21,839 | $ | 19,251 | ||||||||||||
Total stockholders' equity | 23,308 | 19,653 | ||||||||||||||
Total liabilities and stockholders' equity | $ | 33,222 | $ | 28,277 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
NET REVENUE | ||||||||||||||||
Devices | $ | 2,288 | $ | 1,673 | $ | 4,263 | $ | 3,261 | ||||||||
Supplies | 8,009 | 5,900 | 15,230 | 11,189 | ||||||||||||
Total net revenue | 10,297 | 7,573 | 19,493 | 14,450 | ||||||||||||
COSTS OF REVENUE AND OPERATING EXPENSES | ||||||||||||||||
Costs of revenue - rental, product & supply | 1,948 | 1,330 | 3,732 | 2,566 | ||||||||||||
Sales and marketing | 3,081 | 1,457 | 5,554 | 2,763 | ||||||||||||
General and administrative | 2,684 | 2,071 | 5,367 | 4,450 | ||||||||||||
Total costs of revenue and operating expenses | 7,713 | 4,858 | 14,653 | 9,779 | ||||||||||||
Income from operations | 2,584 | 2,715 | 4,840 | 4,671 | ||||||||||||
Other income (expense) | ||||||||||||||||
Deferred insurance reimbursement | - | - | 880 | - | ||||||||||||
Interest expense | - | (37 | ) | - | (153 | ) | ||||||||||
Other income (expense), net | - | (37 | ) | 880 | (153 | ) | ||||||||||
Income from operations before income taxes | 2,584 | 2,678 | 5,720 | 4,518 | ||||||||||||
Income tax expense | 422 | 260 | 1,208 | 179 | ||||||||||||
Net Income | $ | 2,162 | $ | 2,418 | $ | 4,512 | $ | 4,339 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.07 | $ | 0.07 | $ | 0.14 | $ | 0.13 | ||||||||
Diluted | $ | 0.06 | $ | 0.07 | $ | 0.13 | $ | 0.13 | ||||||||
Weighted average basic shares outstanding | 32,326 | 32,620 | 32,279 | 32,610 | ||||||||||||
Weighted average diluted shares outstanding | 33,953 | 34,169 | 33,837 | 34,291 |
The accompanying notes are an integral part of these consolidated financial statements
3 |
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
For the Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
NET REVENUE | ||||||||
Devices | $ | 3,444 | $ | 1,975 | ||||
Supplies | 11,784 | 7,221 | ||||||
Total net revenue | 15,228 | 9,196 | ||||||
COSTS OF REVENUE AND OPERATING EXPENSES | ||||||||
Costs of revenue - devices and supplies | 3,401 | 1,784 | ||||||
Sales and marketing | 5,209 | 2,473 | ||||||
General and administrative | 4,160 | 2,683 | ||||||
Total costs of revenue and operating expenses | 12,770 | 6,940 | ||||||
Income from operations | 2,458 | 2,256 | ||||||
Other income/(expense) | ||||||||
Deferred insurance reimbursement | - | 880 | ||||||
Interest income/(expense) | (4 | ) | - | |||||
Other income/(expense), net | (4 | ) | 880 | |||||
Income from operations before income taxes | 2,454 | 3,136 | ||||||
Income tax (benefit)/expense | (483 | ) | 786 | |||||
Net Income | $ | 2,937 | $ | 2,350 | ||||
Net income per share: | ||||||||
Basic | $ | 0.09 | $ | 0.07 | ||||
Diluted | $ | 0.09 | $ | 0.07 | ||||
Weighted average basic shares outstanding | 32,913 | 32,233 | ||||||
Weighted average diluted shares outstanding | 34,204 | 33,721 |
The accompanying notes are an integral part of these consolidated financial statements
4 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(unaudited)
For the Six Months ended June 30, | ||||||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net cash provided by operating activities | 2,364 | 3,640 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of Property and Equipment | (141 | ) | (661 | ) | ||||
Net cash used in investing activities | (141 | ) | (661 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Principal payments on subordinated debt | - | (385 | ) | |||||
Payments on financing lease obligations | (4 | ) | (59 | ) | ||||
Common stock cash dividends | (2,259 | ) | - | |||||
Purchase of treasury stock | (171 | ) | (1,968 | ) | ||||
Proceeds from the issuance of stock | 137 | 153 | ||||||
Net cash used in financing activities | (2,297 | ) | (2,259 | ) | ||||
Net decrease in cash and cash equivalents | (74 | ) | 720 | |||||
Cash and cash equivalents at beginning of period | 10,128 | 5,565 | ||||||
Cash and cash equivalents at end of period | $ | 10,054 | $ | 6,285 | ||||
Supplemental disclosure of cash and non-cash transactions: | ||||||||
Income taxes paid | $ | 1,957 | $ | 186 | ||||
Interest paid | $ | - | $ | 10 | ||||
Lease incentive received | $ | - | $ | 208 |
For the Three Months ended March 31, | ||||||||
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 2,937 | $ | 2,350 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 252 | 160 | ||||||
Inventory reserves | 249 | 150 | ||||||
Stock-based compensation | 497 | 140 | ||||||
Non-cash lease expense | (10 | ) | 153 | |||||
Provision for deferred income taxes | (473 | ) | 786 | |||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | (716 | ) | (355 | ) | ||||
Prepaid and other assets | (819 | ) | (170 | ) | ||||
Accounts payable and other accrued expenses | 162 | (204 | ) | |||||
Inventory | (1,501 | ) | (366 | ) | ||||
Deposits | 54 | - | ||||||
Other long-term obligations | - | (880 | ) | |||||
Net cash provided by operating activities | 632 | 1,764 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment | (297 | ) | (46 | ) | ||||
Net cash used in investing activities | (297 | ) | (46 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Payments on finance lease obligations | (11 | ) | (4 | ) | ||||
Common stock cash dividends | - | (2,259 | ) | |||||
Purchase of treasury stock | - | (171 | ) | |||||
Proceeds from the issuance of common stock | 221 | 7 | ||||||
Net cash used in financing activities | 210 | (2,427 | ) | |||||
Net increase in cash and cash equivalents | 545 | (709 | ) | |||||
Cash and cash equivalents at beginning of period | 14,040 | 10,128 | ||||||
Cash and cash equivalents at end of period | $ | 14,585 | $ | 9,419 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | (4 | ) | $ | - | |||
Cash paid for rent | $ | (328 | ) | $ | (206 | ) | ||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 1,433 | $ | - | ||||
Inventory transferred to property and equipment under lease | $ | 187 | $ | 112 | ||||
Common stock dividend declared and unpaid | $ | - | $ | 2,259 |
The accompanying notes are an integral part of these consolidated financial statements
5 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(unaudited)
Additional | Total | |||||||||||||||||||||||||||
Common Stock | Paid-in | Treasury | Retained | Non-Controlling | Stockholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | Stock | Earnings | Interest | Equity | ||||||||||||||||||||||
Adjusted Balance, December 31, 2018 | 32,271,367 | $ | 34 | $ | 8,157 | $ | (3,675 | ) | $ | 4,864 | $ | (89 | ) | $ | 9,291 | |||||||||||||
Stock option exercises | 21,832 | - | 8 | - | - | - | 8 | |||||||||||||||||||||
Stock-based compensation expense | - | - | 140 | - | - | - | 140 | |||||||||||||||||||||
Treasury stock | (52,000 | ) | - | - | (171 | ) | - | - | (171 | ) | ||||||||||||||||||
Other | (8 | ) | - | - | - | - | - | - | ||||||||||||||||||||
Net income | - | - | - | - | 2,350 | - | 2,350 | |||||||||||||||||||||
Balance at March 31, 2019 | 32,241,191 | $ | 34 | $ | 8,305 | $ | (3,846 | ) | $ | 7,214 | $ | (89 | ) | $ | 11,618 | |||||||||||||
Stock option exercises | 166,623 | - | 129 | - | - | - | 129 | |||||||||||||||||||||
Warrant exercises | 40,366 | - | - | - | - | - | - | |||||||||||||||||||||
Stock-based compensation expense | - | - | 158 | - | - | - | 158 | |||||||||||||||||||||
Net income | - | - | - | - | 2,162 | - | 2,162 | |||||||||||||||||||||
Balance at June 30, 2019 | 32,448,180 | $ | 34 | $ | 8,592 | $ | (3,846 | ) | $ | 9,376 | $ | (89 | ) | $ | 14,067 |
Additional | Total | |||||||||||||||||||||||||||
Common Stock | Paid-in | Treasury | Retained | Non-Controlling | Stockholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | Stock | Earnings | Interest | Equity | ||||||||||||||||||||||
Balance at December 31, 2017 | 32,778,040 | $ | 33 | $ | 7,612 | $ | (243 | ) | $ | (2,411 | ) | $ | (89 | ) | $ | 4,902 | ||||||||||||
Adjustment for ASC 842 Adoption | - | - | - | (6 | ) | - | (6 | ) | ||||||||||||||||||||
Stock option exercises | 236,957 | - | 86 | - | - | - | 86 | |||||||||||||||||||||
Stock-based compensation expense | - | - | 63 | - | - | - | 63 | |||||||||||||||||||||
Treasury stock | (408,254 | ) | - | - | (1,757 | ) | - | - | (1,757 | ) | ||||||||||||||||||
Net income | - | - | - | 1,920 | - | 1,920 | ||||||||||||||||||||||
Balance at March 31, 2018 | 32,606,743 | $ | 33 | $ | 7,761 | $ | (2,000 | ) | $ | (497 | ) | $ | (89 | ) | $ | 5,208 | ||||||||||||
Stock option exercises | 130,000 | - | 67 | - | - | - | 67 | |||||||||||||||||||||
