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: March 31,June 30, 2013

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 number33-26787-D

      

Zynex, Inc.

(Exact name of registrant as specified in its charter)

      

   

 

NEVADA

   

NEVADA

90-0214497

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

   

   

9990 PARK MEADOWS DRIVE

LONE TREE, COLORADO

80124

(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.    YesxNo¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YesxNo¨

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

   

 

Large accelerated filer

   

Large accelerated filer

¨

Accelerated filer

¨

   

   

   

   

Non-accelerated filer

¨(Do not check if a smaller reporting company)

Smaller reporting company

x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes¨Nox

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

   

 

Class

      

Class

Shares Outstanding as of MayAugust 13, 2013

Common Stock, par value $0.001

31,148,234

 1 


ZYNEX, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

PART I—FINANCIAL INFORMATION

Page

Item 1.

Financial Statements

   

   

   

   

Common Stock, par value $0.001

31,148,234


ZYNEX, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Page

Condensed Consolidated Balance Sheets as of March 31,June 30, 2013 (unaudited) and December 31, 2012 

3

   

   

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended March 31,June 30, 2013 and 2012 

4

   

Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the threesix months ended March 31,June 30, 2013 

5

   

Unaudited Condensed Consolidated Statements of Cash Flows for the threesix months ended March 31,June 30, 2013 and 2012 

6

   

Unaudited Notes to Condensed Consolidated Financial Statements 

7

   

   

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

1416

   

Item 4.

Controls and Procedures 

1922

   

PART II—OTHER INFORMATION

   

Item 1. Legal Proceedings

19

Item 1A. Risk Factors

19

   

   

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 6.

Exhibits 

2024

   

Signatures 

2125

   

 2 



ITEM 1. FINANCIAL STATEMENTS

ZYNEX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)

 

 

March 31,
2013

December 31,
2012

   

   

June 30,
2013

   

      

December 31,
2012

   

(UNAUDITED)

(UNAUDITED)

   

      

   

   

ASSETS

   

   

   

      

   

   

   

Current Assets:

   

   

   

      

   

   

   

Cash

  $681 

  $823 

$

445

      

      

$

823

      

Accounts receivable, net

11,234 

12,224 

   

9,775

      

      

   

12,224

      

Inventory

6,324 

6,160 

   

5,845

      

      

   

6,160

      

Prepaid expenses

256 

243 

   

194

      

      

   

243

      

Deferred tax assets

1,855 

1,855 

   

1,855

      

      

   

1,855

      

Other current assets

228 

57 

   

1,255

      

      

   

57

      

   

   

   

   

   

      

   

   

   

   

   

Total current assets

20,578 

21,362 

   

19,369

      

      

   

21,362

      

   

   

   

   

   

      

   

   

   

Property and equipment, net

3,519 

3,851 

   

3,849

      

      

   

3,851

      

Deposits

170 

171 

   

573

      

      

   

171

      

Deferred financing fees, net

85 

98 

   

73

      

      

   

98

      

Intangible assets, net

188 

203 

   

73

      

      

   

203

      

Goodwill

251 

251 

   

212

      

      

   

251

      

   

   

   

   

   

      

   

   

   

   

   

Total assets

  $24,791 

  $25,936 

$

24,149

      

      

$

25,936

      

   

   

   

   

   

   

   

      

   

   

   

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

   

   

      

   

   

   

Current Liabilities:

   

   

   

      

   

   

   

Line of credit

  $6,602 

  $5,906 

$

6,870

      

      

$

5,906

      

Current portion of notes payable and other obligations

151 

144 

Current portion of notes payable and capital lease obligations

   

131

      

      

   

144

      

Accounts payable

1,675 

2,057 

   

2,108

      

      

   

2,057

      

Income taxes payable

1,003 

1,430 

   

891

      

      

   

1,430

      

Accrued payroll and payroll taxes

934 

899 

   

799

      

      

   

899

      

Deferred rent

390 

371 

   

364

      

      

   

371

      

Current portion of contingent consideration

21 

21 

   

10

      

      

   

21

      

Other accrued liabilities

524 

1,265 

   

457

      

      

   

1,265

      

   

   

   

   

   

      

   

   

   

   

   

Total current liabilities

11,300 

12,093 

   

11,630

      

      

   

12,093

      

   

   

   

   

   

      

   

   

   

Notes payable and other obligations, less current portion

144 

114 

Notes payable and capital lease obligations, less current portion

   

135

      

      

   

114

      

Deferred rent

673 

785 

   

1,470

      

      

   

785

      

Deferred tax liabilities

786 

786 

   

786

      

      

   

786

      

Warranty liability

20 

20 

   

20

      

      

   

20

      

Contingent consideration, less current portion

87 

83 

   

21

      

      

   

83

      

   

   

   

   

   

      

   

   

   

   

   

Total liabilities

  $13,010 

  $13,881 

   

14,062

      

      

   

13,881

      

   

   

   

   

   

      

   

   

   

   

   

Stockholders’ Equity:

   

   

   

      

   

   

   

Preferred stock, $ .001 par value, 10,000,000 shares authorized, no shares issued or outstanding

—   

—   

Common stock, $ .001 par value, 100,000,000 shares authorized, 31,148,234 shares issued and outstanding at March 31, 2013, and December 31, 2012.

31 

31 

Preferred stock, $.001 par value, 10,000,000 shares authorized, no shares issued or outstanding

   

—  

   

      

   

—  

   

Common stock, $.001 par value, 100,000,000 shares authorized, 31,148,234 shares issued and outstanding at June 30, 2013, and December 31, 2012

   

31

      

      

   

31

      

Paid-in capital

5,489 

5,453 

   

5,522

      

      

   

5,453

      

Retained earnings

6,262 

6,566 

   

4,546

      

      

   

6,566

      

   

   

   

   

   

      

   

   

   

   

   

Total Zynex, Inc. stockholders’ equity

11,782 

12,050 

   

10,099

      

      

   

12,050

      

Noncontrolling interest

(1)

   

(12

)  

      

   

5

      

Total Stockholders’ equity

   

10,087

      

      

   

12,055

      

   

   

   

   

   

   

   

   

   

Total Stockholders’ equity

  $11,781 

  $12,055 

Total liabilities and stockholders’ equity

  $24,791 

  $25,936 

$

24,149

      

      

$

25,936

      

   

   

See accompanying notes to unaudited condensed consolidated financial statements.

 3 



ZYNEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

   

 

   

   

Three months ended
March 31,

   

2013 

2012 

Three months ended
June 30,

   

   

Six months ended
June 30,

   

   

   

2013

   

      

2012

   

   

2013

   

      

2012

   

Net revenue:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Rental

  $1,679 

  $2,062 

$

1,643

      

      

$

2,437

      

   

$

3,322

      

      

$

4,499

      

Sales

5,989 

6,882 

   

3,829

      

      

   

7,589

      

   

   

9,818

      

      

   

14,471

      

   

   

   

5,472

      

      

   

10,026

      

   

   

13,140

      

      

   

18,970

      

7,668 

8,944 

   

   

Cost of revenue:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Rental

301 

258 

   

398

      

      

   

273

      

   

   

699

      

      

   

531

      

Sales

1,890 

1,555 

   

1,485

      

      

   

1,513

      

   

   

3,375

      

      

   

3,068

      

   

   

   

1,883

      

      

   

1,786

      

   

   

4,074

      

      

   

3,599

      

2,191 

1,813 

   

   

Gross profit

5,477 

7,131 

   

3,589

      

      

   

8,240

      

   

   

9,066

      

      

   

15,371

      

Selling, general and administrative expense

5,833 

6,645 

   

6,153

      

      

   

7,308

      

   

   

11,986

      

      

   

13,953

      

   

   

(Loss) income from operations

(356)

486 

   

(2,564

)  

      

   

932

      

   

   

(2,920

)  

      

   

1,418

      

   

   

   

   

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Other expense:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Interest expense

(130)

(93)

   

(214

)  

      

   

(81

   

   

(344

      

   

(174

Other expense

(6)

—   

   

   

(136)

(93)

Other income (expense)

   

78

      

      

   

(7

)

   

   

72

      

      

   

(7

   

   

   

(136

      

   

(88

   

   

(272

)  

      

   

(181

(Loss) income before income tax

(492)

393 

   

(2,700

      

   

844

      

   

   

(3,192

      

   

1,237

      

Income tax benefit (expense)

182 

(73)

   

973

      

      

   

(371

)  

   

   

1,155

      

      

   

(444

)  

   

   

Net (loss) income

(310)

320 

   

(1,727

)  

      

   

473

      

   

   

(2,037

      

   

793

      

Plus: Net loss– noncontrolling interest

—   

   

   

Plus: Net loss – noncontrolling interest

   

11

      

      

   

—  

      

   

   

17

      

      

   

—  

   

Net (loss) income – attributable to Zynex, Inc.:

  $(304)

  $320 

$

(1,716

)  

      

$

473

      

   

$

(2,020

)  

      

$

793

      

   

   

   

   

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Net (loss) income per share:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Basic

  $(0.01)

  $0.01 

$

(0.06

)  

      

$

0.02

      

   

$

(0.06

)  

      

$

0.03

      

   

   

Diluted

  $(0.01)

  $0.01 

$

(0.06

)  

      

$

0.02

      

   

$

(0.06

      

$

0.03

      

   

   

   

   

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Weighted average number of common shares outstanding:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Basic

31,148,234 

30,881,770 

   

31,148,234

      

      

   

31,091,900

      

   

   

31,148,234

      

      

   

30,986,478

      

   

   

Diluted

31,148,234 

31,037,417 

   

31,148,234

      

      

   

31,249,107

      

   

   

31,148,234

      

      

   

31,142,876

      

   

   

See accompanying notes to unaudited condensed consolidated financial statements.

