U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
Commission File Number: 33-26787-D
Zynex Medical Holdings, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada | 33-26787-D | 90-0214497 |
| (State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
8100 Southpark Way, Suite A-9
Littleton, Colorado 80120
Address of Principal Executive Offices Zip Code
(303) 703-4906
Registrant's Telephone Number,
Including Area Code
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 10, 2007 26,820,351 shares of common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
ZYNEX MEDICAL HOLDINGS, INC.
FORM 10-QSB
INDEX
| Page No. | ||
| PART I: FINANCIAL INFORMATION | ||
| Item 1. Financial Statements: | ||
Condensed Consolidated Balance Sheet (unaudited) – June 30,2007. | 3 | |
Condensed Consolidated Statements of Operations (unaudited) - Three Months and Six Months Ended June 30, 2007 and 2006. | 4 | |
Condensed Consolidated Statement of Stockholders' Equity (unaudited) - Six Months Ended June 30, 2007. | 5 | |
Condensed Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 30, 2007 and 2006. | 6 | |
Notes to Condensed Consolidated Financial Statements (unaudited) | 7 | |
Item 2. Management's Discussion and Analysis or Plan of Operations | 13 | |
Item 3. Controls and Procedures | 15 | |
PART II: OTHER INFORMATION | ||
Item 1. Legal Proceedings | 16 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 16 | |
Item 3. Defaults Upon Senior Securities | 16 | |
Item 4. Submission of Matters to a Vote of Security Holders | 16 | |
Item 5. Other Information | 16 | |
Item 6. Exhibits | 17 | |
SIGNATURES | 18 |
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Zynex Medical Holdings, Inc.
Condensed Consolidated Balance Sheet
June 30, 2007
(unaudited)
| ASSETS | ||||
| Current Assets: | ||||
Cash and cash equivalents | $ | 21,054 | ||
Accounts receivable, less allowance for uncollectible | ||||
accounts of $1,871,770 | 2,288,818 | |||
Inventory | 688,225 | |||
Deferred consulting fees | 22,500 | |||
Deferred financing fees | 9,208 | |||
Prepaid expenses | 6,868 | |||
Deferred tax asset | 391,000 | |||
Other current assets | 20,950 | |||
Total current assets | 3,448,623 | |||
Property and equipment, less accumulated | ||||
depreciation of $321,470 | 449,937 | |||
Deposits | 10,940 | |||
$ | 3,909,500 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||
Current Liabilities: | ||||
Notes payable | $ | 254,483 | ||
Loan from stockholder | 74,691 | |||
Capital lease | 16,332 | |||
Accounts payable | 444,549 | |||
Accrued expenses | 275,202 | |||
Income taxes payable | 546,000 | |||
Total current liabilities | 1,611,257 | |||
Notes payable, less current maturities | 126,448 | |||
Loan from stockholder, less current maturities | 37,683 | |||
Capital lease, less current maturities | 20,888 | |||
Long-term deferred tax liability | 61,000 | |||
1,857,276 | ||||
Contingencies and Commitments | -- | |||
Stockholders' Equity: | ||||
Preferred stock, $.001 par value, 10,000,000 shares authorized, | -- | |||
no shares issued or outstanding | ||||
Common stock, $0.001, par value, 100,000,000 shares authorized, | 26,771 | |||
26,770,827 shares issued and outstanding | ||||
Additional paid-in capital | 2,616,940 | |||
Accumulated deficit | (591,487 | ) | ||
Total stockholders' equity | 2,052,224 | |||
$ | 3,909,500 | |||
See accompanying notes to financial statements.
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Zynex Medical Holdings, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Net sales and rental income | $ | 1,505,207 | $ | 560,860 | $ | 2,841,938 | $ | 1,065,951 | ||||||||
Cost of sales and rentals | 175,747 | 107,610 | 275,382 | 124,003 | ||||||||||||
Gross profit | 1,329,460 | 453,250 | 2,566,556 | 941,948 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | 716,400 | 506,686 | 1,484,194 | 984,304 | ||||||||||||
Depreciation | 32,659 | 22,037 | 62,497 | 42,233 | ||||||||||||
Total operating expenses | 749,059 | 528,723 | 1,546,691 | 1,026,537 | ||||||||||||
Income (loss) from operations | 580,401 | (75,473 | ) | 1,019,865 | (84,589 | ) | ||||||||||
Interest and other expense | (98,553 | ) | (17,735 | ) | (220,636 | ) | (31,053 | ) | ||||||||
Income (loss) before taxes | 481,848 | (93,208 | ) | 799,229 | (115,642 | ) | ||||||||||
Income taxes | 130,300 | -- | 216,000 | -- | ||||||||||||
Net income (loss) | $ | 351,548 | $ | (93,208 | ) | $ | 583,229 | $ | (115,642 | ) | ||||||
Net income (loss) per common and common equivalent share | ||||||||||||||||
Basic | $ | 0.01 | $ | 0.00 | $ | 0.02 | $ | 0.00 | ||||||||
Diluted | $ | 0.01 | $ | 0.00 | $ | 0.02 | $ | 0.00 | ||||||||
Weighted average number of shares outstanding | ||||||||||||||||
Basic | 26,427,002 | 23,277,197 | 26,369,277 | 23,244,065 | ||||||||||||
Diluted | 27,823,336 | 23,277,197 | 27,250,434 | 23,244,065 | ||||||||||||
See accompanying notes to financial statements.