Stock-based compensation expense | - | - | 53 | - | - | - | 53 | |||||||||||||||||||||
Treasury stock | (474,767 | ) | - | - | (211 | ) | - | - | (211 | ) | ||||||||||||||||||
Net income | - | - | - | - | 2,418 | - | 2,418 | |||||||||||||||||||||
Balance at June 30, 2018 | 32,261,976 | $ | 33 | $ | 7,881 | $ | (2,211 | ) | $ | 1,921 | $ | (89 | ) | $ | 7,535 |
Additional | Total | |||||||||||||||||||||||||||
Common Stock | Paid-in | Treasury | Retained | Non-Controlling | Stockholders' | |||||||||||||||||||||||
Shares | Amount | Capital | Stock | Earnings | Interest | Equity | ||||||||||||||||||||||
Balance, December 31, 2018 | 32,271,367 | $ | 34 | $ | 8,157 | $ | (3,675 | ) | $ | 4,864 | $ | (89 | ) | $ | 9,291 | |||||||||||||
Exercised and vested stock-based awards | 21,832 | - | 8 | - | - | - | 8 | |||||||||||||||||||||
Stock-based compensation expense | - | - | 140 | - | - | - | 140 | |||||||||||||||||||||
Treasury stock | (52,000 | ) | - | - | (171 | ) | - | - | (171 | ) | ||||||||||||||||||
Other | (8 | ) | - | - | - | - | - | - | ||||||||||||||||||||
Net income | - | - | - | - | 2,350 | - | 2,350 | |||||||||||||||||||||
Balance at March 31, 2019 | 32,241,191 | $ | 34 | $ | 8,305 | $ | (3,846 | ) | $ | 7,214 | $ | (89 | ) | $ | 11,618 | |||||||||||||
Additional | Total | |||||||||||||||||||||||||||
Common Stock | Paid-in | Treasury | Retained | Non-Controlling | Stockholders' | |||||||||||||||||||||||
Shares | Amount | Capital | Stock | Earnings | Interest | Equity | ||||||||||||||||||||||
Balance, December 31, 2019 | 32,791,665 | $ | 34 | $ | 9,198 | $ | (3,846 | ) | $ | 14,356 | $ | (89 | ) | $ | 19,653 | |||||||||||||
Exercised and vested stock-based awards | 385,917 | - | 221 | - | - | - | 221 | |||||||||||||||||||||
Stock-based compensation expense | - | - | 497 | - | - | - | 497 | |||||||||||||||||||||
Net income | - | - | - | - | 2,937 | - | 2,937 | |||||||||||||||||||||
Balance at March 31, 2020 | 33,177,582 | $ | 34 | $ | 9,916 | $ | (3,846 | ) | $ | 17,293 | $ | (89 | ) | $ | 23,308 |
6 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Organization
Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado. We operate in one primary business segment, medical devices which include Electrotherapyelectrotherapy and Pain Management Products.pain management products. As of June 30, 2019,March 31, 2020, the Company’s only active subsidiary is Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) through which the Company conducts most of its operations. One other subsidiary, Zynex Europe, ApS (“ZEU,” a wholly-owned Denmark corporation), did not generate material revenues during the three and six months ended June 30,March 31, 2020 and 2019 and 2018 from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume monitoring device but it is awaiting approvalwhich was approved by the U.S. Food and Drug Administration (“FDA”) as well as Certificate European (“CE”)in February 2020 and is awaiting approval by the CE Marking in Europe,Europe; therefore, 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 doing business as Pharmazy through January 2016.
The term “the Company” refers to Zynex, Inc. and its active and inactive subsidiaries.
Nature of Business
The Company designs, manufactures and markets medical devices that treat chronic and acute pain, as well as activate and exercise muscles for rehabilitative purposes with electrical stimulation. The Company’s devices are intended for pain management to reduce reliance on drugs and provide rehabilitation and increased mobility through the utilization of non-invasive muscle stimulation, electromyography technology, interferential current (“IFC”), neuromuscular electrical stimulation (“NMES”) and transcutaneous electrical nerve stimulation (“TENS”). OurAll our medical devices are designed for home use and to be patient friendly.friendly and designed for home use. Our devices are small, portable, battery-operatedbattery operated and include an electrical pulse generator which is connected to the body via electrodes. OurAll of our medical devices are marketed in the U.S. and are subject to FDA regulation and approval. Our products require a physician’s prescription before they can be dispensed in the U.S. Our primary product is the NexWave device, which is marketed to physicians and therapists by our field sales representatives. The NexWave requires consumable supplies, such as electrodes and batteries, which are shipped to patients on a recurring monthly basis, as needed.
During the three and six months ended June 30,March 31, 2020 and 2019, and 2018, the Company generated substantially all of its revenue (99.99%) in North America from sales of its devices and related supplies to patients and health care providers.
Unaudited Consolidated Financial Statements
The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019. Amounts as of December 31, 2018,2019, are derived from those audited consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the annual audited financial statements, accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, which has previously been filed with the SEC.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of June 30, 2019March 31, 2020 and the results of its operations and its cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2019March 31, 2020 are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Zynex, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
7 |
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Non-controlling Interest
Non-controlling interest in the equity of a subsidiary is accounted for and reported as stockholders’ equity. Non-controlling interest represents the 20% ownership in the Company’s majority-owned (but currently inactive) subsidiary, Zynex Billing and Consulting, LLC (“ZBC”).
Reclassifications
During 2019, the Company began reporting costs related to its selling and marketing activities separate from its general and administrative costs. As a result, reclassifications between selling and marketing costs and general and administrative costs have been made to the results of operations for the three and six month periods ending June 30, 2018 to conform to the consolidated 2019 financial statement presentation. These reclassifications had no effect on net earnings, retained earnings or cash flows as previously reported.
Use of Estimates
Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The most significant management estimates used in the preparation of the accompanying consolidated financial statements are associated with the allowance for billing adjustments and uncollectible accounts receivable, the reserve for obsolete and damaged inventory, stock-based compensation, and valuation of long-lived assets and realizability of deferred tax assets.
Revenue Recognition, Allowance for Billing Adjustments and CollectabilityLeases
On January 1, 2018The Company recognizes finance and operating lease right-of-use assets and liabilities at the company adoptedlease commencement date based on the new accounting standard on revenue recognition issued byestimated present value of the Financial Accounting Standards Board (“FASB”). Pursuant tolease payments over the revenue from contracts with customers standardlease term. For our finance leases, the Company recognizes revenueuses 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 transfers promised goodsis reasonably certain to customers inexercise such options. The Company recognizes leases with an amount that reflectsinitial term of 12 months or less as lease expense over the consideration to whichlease term and those leases are not recorded on our Consolidated Balance Sheets. For additional information on our leases where the company expects to be entitled, known asCompany is the transaction price.lessee, see Note 8- Leases.
Revenue is generated primarily from sales in the United StatesA significant portion of our electrotherapydevice revenue is derived from patients who obtain our devices and associated supplies. Sales are primarily made with, and shipped, directly to the patient with a small amount of revenue generated from sales to distributors. Device sales can be in the form of a purchase or a lease.under month-to-month lease arrangements. Revenue related to purchased devices are recognized in accordance with ASU No. 2014-09—”Revenue from Contracts with Customers” (ASC 606) and is recognized when the device, which has been prescribed by a doctor, is delivered to the patient which is when control is deemed to have transferred to the customer.