 


 4 


ZYNEX, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

   

 

   

   

   

   

   

   

Number of
Shares

Common
Stock

Paid in
Capital

Retained
Earnings

Noncontrolling
Interest

Total

   

   

   

   

   

   

Number of
Shares

   

      

Common
Stock

   

      

Paid in
Capital

   

      

Retained
Earnings

   

   

Noncontrolling
Interest

   

   

Total

   

January 1, 2013

31,148,234 

  $31 

  $5,453 

  $6,566 

  $

  $12,055 

   

31,148,234

      

      

$

31

      

      

$

5,453

      

      

$

6,566

      

   

$

5

      

   

$

12,055

      

Employee stock-based compensation

—   

—   

36 

—   

—   

36 

   

—  

      

      

   

—  

      

      

   

69

      

      

   

—  

      

   

   

—  

      

   

   

69

      

Net loss

—   

—   

—   

(304)

(6)

(310)

   

—  

      

      

   

—  

      

      

   

—  

      

      

   

(2,020

)

   

   

(17

   

   

(2,037

)

   

   

   

   

   

   

March 31, 2013

31,148,234 

  $31 

  $5,489 

  $6,262 

  $(1)

  $11,781 

   

   

   

   

   

   

June 30, 2013

   

31,148,234

      

      

$

31

      

      

$

5,522

      

      

$

4,546

      

   

$

(12

)  

   

$

10,087

      

See accompanying notes to unaudited condensed consolidated financial statements


ZYNEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED, AMOUNTS IN THOUSANDS)

   

   

   

   

   

Three months ended
March 31,

   

   

2013  

2012  

   

   

   

Cash flows from operating activities:

Net (loss) income

  $(310) 

  $320  

Adjustments to reconcile net (loss) income to net cash used in operating activities:

Depreciation expense

213  

213  

Change in the value of contingent consideration

4  

—    

Provision for losses on uncollectible accounts receivable

136  

63  

Amortization of intangible assets

15  

—    

Amortization of financing fees

13  

12  

Provision for obsolete inventory

17  

—    

Deferred rent

(93) 

(75) 

Employee stock-based compensation expense

36  

46  

Deferred tax expense

—    

19  

Changes in operating assets and liabilities, net of business acquisition (in 2012):

Accounts receivable

854  

(721) 

Inventory

(181) 

(995) 

Prepaid expenses

(13) 

(11) 

Deposit and other current assets

(170) 

24  

Accounts payable

(382) 

335  

Accrued liabilities

(705) 

(47) 

Income taxes payable

(427) 

47  

   

   

   

   

   

Net cash used in operating activities

(993) 

(770) 

   

   

   

   

   

Cash flows from investing activities:

Purchases of equipment

(55) 

(76) 

Change in inventory used for rental

247  

(119) 

Cash paid for acquisition

—    

(145) 

   

   

   

   

   

Net cash provided by (used in) investing activities

192  

(340) 

   

   

   

   

   

Cash flows from financing activities:

Net borrowings from line of credit

696  

1,096  

Deferred financing fees

—    

(2) 

Payments on notes payable and capital lease obligations

(37) 

(31) 

   

   

   

   

   

Net cash provided by financing activities

659  

1,063  

   

   

   

   

   

Net decrease in cash

(142) 

(47) 

Cash at beginning of period

823  

789  

   

   

Cash at end of period

  $681  

  $742  

   

   

   

   

   

Supplemental cash flow information:

Interest paid

  $113  

  $62  

Income taxes paid (including interest and penalties)

  $427  

  $65  

   

   

   

Supplemental disclosure of non-cash investing and financing activities:

Common stock issuances for business acquisition

  $—    

  $158  

Increase in accounts payable for business acquisition

  $—    

  $100  

Increase in contingent consideration for business acquisition

  $—    

  $135  

Equipment acquired through capital lease

  $72  

  $—    

See accompanying notes to unaudited condensed consolidated financial statements

   

   

 

 5 


ZYNEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED, AMOUNTS IN THOUSANDS) 

   

Six months ended
June 30,

   

   

2013

   

   

2012

   

Cash flows from operating activities:

   

   

   

   

   

   

   

Net (loss) income

$

(2,037

)

   

$

793

   

Adjustments to reconcile net (loss) income to net cash used in operating activities:

   

   

   

   

   

   

   

Depreciation expense

   

417

   

   

   

432

   

Change in the value of contingent consideration

   

(70

)

   

   

6

   

Provision for losses on uncollectible accounts receivable

   

289

   

   

   

158

   

Amortization of intangible assets

   

30

   

   

   

18

   

Impairment of intangible assets

   

100

   

   

   

—  

   

Impairment of goodwill

   

39

   

   

   

—  

   

Amortization of financing fees

   

25

   

   

   

24

   

Provision for obsolete inventory

   

192

   

   

   

190

   

Deferred rent

   

678

   

   

   

(148

)

Employee stock-based compensation expense

   

69

   

   

   

90

   

Deferred tax expense

   

—  

   

   

   

(57

)

Gain on asset disposal

   

(6

)

   

   

—  

   

Changes in operating assets and liabilities, net of business acquisition (in 2012):

   

   

   

   

   

   

   

Accounts receivable

   

2,160

   

   

   

(1,317

)

Inventory

   

123

   

   

   

(2,093

)

Prepaid expenses

   

49

   

   

   

91

   

Deposit and other current assets

   

(1,601

)

   

   

3

   

Accounts payable

   

51

   

   

   

516

   

Accrued liabilities

   

(909

)

   

   

80

   

Income taxes payable

   

(539

)

   

   

172

   

   

   

   

   

   

   

   

   

Net cash used in operating activities

   

(940

)

   

   

(1,042

)

   

   

   

   

   

   

   

   

Cash flows from investing activities:

   

   

   

   

   

   

   

Purchases of equipment

   

(438

)

   

   

(718

)

Change in inventory used for rental

   

111

   

   

   

(18

)

Payments on contingent consideration

   

(3

)

   

   

—  

   

Cash paid for acquisition

   

—  

   

   

   

(245

)

   

   

   

   

   

   

   

   

Net cash used in investing activities

   

(330

)

   

   

(981

)

   

   

   

   

   

   

   

   

Cash flows from financing activities:

   

   

   

   

   

   

   

Net borrowings from line of credit

   

964

   

   

   

1,912

   

Issuance of common stock

   

—  

   

   

   

10

   

Deferred financing fees

   

—  

   

   

   

(2

)

Payments on notes payable and capital lease obligations

   

(72

)

   

   

(63

)

   

   

   

   

   

   

   

   

Net cash provided by financing activities

   

892

   

   

   

1,857

   

   

   

   

   

   

   

   

   

Net decrease in cash

   

(378

)

   

   

(166

)

Cash at beginning of period

   

823

   

   

   

789

   

Cash at end of period

$

445

   

   

$

623

   

   

   

   

   

   

   

   

   

Supplemental cash flow information:

   

   

   

   

   

   

   

Interest paid

$

315

   

   

$

152

   

Income taxes paid (including interest and penalties)

$

539

   

   

$

365

   

   

   

   

   

   

   

   

   

Supplemental disclosure of non-cash investing and financing activities:

   

   

   

   

   

   

   

Common stock issuances for business acquisition

$

—  

   

   

$

158

   

Increase in contingent consideration for business acquisition

$

—  

   

   

$

141

   

Equipment acquired through capital lease

$

137

   

   

$

—  

   

See accompanying notes to unaudited condensed consolidated financial statements

 6 


ZYNEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2013 AND 2012

   

(1) (1)UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENTS’ PLANS

Zynex, Inc. (a Nevada corporation) and its subsidiaries, Zynex Medical, Inc. (ZMI) (a Colorado corporation, wholly-owned), Zynex NeuroDiagnostics, Inc. (ZND) (a Colorado corporation, wholly-owned), Zynex Monitoring Solutions Inc. (ZMS) (a Colorado corporation, wholly-owned), Zynex Billing and Consulting, LLC (ZBC) (a Colorado limited liability company, 80% majority-owned) and Zynex Europe, ApS (ZEU) (a Denmark corporation, wholly-owned), are collectively referred to as the “Company”.

The unaudited condensed 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, 2012. Amounts as of December 31, 2012 are derived from those audited consolidated financial statements. These interim condensed 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, 2012, which has previously been filed with the SEC.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31,June 30, 2013 and the results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and six months ended March 31,June 30, 2013 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.

For the threesix months ended March 31,June 30, 2013 and 2012, the Company reported negative cash flows from operations of $993$985 and $770,$1,042, respectively. In addition, the Company’s line of credit increased from $5,906 at December 31, 2012 to $6,602$6,870 at March 31,June 30, 2013, primarily driven by the Company’s net loss and working capital requirements related to an increase in sales orders during the year.requirements. Maximum borrowings under the line of credit are $7,000. Management developed$7,000, subject to adjustments to its accounts receivable borrowing base, of which, as of June 30, 2013, the Company’s operating plans formaximum amount the Company could borrow was $6,886. During the first half of 2013, the Company encountered challenges, specifically related to emphasize cash flow,health care reform, including, the Affordable Care Act, that affected demand in its core electrotherapy business, ZMI. In response to these challenges, the Company has made reductions in its fixed expenses by cutting its annual employee costs by approximately $3.0 million dollars through headcount reductions. These headcount reductions were executed during the latter part of the second quarter of 2013 and thus the full financial impact will not be evident in our financial statements until future quarters of 2013.   The Company also renegotiated its existing building lease, under which, among other things, base rent has been lowered and the Company is making operational billing changesnow operating in an approximate twelve month free rent period.  Management estimates related cash savings over the next twelve months of approximately $1.5 million dollars.  The Company is monitoring the demand for its ZMI electrotherapy products and will make additional expense adjustments as necessary throughout the remainder of 2013.  Additionally, the Company recently added new products that are less impacted by insurance reimbursement to increase cash collections as well as implementing various cost modificationsthe Company’s ZMI sales channel and are pursuing other opportunities, which are capital goods and service based where revenues are much less dependent on insurance reimbursement in the Company’s other divisions. In ZND, the Company expanded the sales force and has been distributing electroencephalography (EEG) and sleep diagnostic products in the US and will begin distributing mobile sleep diagnostic products and a sleep apnea treatment device. The Company is also investing in the ZBC division where the Company expects increased service based revenue going forward. The Company believes these actions will serve to diversify the product mix and further reduce expenses.the dependency on insurance reimbursement.  Management believes that as a result of the restructuring activities completed during the second quarter of 2013, the Company’s cash flows from operating activities and limited borrowing availableavailability under the line of credit will be sufficient to fund cash requirements through March 31,June 30, 2014.

(2)SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying unaudited condensed 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(2) SIGNIFICANT ACCOUNTING POLICIES (continued)

NONCONTROLLING INTEREST

Noncontrolling interest in the equity of a subsidiary is accounted for and reported as shareholdersstockholders equity. Noncontrolling interest represents the 20% ownership in the Company’s majority-owned subsidiary, ZBC. In 2012, the noncontrolling interest member contributed $10 of property and equipment to ZBC.

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 condensed consolidated financial statements are associated with the allowance for contractual adjustments and uncollectible accounts receivable, the reserve for obsolete and damaged inventory, stock-based compensation, valuation of goodwill and other long-lived assets, and income taxes.

REVENUE RECOGNITION, ALLOWANCE FOR CONTRACTUAL ADJUSTMENTS AND COLLECTIBILITY

The Company recognizes revenue when each of the following four conditions are met 1) a contract or sales arrangement exists, 2) products have been shipped and title has transferred, or rental services have been rendered, 3) the price of the products or services is fixed or determinable, and 4) collectability is reasonably assured. Accordingly, the Company recognizes revenue, both rental and sales,

 7 


ZYNEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

THREE MONTHS ENDED MARCH 31, 2013 AND 2012

when products have been delivered to the patient and the patient’s insurance (if the patient has insurance) has been verified. For medical products that are sold from inventories consigned at clinic locations, the Company recognizes revenue when it receives notice that the product has been prescribed and delivered to the patient and the patient’s insurance coverage has been verified or preauthorization has been obtained from the insurance company, when required. Revenue from the rental of products is normally on a month-to-month basis and is recognized ratably over the products’ rental period. Revenue from sales to distributors is recognized when the Company ships its products, which fulfills its order and transfers title. Revenue is reported net, after adjustments for estimated insurance company or governmental agency (collectively “Third-party Payors”) reimbursement deductions. The deductions are known throughout the health care industry as “contractual adjustments” whereby the Third-party Payors unilaterally reduce the amount they reimburse for the Company’s products.

A significant portion of the Company’s revenues are derived, and the related receivables are due, from Third-party Payors. The nature of these receivables within this industry has typically resulted in long collection cycles. The process of determining what products will be reimbursed by Third-party Payors and the amounts that they will reimburse is complex and depends on conditions and procedures that vary among providers and may change from time to time. The Company maintains an allowance for contractual adjustments and records additions to the allowance to account for the risk of nonpayment. Contractual adjustments result from reimbursements from Third-party Payors that are less than amounts claimed or where the amount claimed by the Company exceeds the Third-party Payors’ usual, customary and reasonable reimbursement rate. The Company determines the amount of the allowance, and adjusts it at the end of each reporting period, based on a number of factors, including historical rates of collection, the aging of the receivables, trends in the historical rates of collection and current relationships and experience with the Third-party Payors. If the rates of collection of past-due receivables recorded for previous fiscal periods changes, or if there is a trend in the rates of collection on those receivables, the Company may be required to change the rate at which it provides for additions to the allowance. A change in the rates of the Company’s collections can result from a number of factors, including experience and training of billing personnel, changes in the reimbursement policies or practices of Third-party Payors, or changes in industry rates of reimbursement. Accordingly, changes to the allowance for contractual adjustments, which are recorded in the income statement as a reduction of revenue, have historically fluctuated and may continue to fluctuate significantly from quarter to quarter.

Due to the nature of the industry and the reimbursement environment in which we operate, estimates are required to record net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of third-party billing arrangements and the uncertainty of reimbursement amounts for certain products or services from payors or an unanticipated requirement to refund payments previously received may result in adjustments to amounts originally recorded. Due to continuing changes in the health care industry and third-party reimbursement, as well as changes in our billing practices to increase cash collections, it is possible that management’s estimates could change in the near term, which could have an impact on our results of operations and cash flows. Any differences between estimated settlements and final determinations are reflected as an increase or a reduction to revenue in the period when such final determinations are known.

 8 


ZYNEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(2) SIGNIFICANT ACCOUNTING POLICIES (continued)

The Company frequently receives refund requests from insurance providers relating to specific patients and dates of service. Billing and reimbursement disputes are very common in the Company’s industry. These requests are sometimes related to a limited number of patients or products; at other times, they include a significant number of refund claims in a single request. The Company reviews and evaluates these requests and determines if any refund request is appropriate. The Company also reviews these refund claims when it is rebilling or pursuing reimbursement from that insurance provider. The Company frequently has significant offsets against such refund requests, and sometimes amounts are due to the Company in excess of the amounts of refunds requested by the insurance providers. Therefore, at the time of receipt of such refund requests, the Company is generally unable to determine if a refund request is valid and should be accrued.

As of March 31,June 30, 2013, the Company believes it has an adequate allowance for contractual adjustments relating to all 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.

In addition to the allowance for contractual adjustments, the Company records an allowance for uncollectible accounts receivable. Uncollectible accounts receivable are primarily a result of the following: non-payment from patients who have been direct billed for co-payments or deductibles, lack of appropriate insurance coverage and disallowances of charges by Third-party Payors. If there is a change to a material insurance provider contract or policy, application by a provider, a decline in the economic condition of providers or a significant turnover of Company billing personnel resulting in diminished collection effectiveness, the estimate of the allowance for uncollectible accounts receivable may not be adequate and may result in an increase in the future.

 8 


ZYNEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

THREE MONTHS ENDED MARCH 31, 2013 AND 2012

At March 31,June 30, 2013 and December 31, 2012, the allowance for uncollectible accounts receivable is $1,837.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments at March 31,June 30, 2013 include cash, accounts receivable and accounts payable, for which current carrying amounts approximate fair value due to their short-term nature. Financial instruments at March 31,June 30, 2013 also include the line of credit and notes payable, the carrying value of which approximates fair value because the interest rates on the outstanding borrowings are at rates that approximate market rates for borrowings with similar terms and average maturities.

INVENTORY

Inventories, which primarily represent finished goods, are valued at the lower of cost (average) or market. Finished goods include products held at the Company’s headquarters and at different locations by health care providers or other parties for rental or sale to patients. Total (gross) inventories at March 31,June 30, 2013 included $6,265$5,618 of finished goods, $526$338 of parts, and $513$1,262 of supplies.

The Company monitors inventory for turnover and obsolescence, and records losses for excess and obsolete inventory as appropriate. At March 31,June 30, 2013, the Company had an allowance for obsolete and damaged inventory of approximately $980.$1,373. The allowance for obsolete and damaged inventory was approximately $1,181 at December 31, 2012. The Company had $2,165$1,402 of open purchase commitments at March 31,June 30, 2013.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Products on rental contracts are placed in property and equipment and depreciated over their estimated useful life. The Company removes the cost and the related accumulated depreciation from the accounts of assets sold or retired, and the resulting gains or losses are included in the results of operations. Depreciation is computed using the straight-line method over the useful life of the asset. As rental inventory contributes directly to the revenue generating process, the Company classifies the depreciation of rental inventory in cost of revenue.

Repairs and maintenance costs are charged to expense as incurred.

 9 


ZYNEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(2)SIGNIFICANT ACCOUNTING POLICIES (continued)

GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of the purchase price over the fair value of the net assets of the business acquired. Authoritative guidance requires that goodwill be testedassessed for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment assessment requires judgment, inincluding the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments are required to estimate the fair value of a reporting unit including estimating future cash flows, determining appropriate discount rates and other assumptions. TheWhen conducting its goodwill impairment assessment, the Company initially performs a qualitative evaluation to determine if it is more likely than not that the fair value of its reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test. During

The Company has determined, based on its qualitative evaluation, that it was necessary to perform the two-step goodwill impairment test during the quarter, primarily because of the significant decline in sales in its ZMI electrotherapy products. In March 2012, the Company acquired substantially all of the assets and business of NeuroDyne Medical Corp. (NeuroDyne).  The Company modified its business forecast for NeuroDyne during the second quarter, resulting in reduced estimated sales and cash flow, as compared to the original business forecast at the time of the acquisition. Management, therefore performed the two-step goodwill impairment test during the second quarter of 2013, and determined that goodwill related to NeuroDyne was impaired and recorded a $39 goodwill impairment charge during the three months ended March 31, 2013, the Company performed the qualitative evaluation and determined that there were no events that indicated that an impairment of goodwill exists as of March 31,June 30, 2013.

Intangible assets with estimable lives are amortized in a pattern consistent with the asset’s identifiable cash flows or using a straight-linestraight- line method over their remaining estimated benefit periods if the pattern of cash flows is not estimable. The Company reviews the carrying value of intangible and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of their carrying amounts to the undiscounted cash flows that the asset or asset group is expected to generate. If the carrying amount of the assets exceeds the undiscounted cash flows the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. The Company’s intangible assets primarily relate to the asset acquisition of NeuroDyne.  The Company modified its business forecast for NeuroDyne during the second quarter, resulting in reduced estimated sales and cash flow, as compared to the original business forecast at the time of the acquisition.  Therefore, the Company recorded an impairment charge of $100 during the second quarter related to certain NeuroDyne intangible assets.  The Company utilized a discounted cash flow (DCF) model to determine fair value for both goodwill and intangible assets as of June 30, 2013.

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 isare 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).