Revenue related to devices out on lease is recognized in accordance with ASC 842, (as defined below). These leases areLeases. Using the guidance in ASC 842, we concluded our transactions should be accounted for as operating leases based on the following criteria below:
· | The lease does not transfer ownership of the underlying asset to the lessee by the end of the lease term. |
· | The lease does not grant the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. |
· | The lease term is month to month, which does not meet the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease. |
· | 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 |
· | The underlying asset is expected to have alternative uses to the lessor at the end of the lease term. |
Leased units still require a doctor’s prescription andLease commencement occurs upon delivery of the lease inception is dependent upon delivery.device to the patient. The companyCompany retains title to the leased device and those devices are classified as property and equipment on the balance sheet. Since our leases are month-to-month and can be returned by the patient at any time, revenue is typically recognized monthly untilfor the customer returnsduration of the unit.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSperiod in which the patient retains the device.
Device sales between purchased, subject to ASC 606,Revenue Recognition and leased, subject to ASC 842, are broken down as following (in thousands):
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
DEVICE REVENUE | ||||||||||||||||
Purchased | $ | 720 | $ | 488 | $ | 1,310 | $ | 713 | ||||||||
Leased | 1,568 | 1,185 | 2,953 | 2,548 | ||||||||||||
Total Device revenue | 2,288 | 1,673 | 4,263 | 3,261 |
Accounts Receivable
SuppliesRevenue is derived from sales and leases of our electrotherapy devices and sales of related supplies and complimentary products. The Company recognizes revenue when control of the product has been transferred to the patient, in the amount that reflects the consideration to which the Company expects to receive. In general, revenue from sales of our devices and supplies is recognized once the product is delivered to the patient, which is when control is deemed to have transferred to the customer. Supplies needed for the device can be set up as a recurring shipment, ordered through the customer support team or our online store as needed.patient.
Sales of our devices and supplies are primarily made with, and shipped directly to the patient with a small amount of revenue generated from sales to distributors. In the healthcare industry there is often a third party involved that will pay on the patient’spatients’ behalf for purchased or leased devices and supplies. The terms of the separate arrangement impact certain aspects of the contracts, with patients covered by Third-party Payors (as defined below),third party payers, such as contract type, performance obligations and transaction price, but for purposes of revenue recognition the contract with the customer refers to the arrangement between the Company and the patient. The Company does not have any material deferred revenue in the normal course of business as each performance obligation is met upon delivery of goods to the patient. The Company had deferred revenue of $0.9 million as of December 31, 2018 related to an insurance reimbursement claim that was de-recognized during the six months ended June 30, 2019. For additional detail, see description below in Note 7. There are no substantial costs incurred through support or warranty obligations.
8 |
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a breakdown of net revenue related to devices accounted for as purchases subject to ASC 606 and leases subject to ASC 842 (in thousands):
For the Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Purchased | $ | 1,280 | $ | 590 | ||||
Leased | 2,164 | 1,385 | ||||||
3,444 | 1,975 |
Primarily all of the Company’s revenues are derived, and the related receivables are due from patients with privatecommercial or government health insurance carriersplans and workers compensation claims (collectively “Third-party Payors”), with a small portion related to private pay individuals, , attorney and auto claims. The transaction price isRevenues are estimated with variable consideration using the most likely amount techniqueportfolio approach by third party payer type based upon historical rates of collection, aging of receivables, trends in historical reimbursement rates by third-party payer types, and current relationships and experience with the third-party payers, which includes estimated constraints for Third-party Payors reimbursement deductions, known throughout the health care industry as “billing adjustments” whereby the Third-party Payors unilaterally reduce the amount they reimburse for the Company’s products,third-party payer refund requests, deductions and for the timing and values of amounts to be billed.adjustments. Inherent in these estimates is the risk that they will have to be revised as additional information becomes available and constraints are released. Specifically, the complexity of Third-party Payorthird-party payer billing arrangements and the uncertainty of reimbursement amounts for certain products from Third-party 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 care industry and Third-party Payor reimbursements, as well as changes in our billing practices to increase cash collections,third-party payer reimbursement, it is possible our forecasting model to estimate collections could change, which could have an impact on our results of operations and cash flows. Any differences between estimated settlements and final determinationsactual collectability are reflected as an increase or a reduction to revenue in the period when such final determinations are known.in which received. Historically these differences have been immaterial and the Company has not had to go back and reassess the adjustments inof future periods for past billing adjustments.
The basis of estimates includes historical rates of collection, the aging of the receivables, trends in the historical reimbursement rates by Third-party Payors, determined using the portfolio approach, and current relationships and experience with the Third-party Payors. A change in the way estimates are determined can result from a number of factors, including experience and training of billing personnel, changes in the reimbursement policies or practices of Third-party Payors,third-party payers, or changes in industry rates of reimbursement. The Company monitors the variability and uncertain timing over Third-party Payor groupsthird-party payer types in our portfolios. If there is a change in our Third-party Payorthird-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 Payors.third-party payer type. However, changes to the allowanceconstraints for billing adjustments which are recorded as a reduction of transaction price, have historically fluctuated and may continue to fluctuate significantly from quarter to quarter and year to year.
The Company frequently receives refund requests from Third-party Payors 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 Third-party Payors. The Company frequently has significant offsets against such refund requests, and sometimes amounts are due to the Company in excess of the amounts of refunds requested by the Third-party Payors. Therefore, at the time of receipt of such refund requests, the Company is generally unable to determine if a refund request is valid and should be accrued. Such refunds are recorded when the amount is fixed and determinable. However, management maintains an allowance for estimated future refunds which we believe is sufficient to cover future claims in connection with its estimates of variable consideration recorded at the time sales are recorded.
The Company estimates the collectability of revenues based upon historical rates of collection, the aging of receivables, trends in the historical reimbursement rates by Third-party Payors, and current relationships and experience with the Third-party Payors. Billing adjustments are recorded as an adjustment of transaction price and are reflected as an increase or a reduction to revenue in the period when such adjustments are identified.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2019, the Company believes its accounts receivable is reasonably stated at its net collectible value and has an adequate allowance for billing adjustments relating to all known Third-party Payor disputes, adjustments and refund requests.
Stock-based Compensation
The Company accounts for stock-based compensation through recognition of the cost of employee services received in exchange for an award of equity instruments, which is measured based on the grant date fair value of the award that is ultimately expected to vest during the period. The stock-based compensation expenses are recognized over the period during which an employee is required to provide service in exchange for the award (the requisite service period, which in the Company’s case is the same as the vesting period). For awards subject to the achievement of performance metrics, stock-based compensation expense is recognized when it becomes probable that the performance conditions will be achieved over the respective performance period.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, accounts receivable, accounts payable, and accrued liabilities, for which current carrying amounts approximate fair value due to their short-term nature. Financial instruments also include capitalized leases,included our operating and finance lease obligations, the carrying value of which approximates fair value because the interest rates on the outstanding borrowings are at rates that approximate market rates for borrowings with similar terms and average maturities.
9 |
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Inventory
Inventory, which primarily represents devices, parts and supplies,Inventories are valuedstated at the lower of cost (average) orand net realizable value. Cost is computed using standard costs, which approximates actual costs on an average cost basis. Following are the components of inventory (in thousands):
March 31, 2020 | December 31, 2019 | |||||||
Raw Materials | $ | 1,381 | $ | 953 | ||||
Work-in-process | 256 | 200 | ||||||
Finished Goods | 1,944 | 1,640 | ||||||
$ | 3,581 | 2,793 | ||||||
Less: reserve | (152 | ) | (415 | ) | ||||
$ | 3,429 | $ | 2,378 |
The Company monitors inventory for turnover and obsolescence and records losses for excess and obsolete inventory, as appropriate. The Company provides reserves for estimated excess and obsolete inventories based upon assumptions about future demand. If future demand is less favorable than currently projected by management, additional inventory write-downs may be required.
Inventories, net of reserve, at June 30, 2019 were $1.3 million which was comprised of finished goods, work in progress, and parts and supplies as compared to December 31, 2018 of $0.8 million.
Segment Information
We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We have identified our Chief Executive Officer, Chief Financial Officer, and Chief FinancialOperating Officer as our chief operating decision-makers (“CODM”).
We currently operate our business as one operating segment which includes two revenue types: Devices and Supplies.
Income Taxes
We record deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.
We useThe Company is subject to the provisions of the Financial Accounting Standards Board (“FASB”) ASC 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities of a recognition threshold and a measurement attribute for the financial statement recognition and measurement ofchange in tax positions taken or expected to be taken in a tax return. For those benefits torates be recognized a tax position must be more likely than not to be sustained upon examination by taxing authorities. On December 22, 2017,in the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revisesperiod 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.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The effective date for the standard is for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. The Company determined that adoption did not have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02,Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”),which allows companies to reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act (the Tax Act), from accumulated other comprehensive income to retained earnings. The new standard is effective for us beginning January 1, 2019, with early adoption permitted. The Company determined that the adoption did not have a material impact on its consolidated financial statements.
The Company adopted ASU 2016-02,Leases (Topic 842),as of January 1, 2019, with an effective date of January 1, 2018, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standards, which among other things, allowed us to carry forward the historical lease classification. We also elected the hindsight practical expedient to determine the lease term for existing leases. Our election of the hindsight practical expedient resulted in the lengthening of the lease term related to one of our financing leases.
Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $3.6 million and $3.9 million, respectively, as of January 1, 2018. The Company also recorded an adjustment to the opening balance of retained earnings of $6,000 on January 1, 2018. The difference between the additional lease assets and lease liabilitieschange was recorded as an adjustment to retained earnings. The standard did not have a material impact on our consolidated statement of operations and had no impact on our statement of cash flows. See Note 8, below, for further discussion regarding the Company’s operating and financing leases.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Effect of ASC 842 Adoption on the Company’s Consolidated Balance Sheets (in thousands, except share amounts)
December 31, | Effect of the Adoption of | December 31, | ||||||||||
2018 | ASC 842 | 2018 | ||||||||||
(as previously reported) | (as adjusted) | |||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash | $ | 10,128 | $ | - | $ | 10,128 | ||||||
Accounts receivable, net | 2,791 | - | 2,791 | |||||||||
Inventory, net | 837 | - | 837 | |||||||||
Prepaid expenses and other | 570 | (2 | )(a) | 568 | ||||||||
Total current assets | 14,326 | (2 | ) | 14,324 | ||||||||
Property and equipment, net | 819 | - | 819 | |||||||||
Operating lease asset | - | 3,050 | (b) | 3,050 | ||||||||
Financing lease asset | - | 19 | (c) | 19 | ||||||||
Deposits | 314 | - | 314 | |||||||||
Long term deferred income taxes | 725 | - | 725 | |||||||||
Total assets | $ | 16,184 | $ | 3,067 | $ | 19,251 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable and accrued expenses | 1,552 | - | 1,552 | |||||||||
Operating lease liability | - | 671 | (b) | 671 | ||||||||
Financing lease liability | - | 14 | (c) | 14 | ||||||||
Deferred rent | 57 | (57 | )(b) | - | ||||||||
Income taxes payable | 688 | - | 688 | |||||||||
Dividends payable | 2,270 | - | 2,270 | |||||||||
Accrued payroll and related taxes | 908 | - | 908 | |||||||||
Deferred insurance reimbursement | 880 | - | 880 | |||||||||
Total current liabilities | 6,355 | 628 | 6,983 | |||||||||
Long-term liabilities: | ||||||||||||
Deferred rent | 531 | (531 | )(b) | - | ||||||||
Operating lease liability | - | 2,967 | (b) | 2,967 | ||||||||
Financing lease liability | - | 10 | (c) | 10 | ||||||||
Total liabilities | 6,886 | 3,074 | 9,960 | |||||||||
Commitments and contingencies | ||||||||||||
Stockholders’ equity: | ||||||||||||
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2019 and December 31, 2018 | - | - | - | |||||||||
Common stock, $0.001 par value; 100,000,000 shares authorized; 33,312,411 issued and 32,241,191 outstanding as of March 31, 2019 and 33,290,587 issued and 32,271,367 outstanding as of December 31, 2018 | 34 | - | 34 | |||||||||
Additional paid-in capital | 8,157 | - | 8,157 | |||||||||
Treasury stock 1,071,220 and 1,019,220 shares, at March 31, 2019 and December 31, 2018, respectively, at cost | (3,675 | ) | - | (3,675 | ) | |||||||
Accumulated earnings | 4,871 | (7 | )(d) | 4,864 | ||||||||
Total Zynex, Inc. stockholders’ equity | 9,387 | (7 | ) | 9,380 | ||||||||
Non-controlling interest | (89 | ) | - | (89 | ) | |||||||
Total stockholders’ equity | 9,298 | (7 | ) | 9,291 | ||||||||
Total liabilities and stockholders’ equity | $ | 16,184 | $ | 3,067 | 19,251 |
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSenacted.
Recent Accounting Pronouncements
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 is effective for us in the first quarter of fiscal 2020, and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2017-12 on our consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (“("ASU 2016-13”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’taren't measured at fair value through net income. The standard will replace today’s “incurred loss”today's "incurred loss" approach with an “expected loss”"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, 2019,2022, and interim periods therein.therein for smaller reporting companies. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We areThe Company is currently evaluating the impact that the adoption of ASU 2016-13 will have on our financial condition, results of operations and cash flows.
In December 2019, FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments simplify the accounting for income taxes by removing certain exceptions to the general principals of Topic 740, “Income Taxes” and also improve consistent application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company is currently evaluating the impact of adopting this guidance.
10 |
ZYNEX, INC.
NOTES TO UNAUDITED 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.
(2) PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
June 30, 2019 | December 31, 2018 | |||||||
Property and equipment | ||||||||
Office furniture and equipment | $ | 1,149 | $ | 1,172 | ||||
Assembly equipment | 128 | 128 | ||||||
Vehicles | 181 | 184 | ||||||
Leasehold improvements | 500 | 480 | ||||||
Leased devices | 542 | 317 | ||||||
$ | 2,500 | 2,281 | ||||||
Less accumulated depreciation | (1,678 | ) | (1,462 | ) | ||||
$ | 822 | $ | 819 |
March 31, 2020 | December 31, 2019 | |||||||
Property and equipment | ||||||||
Office furniture and equipment | $ | 1,431 | $ | 1,178 | ||||
Assembly equipment | 128 | 128 | ||||||
Vehicles | 181 | 181 | ||||||
Leasehold improvements | 544 | 500 | ||||||
Leased devices | 1,077 | 934 | ||||||
$ | 3,361 | 2,921 | ||||||
Less accumulated depreciation | (2,245 | ) | (2,063 | ) | ||||
$ | 1,116 | $ | 858 |
The Company monitors devices out on lease for potential loss and places an estimated reserve on the net book value based on historical loss rates.
Total depreciation expense related to our property and equipment was $76,000 and $42,000$0.1 million for each of the three months ended June 30, 2019March 31, 2020 and 2018, respectively. Depreciation expense for the six-month periods ended June 30, 2019 and 2018 was $143,000 and $68,000, respectively.2019.
Total depreciation expense related to devices out on lease was $0.2 million and $0.1 million for both the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively. Depreciation expense related to devices out on lease was $0.2 million for both the six months ended June 30, 2019 and 2018, respectively. Depreciation on leased units is reflected on the income statement as cost of revenue.
(3)EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding and the number of dilutive potential common share equivalents during the period, calculated using the treasury-stock method for outstanding stock options.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The calculation of basic and diluted earnings per share for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 are as follows (in thousands, except per share data):
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Basic earnings per share | ||||||||||||||||
Net income available to common stockholders | $ | 2,162 | $ | 2,418 | $ | 4,512 | $ | 4,339 | ||||||||
Basic weighted-average shares outstanding | 32,326 | 32,620 | 32,279 | 32,610 | ||||||||||||
Basic earnings per share | $ | 0.07 | $ | 0.07 | $ | 0.14 | $ | 0.13 | ||||||||
Diluted earnings per share | ||||||||||||||||
Net income available to common stockholders | $ | 2,162 | $ | 2,418 | $ | 4,512 | $ | 4,339 | ||||||||
Weighted-average shares outstanding | 32,326 | 32,620 | 32,279 | 32,610 | ||||||||||||
Effect of dilutive securities - options and restricted stock | 1,627 | 1,549 | 1,558 | 1,681 | ||||||||||||
Diluted weighted-average shares outstanding | 33,953 | 34,169 | 33,837 | 34,291 | ||||||||||||
Diluted earnings per share | $ | 0.06 | $ | 0.07 | $ | 0.13 | $ | 0.13 |
For the Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Basic earnings per share | ||||||||
Net income available to common stockholders | $ | 2,937 | $ | 2,350 | ||||
Basic weighted-average shares outstanding | 32,913 | 32,233 | ||||||
Basic earnings per share | $ | 0.09 | $ | 0.07 | ||||
Diluted earnings per share | ||||||||
Net income available to common stockholders | $ | 2,937 | $ | 2,350 | ||||
Weighted-average shares outstanding | 32,913 | 32,233 | ||||||
Effect of dilutive securities - options and restricted stock | 1,291 | 1,488 | ||||||
Diluted weighted-average shares outstanding | 34,204 | 33,721 | ||||||
Diluted earnings per share | $ | 0.09 | $ | 0.07 |
11 |
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30,March 31, 2020 and 2019, options to purchase 0.3 million and 0.4 million shares, respectively, of common stock were excluded from the dilutive stock calculation because their effect would have been anti-dilutive.
For both the three- and six-month periods ended June 30, 2018, options to purchase 0.1 million shares of common stock were excluded from the dilutive stock calculation because their effect would have been anti-dilutive.