(3) PROPERTY AND EQUIPMENT

Property and equipment as of June 30, 2013 and December 31, 2012 consist of the following:

   

June 30,
2013

   

      

December 31,
2012

   

   

Useful
lives

   

   

   

(UNAUDITED)

   

   

   

   

   

   

   

   

   

Office furniture and equipment

$

2,302

      

      

$

1,836

      

   

   

3-7 years

      

Rental inventory

   

2,946

      

      

   

3,147

      

   

   

5 years

      

Vehicles

   

76

      

      

   

76

      

   

   

5 years

      

Leasehold improvements

   

375

      

      

   

375

      

   

   

2-6 years

      

Assembly equipment

   

171

      

      

   

168

      

   

   

7 years

      

   

   

5,870

      

      

   

5,602

      

   

   

   

   

Less accumulated depreciation

   

(2,021

)  

      

   

(1,751

   

   

   

   

   

$

3,849

      

      

$

3,851

      

   

   

   

   

 

 

 10 


ZYNEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2013 AND 2012

   

(4)LEASES

(3)PROPERTY AND EQUIPMENTThe Company has commitments under various operating and capital leases that are payable in monthly installments. On June 18, 2013, the Company renegotiated its existing building lease and entered into a new lease agreement for its existing building in Lone Tree, Colorado, effective May 1, 2013. The lease, which expires in November 2023, provides for two five-year renewal options at the then market rental rate. Under the lease, no rental payments are due for the first six months. For the remaining months of the lease, base monthly rent begins at $129 and escalates at $3 per month (or $0.50 per square foot) every twelve months, resulting in a monthly rent of $157 by January 2023. The Company anticipates that for accounting purposes, it will have an annual rental expense of $1,420 throughout the term of the lease. The lease includes a $101 refund from the landlord for amounts previously overpaid for operating expenses, which amounts shall be deducted from the Company’s rent in November 2013. The lease also includes a tenant allowance of $1,130, of which $565 is to be used for leasehold improvements and $565 may be used to apply to rent in December 2013 and beyond. Such allowances are included in the Company’s deferred rent liability and deposit accounts. The lease contains customary events of default, termination, maintenance, indemnification and other lease terms.

   

Property and equipment(5) INTANGIBLE ASSETS

Intangible assets as of March 31,June 30, 2013 and December 31, 2012, consist of the following:

   

 

   

   

   

   

March 31,
2013

December 31,
2012

Useful
lives

   

   

   

   

Office furniture and equipment

  $1,960 

  $1,836 

3-7years

Rental inventory

2,772 

3,147 

5 years

Vehicles

76 

76 

5 years

Leasehold improvements

375 

375 

2-6 years

Assembly equipment

171 

168 

7 years

   

   

5,354 

5,602 

Less accumulated depreciation

(1,835)

(1,751)

   

   

  $3,519 

  $3,851 

   

   

   

June 30, 2013

   

   

December 31, 2012

   

   

Amortization Life
Years

   

   

   

(UNAUDITED)

   

   

   

   

   

   

   

   

   

Trade names

$

33

      

   

$

72

      

   

   

5

      

Non-compete agreement

   

26

      

   

   

26

      

   

   

5

      

Technology

   

74

      

   

   

135

      

   

   

5

      

Domain Name

   

18

      

   

   

18

      

   

   

1

      

Total intangible assets, gross

   

151

      

   

   

251

      

   

   

   

   

Less: accumulated amortization

   

(78

   

   

(48

   

   

   

   

Total intangible assets, net

$

73

      

   

$

203

      

   

   

   

   

(4)INTANGIBLE ASSETS

Intangible assets as of March 31, 2013 and December 31, 2012, consist of the following:

   

   

   

   

   

   

March 31, 2013

December 31, 2012

Amortization Life Years

   

   

   

   

Trade names

  $72 

  $72 

Non-compete agreement

26 

26 

Technology

135 

135 

Domain Name

18 

18 

   

   

   

Total intangible assets, gross

251 

251 

   

Less: accumulated amortization

(63)

(48)

   

   

   

Total intangible assets, net

  $188 

  $203 

   

   

(5)(6)EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) 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.

 

 10 

 11 


ZYNEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2013 AND 2012

   

(6)EARNINGS (LOSS) PER SHARE (continued)

The calculation of basic and diluted earnings (loss) per share for the three and six months ended March 31,June 30, 2013 and 2012 is as follows:

   

 

   

   

Three months ended
March 31,

   

Three months ended

June 30,

   

Six months ended

June 30,

2013 

2012 

2013

   

   

2012

   

   

2013

   

2012

Basic:

   

   

   

   

   

   

   

      

   

   

Net (loss) income applicable to common stockholders

  $(304)

  $320 

$

(1,716

)

   

$

473

   

   

$

(2,020

)

   

$

793

Weighted average shares outstanding – basic

31,148.234 

30,881,770 

Net (loss) income per share – basic

  $(0.01)

  $0.01 

Weighted average shares outstanding—basic

   

31,148,234

   

   

   

31,091,900

   

   

   

31,148,234

   

   

30,986,478

Net (loss) income per share—basic

$

(0.06

)

   

$

0.02

   

   

$

(0.06

)

   

$

0.03

   

   

   

   

   

   

   

   

   

   

   

   

   

Diluted:

   

   

   

   

   

   

   

   

   

   

   

   

   

Net (loss) income applicable to common stockholders

  $(304)

  $320 

$

(1,716

)

   

$

473

   

   

$

(2,020

)

   

$

793

Weighted average shares outstanding – basic

31,148,234 

30,881,770 

   

   

   

   

   

   

   

   

   

   

   

   

   

Weighted average shares outstanding—basic

   

31,148,234

   

   

   

31,091,900

   

   

   

31,148,234

   

   

30,986,478

Dilutive securities

—   

155,647 

   

—  

   

   

   

157,207

   

   

   

—  

   

   

156,398

Weighted average shares outstanding – diluted

31,148,234 

31,037,417 

Net (loss) income per share – diluted

  $(0.01)

  $0.01 

Weighted average shares outstanding—diluted

   

31,148,234

   

   

   

31,249,107

   

   

   

31,148,234

   

   

31,142,876

Net (loss) income per share—diluted

$

(0.06

)

   

$

0.02

   

   

$

(0.06

)

   

$

0.03

Potential common share equivalents as of March 31,June 30, 2012 of 1,187,5001,041,000, related to certain outstanding stock options, were not included in the computation of diluted earnings per share during the three and six months ended June 30, 2013 because the effect would have been anti-dilutive, as the option exercise prices exceeded the average market price of the Company’s common stock. The effect of these shares, if any, on the diluted earnings per share calculation may vary significantly depending on fluctuations in the stock price.

The effects of potential common stock equivalents, related to certain outstanding options for the three and six months ended March 31,June 30, 2013 of 1,237,000 shares have not been included in the computation of diluted net loss per share because the impact of the potential shares would decrease the loss per share.

(6)(7) STOCK-BASED COMPENSATION PLANS

The Company has reserved 3,000,000 shares of common stock for issuance under its 2005 Stock Option Plan (the “Option Plan”). Vesting provisions are determined by the Board of Directors. All stock options under the Option Plan expire no later than ten years from the date of grant.

In the three months ended March 31,June 30, 2013 and 2012, the Company recorded compensation expense related to stock options of $36$33 and $46,$44, respectively. Stock-based compensation recorded in the accompanying condensed consolidated statement of operations for the threesix months ended March 31,June 30, 2013 and 2012 included $4$7 and $7,$13, respectively, in cost of goods sold and $32$62 and $39,$77, respectively, in selling, general and administrative expenses.

In the threesix months ended March 31,June 30, 2013 and 2012, the Company did not grant options to employees or any other person for the purchase of shares of common stock.

A summary of stock option activity under the Option Plan for the three months ended March 31, 2013 is presented below:

 

 

   

   

   

   

   

Shares
Under
Option

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Life

Aggregate
Intrinsic
Value

   

   

   

   

   

Outstanding at January 1, 2013

1,501,500 

  $0.95 

Granted

—   

  $—   

Exercised

—   

  $—   

Forfeited

(61,000)

  $0.80 

   

Outstanding at March 31, 2013

1,440,500 

  $0.95 

6.7 years

  $43 

   

Exercisable at March 31, 2013

874,497 

  $1.09 

5.8 years

  $32 

   

A summary of status of the Company’s non-vested share awards as of and for the three months ended March 31, 2013 is presented below:

 

 11 

12 


ZYNEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2013 AND 2012

   

(7) STOCK-BASED COMPENSATION PLANS (continued)

A summary of stock option activity under the Option Plan for the six months ended June 30, 2013 is presented below:

   

 

Nonvested Shares
Under Option

Weighted Average
Grant Date Fair Value

   

   

   

Non-vested at January 1, 2013

690,877 

  $0.69 

Granted

—   

  $—   

Vested

(87,374)

  $0.69 

Forfeited

(37,500)

  $0.67 

   

Non-vested at March 31, 2013

566,003 

  $0.69 

   

   

Shares
Under
Option

   

      

Weighted
Average
Exercise
Price

   

      

Weighted
Average
Remaining
Contractual
Life

   

      

Aggregate
Intrinsic
Value

   

Outstanding at January 1, 2013

   

1,501,500

      

      

$

0.95

      

      

   

   

   

      

   

   

   

Granted

   

—  

      

      

$

—  

      

      

   

   

   

      

   

   

   

Exercised

   

—  

      

      

$

—  

      

      

   

   

   

      

   

   

   

Forfeited

   

(127,250

)

      

$

0.86

      

      

   

   

   

      

   

   

   

Outstanding at June 30, 2013

   

1,374,250

      

      

$

0.96

      

      

   

6.4 years

      

      

$

20

      

Exercisable at June 30, 2013

   

908,871

      

      

$

1.08

      

      

   

5.6 years

      

      

$

17

      

A summary of status of the Company’s non-vested share awards as of and for the six months ended June 30, 2013 is presented below:

   

Nonvested Shares
Under Option

   

      

Weighted Average
Grant Date Fair Value

   

Non-vested at January 1, 2013

   

690,877

      

      

$

0.69

      

Granted

   

—  

      

      

$

—  

      

Vested

   

(155,873

)

      

$

0.78

      

Forfeited

   

(69,625

)

      

$

0.71

      

Non-vested at June 30, 2013

   

465,379

      

      

$

0.66

      

As of March 31,June 30, 2013, the Company had approximately $188$142 of unrecognized compensation expense related to stock options that will be recognized over a weighted-average period of approximately 2.32.2 years.

(7)(8) FAIR VALUE MEASUREMENTS

The Company measures certain assets and liabilities pursuant to accounting guidance which establishes a three-tier fair value hierarchy and prioritizes the inputs used in measuring fair value. Theses tiers include:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.

 

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

Level 3: Unobservable inputs are used when little or no market data is available.