(4) STOCK-BASED COMPENSATION PLANS
In June 2017, our stockholders approved the 2017 Stock Incentive Plan (the “2017 Stock Plan”) with a maximum of 5,000,000 shares reserved for issuance. Awards permitted under the 2017 Stock Plan include: Stock Options and Restricted Stock. Awards issued under the 2017 Stock Plan are at the discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to the closing price of our common stock on the date of grant and generally vest over four years. Restricted Stock Awards are issued to the recipient upon vesting and are not included in outstanding shares until such vesting and issuance occurs.
During the three and six months ended June 30,March 31, 2020, 14,000 stock option awards were granted under the 2017 Stock Plan. During the three months ended March 31, 2019, 35,000 and 0.40.3 million stock option awards were granted under the 2017 Stock Plan, respectively. No stock option awards were granted duringPlan. At March 31, 2020, the three and six months ended June 30, 2018. At June 30, 2019, 0.9company had 1.3 million stock option awards remain issuedoptions outstanding and outstanding0.7 million exercisable under the 2017 Stock Plan.following plans:
Outstanding Number of Options (in thousands) | Exercisable Number of Options (in thousands) | |||||||
Plan Category | ||||||||
2005 Stock Option Plan | 388 | 388 | ||||||
Equity Compensation Plans not approved by Shareholders | 59 | 30 | ||||||
2017 Stock Option Plan | 869 | 238 | ||||||
Total | 1,316 | $ | 656 |
During the three and six months ended June 30, 2019, 5,000 and 10,000March 31, 2020, 165,000 shares of restricted stock were granted to the Board of Directors and management under the 2017 Stock Plan, respectively.Plan. During the three months ended March 31, 2019, 5,000 shares of restricted stock were granted. The fair market value of restricted shares for share-based compensation expensing is equal to the closing price of our common stock on the date of grant. The vesting on the Restricted Stock Awardsis typically occurreleased quarterly over three years for the Board of Directors and annually or quarterly over four years for management.
The following summarizes stock-based compensation expenses recorded in the consolidated statements of operations:
For the Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cost of Revenue | $ | 6 | $ | 6 | ||||
Sales and marketing expense | 29 | 41 | ||||||
General, and administrative | 462 | 93 | ||||||
Total stock based compensation expense | $ | 497 | $ | 140 |
During the three and six months ended June 30, 2019,March 31, 2020, there were 14,000 options granted at a weighted average exercise price of $10.15 per share. The weighted-average grant date fair value of options granted during the three months ended March 31, 2020 was $8.88. The Company recorded compensation expense related to stock options andissued 165,000 shares of restricted stock to management during the three months ended March 31, 2020.
During the three months ended March 31, 2019, there were 0.3 million options granted at a weighted average exercise price of approximately $0.2 million and $0.3 million, respectively.$4.37 per share. The weighted-average grant date fair value of options granted during the three months ended March 31, 2019 was $3.86. The Company recorded compensation expenseissued 5,000 shares of approximately $0.1 million related to stock options and restricted stock for bothto management during the three and six months ended June 30, 2018. The Company includes stock-based compensation expense in its in general and administrative expense on the accompanying consolidated statements of operations.March 31, 2019.
The Company received proceeds of approximately $0.1$0.2 million related to option exercises during both the three and six months ended June 30, 2019. The Company received proceeds of approximately $50,000 and $0.1 million$8,000 related to option exercises during the three and six months ended June 30, 2018,March 31, 2020 and 2019, respectively.
The Company used the Black ScholesBlack-Scholes option pricing model to determine the fair value of stock option grants, using the following assumptions for the three and six months ended June 30,March 31, 2020 and March 31, 2019. There were no stock options granted during the three and six months ended June 30, 2018.
12 |
ZYNEX, INC.
For the Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Expected term (years) | 6.79 | 6.25 | ||||||
Risk-free interest rate | 1.59 | % | 2.62 | % | ||||
Expected volatility | 116.76 | % | 121.98 | % | ||||
Expected dividend yield | - | % | - | % |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||
2019 | 2019 | |||||||
Expected term (years) | 6.25 | 6.25 | ||||||
Risk-free interest rate | 2.49 | % | 2.59 | % | ||||
Expected volatility | 121.49 | % | 121.95 | % | ||||
Expected dividend yield | - | % | - | % |
A summary of stock option activity under all equity compensation plans for the sixthree months ended June 30, 2019,March 31, 2020, is presented below:
Weighted- | ||||||||||||||||
Average | ||||||||||||||||
Weighted- | Remaining | Aggregate | ||||||||||||||
Number of | Average | Contractual | Intrinsic | |||||||||||||
Shares | Exercise | Term | Value | |||||||||||||
(in thousands) | Price | (Years) | (in thousands) | |||||||||||||
Outstanding at December 31, 2018 | 1,885 | $ | 0.80 | 6.3 | $ | 4,085 | ||||||||||
Granted | 415 | $ | 4.53 | |||||||||||||
Expired | (7 | ) | $ | 1.00 | ||||||||||||
Forfeited | (77 | ) | $ | 2.51 | ||||||||||||
Exercised | (173 | ) | $ | 0.79 | ||||||||||||
Outstanding at June 30, 2019 | 2,043 | $ | 1.49 | 6.5 | $ | 15,326 | ||||||||||
Exercisable at June 30, 2019 | 1,216 | $ | 0.40 | 4.8 | $ | 10,449 |
Weighted- | ||||||||||||||||
Average | ||||||||||||||||
Weighted- | Remaining | Aggregate | ||||||||||||||
Number of | Average | Contractual | Intrinsic | |||||||||||||
Shares | Exercise | Term | Value | |||||||||||||
(in thousands) | Price | (Years) | (in thousands) | |||||||||||||
Outstanding at December 31, 2019 | 1,855 | $ | 2.48 | 6.42 | $ | 10,032 | ||||||||||
Granted | 14 | $ | 10.15 | |||||||||||||
Forfeited | (175 | ) | $ | 5.40 | ||||||||||||
Exercised | (378 | ) | $ | 0.58 | ||||||||||||
Outstanding at March 31, 2020 | 1,316 | $ | 2.72 | 7.18 | $ | 10,991 | ||||||||||
Exercisable at March 31, 2020 | 656 | $ | 1.00 | 5.81 | $ | 6,604 |
A summary of restricted stock award activity under all equity compensation plans for the sixthree months ended June 30,March 31, 2019, is presented below:
Number of | ||||
Shares | ||||
(in thousands) | ||||
Granted but not vested at December 31, | ||||
Granted | ||||
Vested | ( | ) | ||
Granted but not vested at |
As of June 30, 2019,March 31, 2020, the Company had approximately $2.2$3.8 million of unrecognized compensation expense related to stock options and restricted stock awards that will be recognized over a weighted average period of approximately 3.02.5 years.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(5)STOCKHOLDERS’ EQUITY
Common Stock Dividend
Our Board of Directors declared a cash dividend of $0.07 per share on November 6, 2018. The dividend of $2.3 million was paid on January 18, 2019 to stockholders of record as of January 2, 2019.
Treasury Stock
From December 6, 2017 through March 6, 2018, we had the ability through our stock purchase program to re-purchase our common stock at prevailing market prices either in the open market or through privately negotiated transactions up to $2.0 million. On March 6, 2018, we reached the limit of $2.0 million and share re-purchases were ceased. From the inception of the plan through March 6, 2018, we purchased 495,091 shares of our common stock for $2.0 million or an average price of $4.04 per share.
On May 14, 2018, our Board of Directors approved a new program to buy back an additional $2.0 million of our common stock at prevailing market prices either in the open market or through privately negotiated transactions through May 13, 2019. For the sixthree months ending June 30,March 31, 2019, the Company purchased 52,000 shares of our common stock for $0.2 million for an average price of $3.29 per share, related to the new program. From May 14, 2018 through May 13,March 31, 2019, the Company purchased 576,129 shares of our common stock for $1.8 million or an average price $3.20 per share.
13 |
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Warrants
During the six months ended June 30, 2019, 50,000 warrants were exercised. TheseIn October 2017, 150,000 common stock warrants were issued during October 2017 as paymentin exchange for professional services. The exercise was done pursuant
In connection with the agreement entered into on March 28, 2016, with Triumph Bank, we issued a common stock warrant to a net exercise provision and, as a result, 9,634purchase 50,000 shares of common stock were withheld to facilitate the payment of the exercise price which resulted in the issuance of 40,366 shares ofCompany’s common stock.
A summary of stock warrant activity for the three months ended March 31, 2020 is 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, 2019 | 100 | $ | 2.63 | 4.77 | $ | 525 | ||||||||||
Granted | - | $ | - | |||||||||||||
Exercised | - | $ | - | |||||||||||||
Forfeited | - | $ | - | |||||||||||||
Outstanding and Exercisable at March 31, 2020 | 100 | $ | 2.63 | 4.52 | $ | 845 |
(6) INCOME TAXES
The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, primarily related to excess tax benefits on stock option exercises. For the sixthree months ended June 30, 2019March 31, 2020 discrete items adjusted were $0.3$1.1 million. At June 30, 2019March 31, 2020 the Company is currently estimating an annual effective tax rate of approximately 28%26%. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to various factors.