The following table presents information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of March 31,June 30, 2013, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

   

   

   

March 31, 2013

Significant
Unobservable
Inputs
(Level 3)

   

   

June 30, 2013

   

      

Significant
Unobservable
Inputs
(Level 3)

   

Liabilities:

   

   

   

      

   

   

   

Contingent consideration

  $108

  $108

$

31

      

      

$

31

      

 13 


ZYNEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(8) FAIR VALUE MEASUREMENTS (continued)

The fair value of the contingent consideration was determined using a discounted cash flow model at the acquisition date and is revalued at each reporting date or more frequently if circumstances dictate based on changes in the discount periods and rates, changes in the timing and amount of the revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the obligations. The changes in the fair value of this obligation and the accretion expense related to the increase in the net present value of the contingent liabilities was $4$74 for the three months ended March 31,June 30, 2013. No contingentContingent payments of $3 were made during the period.

Changes in the fair value of these obligations are recorded as income or expense within the line item "Other income (expense)" in the Company's consolidated statements of operations. Accretion expense related to the increase in the net present value of the contingent liabilities is also included in the line item "Other income (expense)" in the Company's consolidated statements of operations. The fair value measurement is based on significant inputs not observable in the market, which are referred to as Level 3 inputs.

Changes in the fair value of the Level 3 liabilities for the six months ended June 30, 2013:

Balance at beginning of 2013

$

104

   

Payments

   

(3

)

Accretion expense

   

4

   

Change in fair value of contingent consideration

   

(74

)

Balance at end of 2013

$

31

   

(8)As of June 30, 2013 the Company modified its financial forecasts for NeuroDyne,resulting in reduced sales and cash flow since the acquisition in March 2012.  

(9) 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 for the three and six months ended March 31,June 30, 2013 was 37%approximately 36%. The Company’s income tax expense for the threesix months ended March 31,June 30, 2012 was partially offset by a state income tax refund, which resulted in a lower effective tax rate for the period. The Company paid income taxes of $427$112 and $539 during the first three and six months of 2013, respectively, which was included in income taxes payable at December 31, 2012.

(9)(10) LINE OF CREDIT

The Company has an asset-backed revolving credit facility of up to $7,000, subject to reserves and reductions to the extent of changes in the Company’s asset borrowing base, under a Loan and Security Agreement, as amended, (the “Doral Agreement”) with Doral Healthcare Finance, a division of Doral Money, Inc. Borrowings under the Doral Agreement bear interest at a variable rate equal to the greater of (i) the British Bankers’ Association LIBOR rate as published in The Wall Street Journal for dollar deposits in the amount of $1,000 with a maturity of one month or (ii) 3% per annum, plus, in each case, a margin of 3.75%. The Doral agreementAgreement requires monthly interest payments in arrears on the first date of each month. The Doral Agreement will mature on December 19, 2014. The Company may terminate the Doral Agreement at any time prior to the maturity date upon thirty days’ prior written notice and upon payment in full of all outstanding obligations under the Doral Agreement. If the Company terminates the Doral Agreement, the Company must

 12 


ZYNEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

THREE MONTHS ENDED MARCH 31, 2013 AND 2012

pay a specified early termination fee. As of March 31,June 30, 2013, $6,602$6,870 was outstanding under the Doral Agreement and $398$16 was available for borrowing based on the Company’s current borrowing base.

The Doral Agreement requires a lockbox arrangement whereby all receipts are swept daily to reduce borrowings outstanding. This arrangement causes the Doral Agreement to be classified as a current liability.

As of March 31,June 30, 2013, the effective interest rate under the Doral Agreement was 8% (7% interest rate and 1% fees).

 14 


ZYNEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(10) LINE OF CREDIT (continued)

The Doral Agreement contains certain customary restrictive and financial covenants for asset-backed credit facilities.  As of March 31,June 30, 2013, the Company was not in compliance with one of the financial covenants under the Doral Agreement.  As a result, all amounts due under the credit agreement are callable by the lender. The Company is currently in discussions with the lender and expects to receive a waiver; however, no assurance can be given.  If a waiver is not obtained, in addition to demanding immediate payment of amounts outstanding under the Credit Agreement, the lender can restrict or prevent the Company from borrowing while in default, which could have a material adverse impact on the Company’s cash flow and liquidity.

(10)(11) CONCENTRATIONS

The Company sourced approximately 24% and 22% of its electrotherapy products from one contract manufacturer during the three and six months ended March 31,June 30, 2013. Management believes that its relationships with suppliers are strong; however, if necessary these relationships can be replaced. If the relationships were to be replaced, there may be a short-term disruption to operations, a period of time in which products may not be available and additional expenses may be incurred.

The Company had receivables from a private health insurance carrier at March 31,June 30, 2013 that made up approximately 16%10% of the net accounts receivable balance. The same private health insurance carrier made up approximately 22% of net accounts receivable at December 31, 2012.

(11)(12) 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 provide for them if losses are determined to be both probable and estimable.

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

(12)(13) SEGMENT REPORTING

At March 31,June 30, 2013, the Company has determined that it has three reporting segments comprised of the following subsidiaries, ZMI and ZBC, ZND and ZEU, and ZMS. This determination was made based on the nature of the products and services offered to customers or the nature of the function in the organization. The accounting policies for each of these segments are the same as those described in Note 2, and inter-segment transactions are eliminated.

Net revenue was primarily generated from sales in the United States.

   

 

   

   

   

   

ZMI &
ZBC

   

      

ZND &
ZEU

   

      

ZMS

   

      

TOTAL

   

ZMI &
ZBC

ZND &
ZEU

ZMS

TOTAL

   

   

   

   

THREE MONTHS ENDED MARCH 31, 2013

THREE MONTHS ENDED JUNE 30, 2013

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Sales

  $7,606

  $62

  $—  

  $7,668

$

5,358

      

      

$

114

      

      

$

—  

      

      

$

5,472

      

Gross profit

5,430

47

—  

5,477

   

3,528

      

      

   

61

      

      

   

—  

      

      

   

3,589

      

Total assets

24,142

625

24

24,791

   

23,142

      

      

   

986

      

      

   

21

      

      

   

24,149

      

   

   

   

   

THREE MONTHS ENDED MARCH 31, 2012

THREE MONTHS ENDED JUNE 30, 2012

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Sales

  $8,869

75

  $—  

  $8,944

$

9,973

      

      

   

53

      

      

$

—  

      

      

$

10,026

      

Gross profit

7,081

50

—  

7,131

   

8,204

      

      

   

36

      

      

   

—  

      

      

   

8,240

      

Total assets

23,098

781

9

23,888

   

24,724

      

      

   

762

      

      

   

8

      

      

   

25,494

      

   

   

   

   

SIX MONTHS ENDED JUNE 30, 2013

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Sales

$

12,964

      

      

$

176

      

      

$

—  

      

      

$

13,140

      

Gross profit

   

8,958

      

      

   

108

      

      

   

—  

      

      

   

9,066

      

Total assets

   

23,142

      

      

   

986

      

      

   

21

      

      

   

24,149

      

SIX MONTHS ENDED JUNE 30, 2012

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Sales

$

18,842

      

      

   

128

      

      

$

—  

      

      

$

18,970

      

Gross profit

   

15,285

      

      

   

86

      

      

   

—  

      

      

   

15,371

      

Total assets

   

24,724

      

      

   

762

      

      

   

8

      

      

   

25,494

      

   

   

 

 13 

 

15 


   

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 expansion and other business development activities, as well asbusiness trends, 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 need for additional capital in order to grow our business, our ability to engage additional sales representatives, the need to obtain U.S. Food and Drug Administration (“FDA”) clearance and Certificate European (“CE”) marking of new products, the acceptance of new products as well as existing products by doctors and hospitals, our dependence on the reimbursement from insurance companies for products sold or rented to our customers, acceptance of our products by health insurance providers for reimbursement, larger competitors with greater financial resources, the need to keep pace with technological changes, our dependence on third-party manufacturers to produce our goods on time and to our specifications, implementation of our sales strategy including a strong direct sales force, and other risks described in our Annual Report on Form 10-K for the year ended December 31, 2012.

These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes thereto, included in the Company’s 2012 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission.

The Company currently has five subsidiaries; ZynexMedical,Zynex Medical, Inc. (ZMI), Zynex NeuroDiagnostics, Inc. (ZND), Zynex Monitoring Solutions Inc. (ZMS), Zynex Billing and Consulting, LLC (ZBC) and Zynex Europe, Aps (ZEU).

RESULTS OF OPERATIONS (Amounts in thousands):

Revenue

Our products may be rented on a monthly basis or purchased. Renters and purchasers are primarily patients and healthcare insurance providers on behalf of patients. Our products may also be purchased by dealers. If a patient is covered by health insurance, the Third-party Payor typically determines whether the patient will rent or purchase a unit depending on the anticipated time period for its use. If contractually arranged, a rental continues until an amount equal to the purchase price is paid when we transfer ownership of the product to the patient and cease rental charges.  We also sell consumable supplies, consisting primarily of surface electrodes and batteries that are used in conjunction with our electrotherapy products.  

Revenue is reported net, after adjustments for estimated insurance company reimbursement deductions. The deductions are known throughout the health care industry as “contractual adjustments” whereby the healthcare insurers unilaterally reduce the amount they reimburse for our products as compared to the rental rates and sales prices charged by us. The deductions from gross revenue also take into account the estimated denials of claims for our products placed with patients which may affect collectability. See Note 2 to the Unaudited Condensed Consolidated Financial Statements in this quarterly report for a more complete explanation of our revenue recognition policies.

During the first quarterhalf of 2013, we encountered industry challenges specifically related to health care reform, (specifically theincludingthe Affordable Care Act) and business seasonalityAct, that affected demand in our core electrotherapy business, ZMI.    The Affordable Care Act dramatically alters the United States healthcarehealth care system and is intended to decrease the number of uninsured Americans and reduce the overall cost of health care.healthcare. The Affordable Care Act attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance, expanding Medicaid eligibility, reducing Medicare payments to providers, expanding the Medicare program's use of value-based purchasing programs and instituting certain private health insurance reforms. Although a majority of the measures contained in the Affordable Care Act do not take effect until 2014, certain measures have already become effective or will be implemented in 2013, and additional government policies designed to reduce the overall cost of the Medicare program through reduced reimbursement and reduced coverage for certain items and services have already become effective. We believeThese factors have resulted in reimbursement changes for durable medical equipment, which has caused uncertainty existsto exist at the medical practitioner level related to changescausing a delay and decline in health care, which has delayed prescriptions/ordersdemand for our ZMI business. Itelectrotherapy products.  We  also have experienced reimbursement challenges from government and third party payors related to certain medical indications for our ZMI electrotherapy products, all of which have negatively impacted our revenue and financial results for the first half of 2013.It is difficult to predict the full impact of the Affordable Care Act because of its complexity, lack of implementing regulations and interpretive guidance, gradual and potentially delayed implementation, future potential legal challenges, and possible repeal and/or amendment, as well as the inability to foresee how individuals and businesses will respond to the choices afforded them by the Affordable Care Act.Further complicating predictions regarding the impact of the Affordable Care Act is


uncertainty surrounding individual State’s decisions to expand Medicaid, as contemplated by the Affordable Care Act, but made optional by the Supreme Court.As a result, it is difficult to predict the full impact that health care reform, including the Affordable Care Act, will have on our revenue and results of


operations.  The first quarter of every year also presentsHowever, we anticipate continued depressed revenues and a high degree of seasonality due to insurance ‘resets’ of patient deductibles, which tends to slow reimbursement and ordersnet loss for our ZMI business.the year.

In an effort to minimize the impact of health care reform, we have made modificationsreductions in our fixed expenses by cutting our annual employee costs by approximately $3.0 million dollars through headcount reductions. We also renegotiated our existing building lease and entered into a new agreement, in which, among other things, base rent has been lowered and we are now operating in an approximate twelve month free rent period, which results in cash savings over the next twelve months of approximately $1.5 million.  We are monitoring the demand for our ZMI electrotherapy products and will make additional expense adjustments as necessary throughout the remainder of 2013.  Additionally, we recently added new products that are less impacted by insurance reimbursement to our directZMI sales force withinchannel and are pursuing other opportunities, which are capital goods and service based where revenues are much less dependent on insurance reimbursement as in our Zynex Medical business, including reducing the number of sales employees, modifying sales compensation packages and increasing the level of sales force training as it relates to health care reform. We believe these efforts helped us to reduce our overall selling, general and administrative costs for the first quarter of 2013, but also negatively impacted the amount of orders that were received, contributing to a decrease in net revenue for the period.

We believe the impact from these changes is short-term and that our overall market position in the electrotherapy market remains strong; howeverother divisions. In ZND, we cannot provide any assurances. Additionally, we began expandingexpanded our sales force within our ZND business division and recently entered into a sales and distribution contract forhave been distributing electroencephalography (EEG) and sleep diagnosticsdiagnostic products whichin the US and will begin distributing mobile sleep diagnostic products and a sleep apnea treatment device. We are products soldalso investing in our ZBC division where we expect increased service based revenue going forward. We believe these actions will serve to businessesdiversify our product mix and not reliantfurther reduce our dependency on insurance reimbursement. We believe the investments made in our other divisions will help diversify our business and provide further platforms for future growth.

Total Net Revenue (Rental and Sales).

   

 

Three months ended

   

Three months ended

   

Six months ended

   

Total net revenue by type (in thousands):

March 31, 2013

March 31, 2012

   

June 30,

2013

   

June 30,

2012

   

June 30,

2013

   

June 30,

2012

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Net Rental Revenue

  $1,679

  $2,062

   

$

1,643

   

$

2,437

   

$

3,322

   

$

4,499

   

Sales of electrotherapy and other privately-labeled distributed products

2,091

3,058

   

   

1,255

   

3,622

   

   

3,346

   

   

6,680

   

Sales of recurring consumable supplies

3,898

3,824

   

   

2,574

   

3,967

   

   

6,472

   

   

7,791

   

Total Net Sales Revenue

5,989

6,882

   

   

3,829

   

7,589

   

   

9,818

   

   

14,471

   

Total Net Revenue

  $7,668

  $8,944

   

$

5,472

   

$

10,026

   

$

13,140

   

$

18,970

   

   

Total net revenue decreased $1,276,$4,554, or 14%45%, to $7,668$5,472 for the three months ended March 31,June 30, 2013, from $8,944$10,026 for the three months ended March 31,June 30, 2012. Total net revenue decreased $5,830, or 31%, to $13,140 for the six months ended June 30, 2013, from $18,970 for the six months ended June 30, 2012.

The decrease was primarily due to a 32%54% and 44% decrease in prescriptions (orders) for our electrotherapy products for the three months and six months ended March 31,June 30, 2013, respectively, as compared to the same periodperiods in 2012. The overall decrease in total net revenue for the three and six months ended March 31,June 30, 2013 was also impacted by industry conditions driven by health care reform, and changes made to our ZMI sales distribution channel,the related decrease in reimbursement rates as discussed above.   

Orders for our products lead to (1) rental income, which we anticipate receiving on a recurring basis over the time patients use our products, (2) direct sales of our products, and (3) corresponding recurring sales of electrodes and other supplies for our products, all of which are subject to our ability to collect payment due to contractual adjustments by insurers.  Our products are subject to reimbursement policies of Third-party Payors, which we may not be able to determine with any certainty.  These Third-party Payor policies typically dictate whether our products will be purchased or rented.  Therefore, our revenue mix of net rental and net sales revenue may fluctuate from time to time and may not be an indicator of the overall demand for our products.  We are unable to determine if the reimbursement policy trend towards purchasing rather than renting our products will continue or change in the future, as it is based on many market and Third-party Payor factors.  Shifts in our revenue mix may also have a material impact on our overall gross margin, as product sales result in a lower gross profit because their cost of sales is higher than that from rentals (cost of sales associated with rentals is primarily depreciation).

Net Rental Revenue

Net Rental Revenue decreased $383,$794, or 19%33%, to $1,679$1,643 for the three months ended March 31,June 30, 2013, from $2,062$2,437 for the three months ended March 31,June 30, 2012.  Net Rental Revenue decreased $1,177, or 26%, to $3,322 for the six months ended June 30, 2013, from $4,499 for the six months ended June 30, 2012.  

Net Rental Revenue


The decrease was primarily due to a 54% and 44% decrease in prescriptions (orders) for our electrotherapy products for the three months ended March 31, 2013 represented 22% of total net revenue compared to 23% for the threeand six months ended March 31, 2012. The decrease in net rental revenue for the three months ended March 31,June 30, 2013 is primarily due to the decrease in orders received for the first quarter of 2013 (as discussed above) as compared to the same quarter forperiods in 2012, and the continued shift in our revenue mix (from rentalsdriven by industry conditions related to direct purchase).health care reform, as discussed above.


Net Sales Revenue

Net Sales Revenue decreased $893,$3,760, or 13%50%, to $5,989$3,829 for the three months ended March 31,June 30, 2013, from $6,882$7,589 for the three months ended March 31,June 30, 2012.  Net Sales Revenue decreased $4,653, or 32%, to $9,818 for the six months ended June 30, 2013, from $14,471 for the six months ended June 30, 2012.  

Net Sales Revenue for the three and six months ended March 31,June 30, 2013 represented 78%70% and 75% of total net revenue compared to 77%76% for the three and six months ended March 31,June 30, 2012.  Net Sales Revenue is comprised of two primary components: sales of electrotherapy devices and private-labeled distributed products, representing 27%23% and 25% of total net revenue for the three and six months ended March 31,June 30, 2013, respectively, and sales of recurring device consumables (batteries and electrodes), representing 51%47% and 49% of total net revenue for the three and six months ended March 31, 2013.June 30, 2013, respectively.  This compares to the sale of electrotherapy devices and private-labeled distributed products representing 34%36% and 35% of total net revenue for the three and six months ended March 31,June 30, 2012, respectively, and sale of device consumables representing 43%40% and 41% of total net revenue for the three and six months ended March 31, 2012.June 30, 2012, respectively,.  The decrease in Net Sales Revenue for the three months ended March 31, 2013 was primarily due to a 54% and 44% decrease in orders (as discussed above) overprescriptions (orders) for our electrotherapy products for the same three monthand six months ended June 30, 2013 as compared to the same periods in 2012, and the continued change in Third-party Payor reimbursement trends, in favor of purchasing products rather than renting them. Because of the number of units in the field we experienced a 2% increase of sales of our recurring consumable supplies over the comparable three month periods in 2012.driven by industry conditions related to health care reform, as discussed above.    

Gross Profit

Total gross profit for the three months ended March 31,June 30, 2013 was $5,477$3,589 (or 71%66% of total net revenue) compared to $7,131$8,240 (or 80%82% of total net revenue) in the three months ended March 31,June 30, 2012. Total gross profit for the six months ended June 30, 2013 was $9,066 (or 69% of total net revenue) compared to $15,371 (or 81% of total net revenue) in the six months ended June 30, 2012.

Total gross profit percentage for the three and six months ended March 31,June 30, 2013 decreased 9%16% and 12%, respectively, from the three and six months ended March 31, 2013.June 30, 2012.  The decrease in the gross profit percentage for the three and six months ended March 31,June 30, 2013 was primarily due to lower sales volume reported in the first three and six months ofended June 30, 2013, as we had less net revenue to cover fixedmanufacturing costs and incremental expenses incurred because of manufacturing.an increase to our allowance for obsolete inventory, due to excess quantities now in the field.   

Selling, General and Administrative (“SG&A”)

Total SG&A expenses decreased $812,$1,155, or 12%16%, to $5,833$6,153 for the three months ended March 31,June 30, 2013 from $6,645$7,308 for the three months ended March 31,June 30, 2012.   Total SG&A expenses decreased $1,967, or 14%, to $11,986 for the six months ended June 30, 2013 from $13,953 for the six months ended June 30, 2012.    In an effort to minimize the impact of health care reform, we have made reductions in our fixed expenses by cutting our annual employee costs by approximately $3,000 through headcount reductions. These headcount reductions were executed during the latter part of the second quarter of 2013 and thus the full financial impact will not be evident on our financial statements until future quarters of 2013.   We also renegotiated our existing building lease, in which, among other things, base rent has been lowered and we are now operating in an approximate twelve month free rent period, which results in cash savings over the next twelve months of approximately $1,500.  These restructuring activities resulted in additional expenses of approximately $199 for the second quarter of 2013, primarily from severance and the write-off of the old lease building deposit.  We are monitoring the demand for our ZMI electrotherapy products and will make additional expense adjustments as necessary throughout the remainder of 2013.