The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s effective income tax rate was 27%(19)% for the sixthree months ended June 30, 2019.March 31, 2020. Discrete items recognized during the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, resulted in a tax benefit of approximately $0.3$1.1 million for both periods.and $18,000, respectively. The Company recorded an income tax expensebenefit of $0.4 million and $1.2 million for the three and six months ended June 30, 2019, respectively,$483,000 and income tax expense of $0.3 million and $0.2 million$786,000 for the three and six months ended June 30, 2018.March 31, 2020 and 2019, respectively.
TaxesOn March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of $2.0 millionemployer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and $0.2 milliontechnical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, net operating loss carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from 30% to 50% of EBITDA. We are analyzing the different aspects of the CARES Act to determine whether any specific provisions may impact us.
No taxes were paid during the sixthree months ended June 30 2019March 31, 2020 and 2018, respectively.2019.
(7)(7) DEFERRED INSURANCE REIMBURSEMENT
During the first quarter of 2016, the Company collected $880,000 from a single insurance company for accounts receivable. The accounts receivable had been previously reduced to zero by the allowance for billing adjustments. Subsequent to March 31, 2016, the insurance company verbally communicated to the Company that this payment was made in error and requested it be refunded to the insurance company. The Company recorded this $880,000 insurance reimbursement as a deferred insurance liability.
14 |
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
During the first quarter of 2019, the Company recognized $880,000 as other income and reversed the liability as management’s assessment was that any repayment obligation was deemed remote.liability. The Company has included this amount in other income in order to ensure comparability of the Company’s operating income results for the sixthree months ended June 30,March 31, 2019 and 2018. Management’s legal determination that any refund obligation is remote was based on the facts and circumstances related to the dispute, which included reviewing the legal statutes within the jurisdictions the Company operates.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(8)LEASES
The Company’s primaryCompany has three operating leases pertaining to its corporate headquarters located in Englewood, CO. Details of each lease are as follows:
· | The Company entered into a sublease agreement on October 20, 2017 with CSG Systems Inc. for approximately 41,715 square |
· | The Company entered into an amendment to its sublease agreement, above, on March 11, 2019 |
· | The Company entered into an amendment to its sublease agreement, above, on January 3, 2020 for an additional 22,546 square feet of office space. The term of the sublease began on March 9, 2020 and will run through June 30, 2025. From the commencement date through October 31, 2020, the rent per square foot is $13.00, increasing to $21.75 per square foot from November 1, 2020 through October 31, 2021. The price per square foot increases by an additional $1 annually beginning November 1, 2021. Upon lease commencement, the Company recorded an operating lease liability and a corresponding right-of-use asset for $1.4 million each. |
The Company is also obligated to pay its proportionate share of building operating expenses. The sub-landlord agreed to contribute approximately $0.2 million toward tenant improvements which is accountedhas one finance lease for office equipment as a reduction of the operating lease asset and subsequently treated as a reduction of rent expense over the term of the lease.follows:
· | The Company entered into an equipment lease on September 20, 2019 with Konica Minolta Premier Finance for a copier/printer and related software located at its corporate offices. The term of the equipment lease agreement is 5 years with the option to purchase the equipment at the end of the lease. The Company does not expect to exercise the option to purchase the equipment and, accordingly, has not considered the effect of the purchase in the evaluation of the lease asset and liability. Rent is to be paid monthly at a fixed rate for the term of the equipment lease agreement. Upon lease commencement, the Company recorded a finance lease liability and a corresponding right-of-use asset for $0.2 million each. |
The Company’s operating leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operatingthe lease liabilities.liability. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company’s incremental borrowing rate was determined to be 4.8%4.5% for its operating lease liabilities and 7.0% forliabilities. The Company’s equipment lease agreement has an implicit rate of 8.3%, which was used to measure its financing leases.finance lease liability. The remaining lease term was 4.03.3 years for the Company’s sublease agreementsoperating leases and 1.34.6 years for the Company’s financing lease.its finance leases.
The table below reconciles the undiscounted future minimum lease payments under the Company’s operating leases to the total operating lease liabilities recognized on the consolidated balance sheets as of June 30, 2019 (in thousands):
15 |
July 1, 2019 through December 31, 2019 | $ | 537 | ||
2020 | 1,344 | |||
2021 | 1,408 | |||
2022 | 1,473 | |||
2023 | 763 | |||
Total undiscounted future minimum lease payments | 5,525 | |||
Less: Difference between undiscounted lease payments and discounted operating lease liabilities: | (620 | ) | ||
Total operating lease liabilities | $ | 4,905 |
Operating lease liability | Financing lease liability | |||||||
April 1, 2020 through December 31, 2020 | 1,246 | 42 | ||||||
2021 | 1,878 | 45 | ||||||
2022 | 1,964 | 45 | ||||||
2023 | 1,017 | 45 | ||||||
2024 | - | 34 | ||||||
Total undiscounted future minimum lease payments | 6,105 | 211 | ||||||
Less: Difference between undiscounted lease payments and discounted lease liabilities: | (473 | ) | (32 | ) | ||||
Total lease liabilities | $ | 5,632 | $ | 179 |
Operating lease costs were $0.2 and $0.4 million and $0.2 million for both the three and six months ended June 30,March 31, 2020 and 2019, and 2018,respectively, which were included in general and administrative expenses on the consolidated statement of operations.
(9) CONCENTRATIONS
For the three months ended June 30, 2019,March 31, 2020, the Company sourced approximately 72%40% of the suppliescomponents for its electrotherapy products from two significant vendors (defined as supplying at least 10%). For the same period in 2018, the Company sourced approximately 68% of the supplies from two significant vendors.
For the sixthree months ended June 30,March 31, 2019 the Company sourced approximately 60% of supplies for its electrotherapy products from one significant vendor. For the same period in 2018 the company sourced approximately 79%57% of suppliescomponents from two significant vendors.
Management believes that its relationships with suppliers are good; however, if the relationships were to be replaced, there may be a short-term disruption to operations, a period of time in which products may not be available and additional expenses may be incurred.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company had receivables from two health insurance carriersthird-party payers at June 30,March 31, 2020 and December 31, 2019, that made up approximately 37% of the net accounts receivable balance. The Company had receivables from one health insurance carrier at December 31, 2018, that made up approximately 23%, respectively,39% of the net accounts receivable balance.
(10) LITIGATION
From time to time, the Company may become party to litigation and other claims in the ordinary course of business. To the extent that such claims and litigation arise, management would accrue the estimated exposure for such events when losses are determined to be both probable and estimable.
The Company is currently not a party to any material pending legal proceedings.
(11) (11) RELATED PARTY TRANSACTIONS
As of June 30, 2019, the Company employs Mr. Martin Sandgaard, son of Thomas Sandgaard. Total compensation for Martin Sandgaard was $21,000 and $47,000 for the three and six months ended June 30, 2019, respectively. Mr. Sandgaard’s compensation for the three and six months ended June 30, 2018 was $21,000 and $46,000, respectively.
To meet Mr. Sandgaard’s obligation to his former wife under a settlement agreement, the Company, during the fourth quarter of 2015, entered into a three-year employment arrangement totaling $100,000 per year with Mr. Joachim Sandgaard. During the three and six months ended June 30, 2018, total compensation paid to Joachim Sandgaard was $25,000 and $54,000. Joachim Sandgaard’s employment with the Company ceased during December 2018.
(12) SUBSEQUENT EVENT
Effective July 22,
In December 2019, a novel Coronavirus disease (“COVID-19”) was reported and on March 11, 2020, the BoardWorld Health Organization characterized COVID-19 as a pandemic. While the Company did not incur significant disruptions to its operations during the first quarter of Directors appointed Giuseppe Papandrea as Chief Operating Officer2020 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 Company. Additionally,pandemic on such date,all aspects of its business. See also the risk factor relating to COVID-19 disclosed in Item 1A of Part II, below.
The Company entered into an employment agreement with Mr. Papandrea, which was included as an exhibitevaluated subsequent events up to the Current Report on Form 8-K filed on July 22, 2019.April 28, 2020 and concluded that there were no additional subsequent events.