A summary of expenses by department for the three and six months ended March 31,June 30, 2013 and 2012 is provided below:

   

 

Three months ended

   

Three months ended

   

Six months ended

   

SG&A expense by department

March 31, 2013

% of Net Revenue

March 31, 2012

% of Net Revenue

   

June 30, 2013

   

% of Net Revenue

   

June 30, 2012

   

% of Net Revenue

   

   

June 30, 2013

   

% of Net Revenue

   

June 30, 2012

   

% of Net Revenue

   

   

Sales & Marketing

  $1,906   

25%

  $3,095   

35%

   

$

2,274

   

   

42

%

   

$

3,805

   

38

%

   

$

4,181

   

   

32

%

   

$

6,903

   

36

%

   

Reimbursement & Billing

2,231   

29%

2,034   

23%

   

   

2,037

   

37

%

   

   

2,047

   

20

%

   

   

4,268

   

   

32

%

   

   

4,144

   

22

%

   

General & Administrative

1,356   

18%

1,183   

13%

   

   

1,508

   

28

%

   

   

1,127

   

11

%

   

   

2,864

   

   

22

%

   

   

2,244

   

12

%

   

Engineering & Operations

340   

4%

333   

4%

   

   

334

   

6

%

   

   

329

   

3

%

   

   

673

   

   

5

%

   

   

662

   

3

%

   

Total SG&A expenses

  $5,833   

76%

  $6,645   

74%

   

$

6,153

   

112

%

   

$

7,308

   

72

%

   

$

11,986

   

   

91

%

   

$

13,953

   

73

%

   

   

Our sales and marketing expenses decreased by $1,189$1,531 and $2,722 for the three and six months ended March 31,June 30, 2013 over the same periodperiods in 2012, primarily due to less commissions incurred in the current periodduring 2013 (total orders decreased 32%54% and 44% for the three and six months ended March 31,June 30, 2013 over the same periodperiods in 2012) and changes made to our sales force, which included a reduction in direct sales employees and changes to compensation packages. Our reimbursement and billing expenses increaseddecreased by $134$10 for the three months ended March 31,June 30, 2013 as compared to the three months ended March 31,June 30, 2012 and increased by $124 for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012, due to additional investments made in our reimbursement and billing department, consisting primarily of incremental system related expenses.  Our reimbursement and billing department relies on personnel, processes and systems to negotiate and collect from Third-party Payors. Therefore, we continue to evaluate and monitor the infrastructure in this department, as it is our primary function for cash collections, which may result in increased expenses in future periods.  Improvements in our reimbursement and billing function may lead to higher revenues, as better negotiations and collection efforts with Third-party Payors could result in an increase to our aggregate accounts receivable collection percentage. Our general and administrative expenses increased by $173$381 and $620 for the three and six months ended March 31,June 30, 2013 over the same periodperiods in 2012, which was primarily the result of additional administrative infrastructure, including the addition of incremental regulatory personnel and administrative personnel to support the sales efforts in our ZND division.division and the write down of certain NeuroDyne Intangible Assets.  Engineering and operations decreasedincreased by $7$5 and $11 for the three and six months ended March 31,June 30, 2013 over the same periodperiods in 2012.


Other ExpenseIncome (Expense)

Other expense is comprised of interest expense and other expense.

Interest expense for the three and six months ended March 31,June 30, 2013 was $130,$214 and $344, respectively, compared to $93$81 and $174 for the same periodperiods in 2012. The increase in interest expense is a result of our increased use of our revolving line of credit during the first threesix months of 2013, which resulted in a revolving line of credit balance of $6,602$6,870 as of March 31,June 30, 2013, versus a balance of $4,385$5,201 as of March 31,June 30, 2012.  

Other expenseincome for the three and six months ended March 31,June 30, 2013 was $6$78 and $72, respectively, as compared to zeroother expense of $7 for the three and six months ended March 31,June 30, 2012.  Amounts for the three and six months ended June 30, 2013 include the change in the fair value of contingent consideration of approximately $70.

Income Tax Benefit (Expense)

Income tax benefit for the three and six months ended March 31,June 30, 2013 was $182$973 and $1,155 compared to income tax expense of ($73)371) and ($444) for the same periodperiods in 2012.  Income tax benefit for the three and six months ended March 31,June 30, 2013 was the result of the Company generating a loss before income tax of $492.($2,700) and ($3,193), respectively.  Income tax expense for the three and six months ended March 31,June 30, 2012 was the result of the Company generating an income before income tax of $393. $844 and $1,237, respectively.   The provision for income taxes is recorded at the end of each interim period passedbased on the Company’sCompany's best estimate of its effective income tax rate expected to thebe applicable for the full fiscal year.  The Company’s effective income tax rate for the three and six months ended March 31,June 30, 2013 was 37% The Company’s income tax expense for the three months ended March 31, 2012 was partially offset by a state income tax refund, which resulted in a lower effective tax rate for the period.36%.


LIQUIDITY AND CAPITAL RESOURCES:

Line of Credit

We have an asset-backed revolving credit facility of up to $7,000, subject to reserves and reductions to the extent of changes in our asset borrowing base, under a Loan and Security Agreement (the “Doral Agreement”) with Doral Healthcare Finance, a division of Doral Money, Inc. Borrowings under the Doral Agreement bear interest at a variable rate equal to the greater of (i) the British Bankers’ Association LIBOR rate as published in The Wall Street Journal for dollar deposits in the amount of $1,000 with a maturity of one month or (ii) 3% per annum, plus, in each case, a margin of 3.75%. The Doral Agreement will mature on December 19, 2014.As of March 31,June 30, 2013, the effective interest rate under the Doral Agreement was 8% (7% interest rate and 1% fees).We may terminate the Doral Agreement at any time prior to the maturity date upon thirty (30) days’ prior written notice and upon payment in full of all outstanding obligations under the Doral Agreement. If we terminate the Doral Agreement, we must pay a specified early termination fee.

The availability of the line of credit depends upon our ongoing compliance with convenants,covenants, representations and warranties in the Doral Agreement and borrowing base limitations. Although the maximum amount of the line of credit is $7,000, the amount available for borrowing under the line of credit is subject to a ceiling based upon eligible receivables and other limitations, which may limit our ability to borrow the maximum amount. As of March 31,June 30, 2013, $6,602$6,870 was outstanding under the Doral Agreement and $398$16 was available for borrowing based on our current borrowing base.

The Doral Agreement also contains certain customary restrictive and financial covenants for asset-backed revolving credit facilities.  As of March 31,June 30, 2013,we were not in compliance with one of the financial covenants under the Doral Agreement.  As a result, all amounts due under the credit agreement are callable by the lender. We are currently in discussions with the lender and expect to receive a waiver; however, no assurance can be given.  If a waiver is not obtained, in addition to demanding immediate payment of amounts outstanding under the Credit Agreement, the lender can restrict or prevent us from borrowing while in default, which could have a material adverse impact on our cash flow and liquidity.

Limited Liquidity

Cash at March 31,June 30, 2013 was $681,$445, compared to cash at December 31, 2012 of $823.

Cash used in operating activities was $993$940 for the threesix months ended March 31,June 30, 2013 compared to $770$1,042 of cash used in operating activities for the threesix months ended March 31,June 30, 2012. The primary uses of cash in operations for the threesix months ended March 31,June 30, 2013 was the result of the net loss reported for the period, decreasesan increase in accounts payable,deposits and other current assets and a decrease in accrued expensesliabilities and income taxes, payable, which were partially offset by a decrease in accounts receivable.  The primary uses of cash infrom operations for the threesix months ended March 31,June 30, 2012 was the result of decreases in collections on accounts receivable, including the impact of the industry Version 5010 electronic claims processing conversion, and increases in inventory required to support our growing revenue,increase in orders during the six months ended June 30, 2012, offset by increased net income and adjustments for non-cash items.  

Cash provided byused in investing activities for the threesix months ended March 31,June 30, 2013 was $192$330 compared to cash used in investing activities of $340$981 for the threesix months ended March 31,June 30, 2012. Cash provided byused in investing activities for the threesix months ended March 31,June 30, 2013 primarily represents purchases of equipment, partially offset by an increase in cash flows relating to the change in the inventory held for rental, which reflects the change in our revenue mix towards selling rather than renting our products, offset by purchase of equipment.products.  Cash used in investing activities for the threesix months ended March 31,June 30, 2012 primarily represents the purchase and in-house production of rental products, purchases of capital equipment and the purchase of the assets of NeuroDyne Medical Corp.  (See Note 5 of our Consolidated Financial Statements in our Annual Report on Form 10-K for the year-ended December 31, 2012 for additional information).  


Cash provided by financing activities was $659$892 for the threesix months ended March 31,June 30, 2013 compared with cash provided by financing activities of $1,063$1,857 for the threesix months ended March 31,June 30, 2012.  The primary financing sources of cash for the threesix months ended March 31,June 30, 2013 and 2012 were net borrowings under the line of credit, partially offset by payments on capital lease obligations and deferred financing fees.

Our limited liquidity is primarily a result of (a) the high level of outstanding accounts receivable because of deferred payment practices of Third-party Payors, (b) the required high levels of inventory kept with sales representatives held at the offices of health care providers that are standard in the electrotherapy industry, (c) the need for expenditures to continue to enhance the Company’s internal billing processes, ahead of and in anticipation of revenue growth, (d) the delayed cost recovery inherent in rental transactions, and (e) expenditures required for on-going product development.  In addition, during the first quarterhalf of 2013, we encountered industry challenges, includingspecifically related to health care reform  and the implementation of the Affordable Care Act that negatively affected demand in our core electrotherapy business, ZMI. These factors have resulted in reimbursement changes for durable medical equipment, which has caused uncertainty to exist at the medical practitioner level causing a delay and decline in


demand for our ZMI electrotherapy products.  We also have experienced reimbursement challenges from government and third party payors related to certain medical indications for our ZMI electrotherapy products, all of which have negatively impacted our revenue and financial results for the first half of 2013.  Limited liquidity may restrict our ability to carry out our current business plans and curtail our revenue growth.