16 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Notice Regarding Forward-Looking Statements
This quarterly report contains statements that are forward-looking, such as statements relating to plans for future organic growth and other business development activities, as well as the impact of reimbursement trends, other capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks include the ability to engage effective sales representatives, the need to obtain FDAU.S. Food and Drug Administration (“FDA”) clearance and CECertificate European (“CE”) marking of new products, the acceptance of new products as well as existing products by doctors and hospitals, our dependence on the reimbursement from insurance companies for products sold or leased to our customers, acceptance of our products by health insurance providers for reimbursement, larger competitors with greater financial resources, the need to keep pace with technological changes, our dependence on third-party manufacturers to produce key components of our products on time and to our specifications, implementation of our sales strategy including a strong direct sales force, the impact of COVID-19 on our business, and other risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
These interim financial statements and the information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the annual audited consolidated financial statements, and notes to consolidated financial statements, included in the Company’s 20182019 Annual Report on Form 10-K and subsequently filed reports, which have previously been filed with the Securities and Exchange Commission.
General
The CompanyZynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado. We operate one primary business segment, medical devices which include Electrotherapy and Pain Management Products. As of June 30, 2019,March 31, 2020, the Company’s only active subsidiary is Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) through which the Company conducts most of its operations. One other subsidiary, Zynex Europe, ApS (“ZEU,” a wholly-owned Denmark corporation), did not generate material revenues during the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume monitoring device but itwhich was approved by the U.S. Food and Drug Administration (“FDA”) in February 2020 and is awaiting approval by the FDA as well as CE Marking in Europe, therefore, ZMS has achieved no revenues to date.
RESULTS OF OPERATIONS
Summary
Net revenue was $10.3$15.2 million and $7.6$9.2 million for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $19.5 million and $14.5 million for the six months ended June 30, 2019 and 2018, respectively. Net revenue increased 36% and 35%66% for the three and six-month periodsthree-month period ended June 30, 2019, respectively.March 31, 2020. Net income was $2.2increased 25% to $2.9 million forduring the three months ended June 30, 2019 compared withMarch 31, 2020 from $2.4 million during the same period in 2018. Net income was $4.5 million for the sixthree months ended June 30, 2019 compared with $4.3 million during the same period in 2018.March 31, 2019. We generated cash flows from operating activities of $2.4$0.6 million during the sixthree months ended June 30, 2019.March 31, 2020. Working capital at June 30, 2019March 31, 2020 was $11.9$19.9 million, an increase of 62%14% from $7.3$17.4 million as of December 31, 2018.2019.
Net Revenue
Net revenues are comprised of device and supply sales, reducedconstrained by estimated Third-party Payors’third-party payor reimbursement deductions and an allowanceestimated uncollectible amounts. Product device revenue is primarily comprised of sales and rentals of our electrotherapy products and also includes our cervical traction, lumbar support and hot/cold therapy products.
Supplies revenue is primarily comprised of sales of our consumable supplies to patients using our electrotherapy products, consisting primarily of surface electrodes and batteries.
Revenue related to both devices and supplies is reported net, after adjustments for estimated third-party payor reimbursement deductions and estimated uncollectible amounts, if needed. The reserveamounts. Estimates for billing allowance adjustmentsthird-party payor reimbursement deductions and allowance for uncollectible accounts are adjusted on an ongoing basis in conjunction with the processing of Third-party Payorthird-party payor insurance claims and other customer collection history. Product device revenue is primarily comprised TENS products and also includesBilling allowance adjustments are common in our cervical traction, lumbar support and hot/cold therapy products. Supply revenue includes consumable supplies related primarily to our TENS products.
We also sell consumable supplies for all patients using our electrotherapy products, consisting primarily of surface electrodes and batteries. Revenue for the electrotherapy products is reported net, after adjustments for estimated insurance company reimbursement deductions and estimated allowance for uncollectible accounts. The deductions are known throughout the health care industry as “billing adjustments” whereby the healthcare insurersthird-party payors unilaterally reduce the amount they reimburse for our products as compared to the sales pricesprice charged by us. TheThese 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 21 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.
17 |
We sometimesoccasionally 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 June 30, 2019, we believe we have an adequate allowance for billing adjustments relating to known insurance disputes and refund requests. However, no assurances can be given with respect to such estimates of reimbursements and offsets or the ultimate outcome of any refund requests.
Net revenue increased $2.7$6.0 million or 36%66% to $10.3$15.2 million for the three months ended June 30, 2019,March 31, 2020, from $7.6$9.2 million for the same period in 2018. Net revenue increased $5.0 million or 35% to $19.5 million for the six months ended June 30, 2019, from $14.5 million for the same period in 2018. For both the three- and six-month periods ended June 30, 2019, the2019. The growth in net revenue from the same periods in 2018 is primarily related to a 65% and 48%the 126% growth in device orders respectively, which led to an increased customer base and drove higher sales of consumable supplies. We are also continually improving our billing and collection procedures, which allows us to increase our collection rates.
Device Revenue
Device revenue is related to the sale or lease of our products. Device revenue increased $0.6$1.4 million or 37%74% to $2.3$3.4 million for the three months ended June 30, 2019,March 31, 2020, from $1.7$2.0 million for the same period in 2018.
Device revenue increased $1.0 million or 31% to $4.3 million for the six months ended June 30, 2019, from $3.3 million for the same period in 2018.
2019. The increase in device revenue is primarily related to growth in orders which is attributable to our increased sales force expansion.force.
Supplies Revenue
Supplies revenue is related to the sale of supplies, primarily electrodes and batteries, for our products. Supplies revenue increased $2.1$4.6 million or 36%63% to $8.0$11.8 million for the three months ended June 30, 2019,March 31, 2020, from $5.9$7.2 million for the same period in 2018.
Supplies revenue increased $4.0 million or 36% to $15.2 million for the six months ended June 30, 2019, from $11.2 million for the same period in 2018.
2019. The increase in supplies revenue is primarily related to an increased customer base from increased device sales in 20182019 and 2019,2020, plus improvements in our billing and collection procedures.
Operating Expenses
Cost of Revenue – Device and Supply
Cost of Revenue – device and supply consist primarily of device and supply costs, operations labor and overhead, shipping and depreciation. Cost of revenue for the three months ended June 30, 2019March 31, 2020 increased 46%91% to $1.9$3.4 million from $1.3$1.8 million for the same period in 2018. As a percentage of revenue, cost of revenue – device and supply increased to 19% for the three months ended June 30, 2019 from 18% for the same period in 2018.March 31, 2019. The increase in cost of revenue is primarily due to an increase of 37%126% in device and 36% in supply orders from the three months ended June 30, 2018
Cost of revenue for the six months ended June 30, 2019 increased 45% to $3.7 million from $2.6 million for the same period in 2018.orders. As a percentage of revenue, cost of revenue – device–device and supply increased to 19%22% for the sixthree months ended June 30, 2019March 31, 2020 from 18%19% for the same period in 2018.2019. The increase in costas a percentage of revenue is primarily due to an increase of 31% in device and 36% in supply orderslower collections from the six months ended June 30, 2018.certain commercial insurance payors.
Sales and Marketing Expense
Sales and marketing expenses primarily consist of employee related costs, including commissions and other direct costs associated with these personnel including travel expenses and marketing campaign and related expenses.
Sales and marketing expense for the three months ended June 30, 2019March 31, 2020 increased 111% to $3.1$5.2 million from $1.5$2.5 million for the same period in 2018. Sales and marketing expense for the sixthree months ended June 30, 2019 increased 101% to $5.6 million from $2.8 million for the same period in 2018.
March 31, 2019. The increase in sales and marketing expense for both the three and six months ended June 30, 2019 is primarily due to the expansion of our sales force including adding63 additional 117 new sales representatives overand the past 12 months, of which 32 were added during the six months ended June 30, 2019.related costs associated with increased headcount. As a percentage of revenue, sales and marketing expense increased to 30% and $28%34% for the three and six months ended June 30, 2019, respectivelyMarch 31, 2020 from 19%27% for the same periodsperiod in 2018.2019. The increase as a percentage of revenue is primarily due to the increase in costs associated with the increase in headcount,aforementioned expenses, partially offset by the increase in revenue during the period.
General and Administrative Expense
General and administrative expenses primarily consist of employee related costs, and other direct costs associated with these personnel including facilities and travel expenses and professional fees, depreciation and amortization. General and administrative expense for the three months ended June 30, 2019March 31, 2020 increased 30%55% to $2.7$4.2 million from $2.1$2.7 million for the same period in 2018. As a percentage of revenue, general and administrative expense decreased to 26% for the three months ended June 30, 2019 from 27% for the same period in 2018. The decrease as a percentage of revenue is primarily due to the increase in revenue during the period, partially offset by costs associated with increased headcount from the prior year.