For the threesix months ended March 31,June 30, 2013 and 2012, the Company reported negative cash flows from operations of $993$940 and $770,$1,042, respectively. In addition, the Company’s line of credit increased from $5,906 at December 31, 2012 to $6,602$6,870 at March 31,June 30, 2013, primarily driven by the Company’s net loss and working capital requirements. Maximum borrowings under the line of credit are $7,000.$7,000, subject to adjustments to its accounts receivable borrowing base, in which, as of June 30, 2013, the maximum amount the Company could borrow was $6,886. Management developed the Company’s operating plans for 2013 to emphasize cash flow, and under which the Company is making operational billing changes to increase cash collections as well as implementing various cost modifications to reduce expenses. In an effort to minimize the impact of health care reform, the Company has made reductions in its fixed expenses by cutting its annual employee costs by approximately $3,000 through headcount reductions. These headcount reductions were executed during the latter part of the second quarter of 2013 and thus the full financial impact will not be evident on our financial statements until future quarters of 2013.   The Company also renegotiated its existing building lease, under which, among other things, base rent has been lowered and the Company is now operating in an approximate twelve month free rent period, which is expected to result in cash savings over the next twelve months of approximately $1,500.  The Company is monitoring the demand for its ZMI electrotherapy products and will make additional expense adjustments as necessary throughout the remainder of 2013.  Management believes that through the restructuring activities completed during the second quarter of 2013 the Company’s cash flows from operating activities and borrowing available under the line of credit will be sufficient to fund cash requirements through March 31,June 30, 2014.

Our long-term business plan contemplates organic growth in revenues, through the addition of new products to our sales channel that could mitigate the decline in our ZMI electrotherapy products, and possible acquisitions. Therefore, in order to support a growth in revenue, we require, among other things, funds for the purchases of equipment (primarily for rental inventory), funds for the purchases of inventory and the payment of commissions to sales representatives, and funds for the increase in office lease payments (forexpansion of our new, larger building) to support the higher level of operations.sales channel. On March 9, 2012, in an effort to diversify our product line and penetrate markets that our ZND subsidiary serves, we acquired substantially all NeuroDyne Medical Corp’s assets (See Note 5 of our Consolidated Financial Statements in our Annual Report on Form 10-K for the year-ended December 31, 2012 for additional information). Matters relating to the acquisition (including integration, operation and sales) have and will continue to require commitments of time and resources, which may detract and impede growth in other areas of our business. The NeuroDyne asset purchase agreement provides for a seven year contingent consideration, based on a declining percentage of net revenue generated by NeuroDyne products. The potential amount of all future payments that we could be required to make under the contingent consideration arrangement is between $0 and $190,$52 based on a percentage of net revenue over the next  six years (See Note 5 of our Consolidated Financial Statements in our Annual Report on Form 10-K for the year-ended December 31, 2012 for additional information).years.

There is no assurance that our operations and available borrowings will provide enough cash for operating requirements or for increases in our inventory of products, as needed, for growth.  We may need to seek external financing through the issuance of debt or sale of equity, and we are not certain whether any such financing would be available to us on acceptable terms or at all.  Any additional debt would require the approval of Doral Healthcare Finance.

Our dependence on operating cash flow means that risks involved in our business can significantly affect our liquidity.  Contingencies such as unanticipated shortfalls in revenues or increases in expenses could affect our projected revenue, cash flows from operations and liquidity which may force us to curtail our operating plan or impede our growth.

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

As of March 31,June 30, 2013, we believe we have an adequate allowance for contractual 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.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

There are several accounting policies that involve management’s judgments and estimates and are critical to understanding our


historical and future performance, as these policies and estimates affect the reported amounts of revenue and other significant areas in our reported financial statements.

Please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” located within our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on March 28, 2013, and Note 2 to the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report for further discussion of our “Critical Accounting Policies.”

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of March 31,June 30, 2013. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31,June 30, 2013.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the quarter ended March 31,June 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

   

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Readers are encouraged to carefully consider the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Annual Report”), which could materially affect our business, financial condition or future results. The risks described therein are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.  There have been no material changes to theThe risk factors contained in our 2012 Annual Report and our Quarterly Report on Form 10-Q for the three months ended March 31, 2013.  The risk factor set forth below supplements and updates(and updates) the risk factors previously disclosed in the 2012 Annual Report:

THE PATIENT PROTECTION AND ACCOUNTABILITY ACT OF 2010 WILL HAVE AN IMPACT ON OUR BUSINESS WHICH MAY BE IN PART BENEFICIAL AND IN PART DETRIMENTAL.

In March 2010, broad federal health care reform legislation was enacted in the United States. This legislation did not become effective immediately in total, and may be modified prior to the effective date of some provisions. This legislation could have an impact on our business in a variety of ways including increased number of Medicaid recipients, increased number of individuals with commercial insurance,additional audits conducted by public health insurance plans such as Medicaid and Medicare, changes to the rules that govern employer group health insurance and other factors that influence the acquisition and use of health insurance from private and public payors. This legislation may result in a change in reimbursement for certain durable medical equipment. We believe the new healthcare legislation hasand these changes to reimbursement have caused uncertainty with prescribers, which we believe contributed to our drop in orders and revenue during the first quarterhalf of 2013. We are currently unable to determine whether such trend will continue in future periods or whether the health care reform legislation will have other adverse consequences to our business and results of operations. To the extent prescribers write fewer prescriptions for our products or there is an adverse change to insurance reimbursement for our products, due to the new law or otherwise, our revenue and profitability will be materially adversely affected.

Effective in2013,this year, there will beis a 2.3% excise tax on the first sale of medical devices, with certain exceptions. We dobelieve that a majority of our ZMI products are not know ifsubject to this tax but currently we can make no assurance.   We believe the majority of the products in our ZND division are subject to the extent applicablethis tax.  For our products that are or become subject to anythis excise tax, we are uncertain of our products and transactions, can be passedability to pass this tax on to third-party payors.third parties. Thus far this excise tax has not had a material impact on our financial results.  However, this tax may have a material impact on our business and financial results in future periods.  

Other reform measures changed the timeline to submit Medicare claims to one year from the date of service. We must expend resources to evaluate andpotentially adjust our claims processing procedure to comply with Medicare’s faster filing requirements or risk denials of otherwise appropriate claims and the resulting diminished revenue.


Other reform measures were passed that allow Centers for Medicare and Medicaid (“CMS”) to place a moratorium on new enrollment of Medicare suppliers and to suspend payment to suppliersbased upon a credible allegation of fraud from any source. It is unclear if CMS will use this new authority liberally, potentially impacting our cash-flow and revenue. Additional penalties were added for the knowing and improper retention of overpayments collected from government programs such as Medicare and Medicaid. Failure to identify and return overpayments within a specified time-frame can also implicate the federal False Claims Act with potential for fines and penalties all which could have a material adverse effect on our results of operations and cash flows.

HOSPITALS AND CLINICIANS MAY NOT BUY, PRESCRIBE OR USE OUR PRODUCTS IN SUFFICIENT NUMBERS, WHICH COULD RESULT IN DECREASED REVENUES AND PROFITS.

Hospitals and clinicians may not accept any of our products as effective, reliable, and cost-effective. Factors that could prevent such institutional customer acceptance include:

·  If customers conclude that the costs of these products exceed the cost savings associated with the use of these products;

·  If customers are financially unable to purchase these products;

·  If adverse patient events occur with the use of these products, generating adverse publicity;


·  If we lack adequate resources to provide sufficient education and training to our customers;

·  If frequent product malfunctions occur, leading clinicians to believe that the products are unreliable; and

·  If physicians or other health care providers believe that our products will not be reimbursed by insurers or decide to prescribe competing products.

Because our sales are dependent on prescriptions from physicians, if any of these or other factors results in fewer prescriptions for our products being written, we will have reduced revenues and may not be able to fully fund operations. We experienced a steep decline in orders for our ZMI products during the first haf of 2013 and can make no assurances that demand for our products will not further decline in future periods.

ITEM 6. EXHIBITS

   

 

Exhibit

Number

Description

      

Description

3.1

      

Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 7, 2008).

3.2

3.2

      

Amended and Restated Bylaws (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on October 7, 2008).

10.1*

Amendement No. 1 to Loan and Security Agreement, dated May 31, 2013, among Zynex, Inc., Zynex Medical, Inc., Zynex NeuroDiagnostics, Inc. Zynex Monitoring Solutions Inc., Zynex Billing and Consulting, LLC and Doral Healthcare Finance.

10.2*

Office Lease, effective May 1, 2013, between Public Service Credit Union and Zynex Medical, Inc.  

31.1*

      

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

31.2*

31.2*

      

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

32.1*

32.1*

      

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

101

      

101

The following financial statements, formatted in XBRL: (i) Condensed Consolidated Balance Sheets as of March 31,June 30, 2013 and December 31, 2012, (ii) Condensed Consolidated Statements of Operations for the three and six months ended March 31,June 30, 2013 and 2012 (iii) Condensed Consolidated Statements of Stockholders’ Equity as of March 31,June 30, 2013 (iv) Condensed Consolidated Statements of Cash Flows for the three and six months ended March 31,June 30, 2013 and 2012 and (v) Notes to Condensed Consolidated Financial Statements. The information in Exhibit 101 is ”furnished” and not “filed”, as provided in Rule 402 of Regulation S-T.

*

Filed herewith.

   

   

* Filed herewith.

 

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SIGNATURES

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

   

 

   

   

   

ZYNEX, INC.

Dated: May 13,

August 14, 2013

   

/s/ Thomas Sandgaard

   

Thomas Sandgaard

   

President, Chief Executive Officer and Treasurer

   

   

   

   

   

Dated: May 13,

August 14, 2013

   

/s/ Anthony A. Scalese

   

Anthony A. Scalese

   

Chief Financial Officer

   

 

 

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