General and administrative expense for the six months ended June 30, 2019 increased 21% to $5.4 million from $4.5 million for the same period in 2018.March 31, 2019. The increase in general and administrative expense for the six months is primarily due to increased compensation and benefit expense related to headcount growth, an increase in non-cash stock-based compensation expense as a result of several key hires during the second half of 2019 and increased fees related toincreases in rent and facilities expense as we expanded our uplisting to the Nasdaq Capital Market.corporate headquarters during June 2019 and March 2020. As a percentage of revenue, general and administrative expense decreased to 28%27% for the sixthree months ended June 30, 2019March 31, 2020 from 31%29% for the same period in 2018.2019. The decrease as a percentage of revenue is primarily due to the increase in revenue during the period, partially offset by the aforementioned expenses.
Other Income (Expense)
18 |
For the six months ended June 30, 2019, other income was $0.9 million. The $0.9 million was related to a deferred insurance reimbursement from the first quarter of 2016. The Company collected $0.9 million from an insurance company for accounts receivable. Subsequent to March 31, 2016, the insurance company verbally communicated to the Company that this payment was made in error and requested it be refunded to the insurance company. The Company recorded this $0.9 million as a deferred insurance liability.
During the first quarter of 2019, the Company recognized $0.9 million as other income and released the liability. The Company has included this amount in other income in order to ensure comparability of the Company’s operating income results for the six months ended June 30, 2019 and 2018. Management’s legal determination that any refund obligation is remote was based on the facts and circumstances related to the dispute, which included reviewing the legal statutes within the jurisdictions the Company operates.
During the three and six months ended June 30, 2018, other expense was comprised of interest expense of $37,000 and $0.1 million, respectively.
The decrease in expense during the three and six months ended June 30, 2019 was primarily due to the retirement of debt related to the private placement completed during the second quarter of 2018 and the related interest expense and amortization of debt issuance and debt discount costs.
Income Taxes
The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s effective income tax rate was 28%(19)% for the sixthree months ended June 30, 2019.March 31, 2020. Discrete items, primarily related to excess tax benefits related toon stock option exercises, of $0.3$1.1 million areand $18,000 were recognized as a benefit against income tax expense.expense for the three months ended March 31, 2020 and 2019, respectively. For the three and six months ended June 30,March 31, 2020 the company has an income tax benefit of approximately $0.5 million. For the three months ended March 31, 2019 the Company hascompany had an income tax expense of approximately $0.4 million and $1.2 million, respectively. The Company recorded income tax expense of $0.3 million and $0.2 million for the three and six months ended June 30, 2018.$0.8 million.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations through cash flows from operations, debt and equity transactions. At June 30, 2019,March 31, 2020, our principal source of liquidity was $10.1$14.6 million in cash and $3.5$6.5 million in accounts receivables, net of allowances. Our anticipated uses of cash in the future will be to fund the expansion of our business.receivable.
Net cash provided by operating activities for the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 was $2.4$0.6 million and $3.6$1.8 million, respectively. The decrease in cash provided by operating activities for the sixthree months ended June 30, 2019March 31, 2020 was primarily due to the significant increase in cash paid for income taxes asinventory in 2020. The increase in inventory is related to our order growth plus excess stockpiles in anticipation of possible supply chain shortages related to the Company utilized all available net operating losses in 2018.COVID-19 virus.
Net cash used in investing activities for the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 was $0.1$0.3 million and $0.7 million,$46,000, respectively. Cash used in investing activities for both the sixthree months ended June 30,March 31, 2020 and 2019 was primarily related to the purchase of office furniture and equipment and leasehold improvements related to our expansion into the third floor at our corporate headquarters. Cash used in investing activities for the six months ended June 30, 2018 was primarily related to leasehold improvements at our new corporate headquarters.
Net cash provided by financing activities for the three months ended March 31, 2020 was $0.2 million compared with net cash used in financing activities of $2.4 million for both the six-month periods ended June 30, 2019 and 2018 was $2.3 million.same period in 2019. The cash provided by financing activities for the three months ended March 31, 2020 was primarily due to proceeds from the issuance of common stock upon exercises of stock options. Cash used in financing activities for the sixthree months ended June 30,March 31, 2019 was primarily due to the payment of a dividend of $2.3 million to stockholders of record on January 2, 2019 and re-purchases of our common stock of $0.2 million, which was partially offset by cash received upon the exercise of stock options of $0.1 million. Cash used in financing activities for the six months ended June 30, 2018 was primarily due to re-purchases of our common stock of $2.0 million and $0.4 million of principal payments on our subordinated notes payable.
We believe our cash and cash equivalents, together with anticipated cash flow from operations will be sufficient to meet our working capital, and capital expenditure requirements for at least the next twelve months. In making this assessment, we considered the following:
· | Our cash and cash equivalents balance at |
· | Our working capital balance of |
· | Our profitability during the last |
· | Our projected income and cash flows for the next 12 months. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
On January 1, 2019, we adopted ASU No. 2016-02,Leases (Topic 842),with an effective date of January 1, 2018, using the modified retrospective approach. ASU 2016-02 requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for operating and financing leases. We elected the package of practical expedients permitted under the transition guidance within the new standards, which among other things, allowed us to carry forward the historical lease classification. We also elected the hindsight practical expedient to determine the lease term for existing leases. Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $3.6 million and $3.9 million, respectively, as of January 1, 2018. The difference between the additional lease assets and lease liabilities was recorded as an adjustment to retained earnings. The standard did not have a material impact on our consolidated statement of operations and had no impact on our statement of cash flows.
There have been no other significant changes to our critical accounting policies.
Please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and Note 2 to the Consolidated Financial Statements located within our Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the Securities and Exchange Commission on February 28, 2019.27, 2020.
OFF BALANCE SHEET ARRANGEMENTS
The Company had no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
RISKS AND UNCERTAINTIES
In December 2019, a novel Coronavirus disease (“COVID-19”) was reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. While the Company did not incur significant disruptions to its operations during the first quarter of 2020 from COVID-19, it is unable at this time to predict the impact that COVID-19 will have on its business, financial position and operating results in future periods due to numerous uncertainties. The Company has been and continues to closely monitor the impact of the pandemic on all aspects of its business. See also the risk factor relating to COVID-19 disclosed in Item 1A of Part II, below.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, we are exposed to certain market risks, including changes in interest rates. Uncertainties that are either non-financial or non-quantifiable such as political, economic, tax, other regulatory, or credit risks including healthcare reimbursement practices, are not included in the following assessment of market risks.
19 |
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer (CEO) and chief financial officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of June 30, 2019,March 31, 2020, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC), and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control Over Financial Reporting
During the three months ended June 30, 2019,March 31, 2020, there were no changes that materially affected or are reasonably likely to affect our internal control over financial reporting.
We are not a party to any material pending legal proceedings.
ThereOther than as set forth below, as of the filing date of this Quarterly Report on Form 10-Q, there have been no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, filed with the SEC on February 28, 2019.27, 2020.
We face risks related to health pandemics, particularly the recent outbreak of COVID-19, which could adversely affect our business and results of operations.
Our business could be materially adversely affected by a widespread outbreak of contagious disease, including the recent outbreak of the novel coronavirus, known as COVID-19, which has spread to many countries throughout the world, including the United States. The effects of this outbreak on our business have included and could continue to include temporary closures of our providers and clinics and suspensions of elective surgical procedures. This Quarterly Report on Form 10-Q should be read in conjunctionhas and could continue to impact our interactions and relationships with our customers.
In addition to temporary closures of the risk factors definedproviders and clinics that we serve, we could also experience temporary closures of the facilities of our suppliers, contract manufacturers, or other vendors in our Annual Report on Form 10-K forsupply chain, which could impact our business, interactions and relationships with our third-party suppliers and contractors, and results of operations. The extent to which the year ended December 31, 2018 under “Item 1A. Risk Factors.”COVID-19 outbreak will impact business and the economy is highly uncertain and cannot be predicted. Accordingly, we cannot predict the extent to which our financial condition and results of operations will be affected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of equity securities by the issuer and affiliated purchasersNone.
The following table presents details of our repurchases during the six months ended June 30, 2019 (in thousands, except average price per share):
Period | Total number of shares purchased | Average price per Share | Total number of shares purchased as part of publicly announced plan | Approximate dollar value of shares that may yet be purchased under the plan | ||||||||||||
January 1, 2019- January 31, 2019 | 52 | 3.29 | 52 | 154 | ||||||||||||
February 1, 2019 – June 30, 2019 | - | - | - | 154 | ||||||||||||
52 | $ | 3.29 | 52 |
On May 14, 2018, our Board of Directors approved a new program to buy back $2.0 million of our common stock at prevailing market prices either in the open market or through privately negotiated transactions through May 13, 2019. The program expired on May 13, 2019.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
N/A
None
20 |
* | Filed herewith |
21 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ZYNEX, INC. | |
/s/ | |
Dated: | Daniel J. Moorhead |
Chief Financial Officer | |
(Principal Financial and Accounting Officer) |
22 |