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Zynex Medical Holdings, Inc.
Condensed Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2007
(unaudited)
| Number of Shares | Amount | Additional Paid in Capital | Accumulated Deficit | Total | ||||||||||||||||
| Balances at December 31, 2006 | 26,310,911 | $ | 26,311 | $ | 2,435,859 | $ | (1,174,716 | ) | $ | 1,287,454 | ||||||||||
| Issuance of common stock for loan extension and conversion | 459,916 | 460 | 167,713 | 168,173 | ||||||||||||||||
| Employee stock compensation expense | 13,368 | 13,368 | ||||||||||||||||||
| Net income | 583,229 | 583,229 | ||||||||||||||||||
| June 30, 2007 | 26,770,827 | $ | 26,771 | $ | 2,616,940 | $ | (591,487 | ) | $ | 2,052,224 | ||||||||||
See accompanying notes to financial statements.
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Zynex Medical Holdings, Inc.
Condensed Consolidated Statements of Cash Flow
(unaudited)
| Six Months Ended June 30, | ||||||||
| 2007 | 2006 | |||||||
| Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 583,229 | $ | (115,642 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 62,497 | 42,233 | ||||||
Provision for losses in accounts receivable | 771,770 | -- | ||||||
Amortization of deferred consulting and financing fees | 132,610 | 15,714 | ||||||
Issuance of common stock and warrants for consulting services, interest and loan fees | 69,173 | 25,000 | ||||||
Provision for obsolete inventory | 24,000 | -- | ||||||
Amortization of discount on note payable | 56,548 | -- | ||||||
Amortization of beneficial conversion feature | 3,904 | -- | ||||||
Deferred tax benefit | (330,000 | ) | -- | |||||
Employee stock compensation expense | 13,368 | 9,710 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (1,722,715 | ) | (263,562 | ) | ||||
Inventory | (151,212 | ) | (10,404 | ) | ||||
Prepaid expenses | 31,198 | (14,190 | ) | |||||
Refundable income taxes | -- | 7,586 | ||||||
Other current assets | (9,700 | ) | 432 | |||||
Accounts payable | 102,097 | 78,073 | ||||||
Accrued expenses | 2,613 | 3,029 | ||||||
Income taxes payable | 546,000 | -- | ||||||
Net cash provided by (used in) operating activities | 185,380 | (222,021 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchases of equipment | (185,191 | ) | (40,139 | ) | ||||
Net cash used in investing activities | (185,191 | ) | (40,139 | ) | ||||
Cash flows from financing activities: | ||||||||
Payments on notes payable and capital lease | (301,199 | ) | (97,581 | ) | ||||
Proceeds from loans payable | -- | 240,000 | ||||||
Proceeds from loans from stockholder | 74,000 | 126,900 | ||||||
Repayment of loans from stockholder | (17,133 | ) | (57,632 | ) | ||||
Issuance of common stock | -- | 108,563 | ||||||
Net cash (used in) provided by financing activities | (244,332 | ) | 320,250 | |||||
Net (decrease) increase in cash and cash equivalents | (244,143 | ) | 58,090 | |||||
Cash and cash equivalents at beginning of period | 265,197 | 18,733 | ||||||
Cash and cash equivalents at end of period | $ | 21,054 | $ | 76,823 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 21,882 | $ | 30,282 | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Conversion of notes payable to common stock | $ | 99,175 | ||||||
See accompanying notes to financial statements.
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ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Nature of Business
The Company designs, assembles and commercializes a line of FDA cleared medical devices for the electrotherapy and stroke rehabilitation markets. The Company also purchases electrotherapy devices and supplies from other domestic and international suppliers for resale.
2. Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles for interim financial information. In the opinion of management, these condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the financial position of the Company as of June 30, 2007 and the results of its operations for the six and three months ended June 30, 2007 and 2006, and its cash flows for the six months ended June 30, 2007 and 2006.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Furthermore, these financial statements should be read in conjunction with Zynex Medical Holdings, Inc.'s audited financial statements at December 31, 2006 included in the Company's Form 10-KSB filed April 17, 2007.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. The most significant management estimates used in the preparation of the accompanying financial statements are associated with the collectibility of accounts receivable. Actual results could differ from those estimates.
3. Recent Accounting Pronouncement
The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48") on January 1, 2007. The Company did not identify any controversial tax positions taken on open tax years and did not have any unrecognized tax benefits and there was no effect on the Company’s financial condition or results of operations as a result of implementing FIN 48.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2003. State jurisdictions that remain subject to examination range from 2002 to 2006. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.
The Company’s policy is to recognize interest and penalties accrued on unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits and no interest expense or penalties were recognized during the quarter.
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ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Stock Based Compensation
The Company has a 2005 Stock Option Plan (the "Option Plan") and has reserved 3,000,000 shares of common stock for issuance under 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.
The Company has adopted Statement of Financial Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award that is ultimately expected to vest during the period. SFAS 123R requires the stock compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the requisite service period, which in the Company’s case is the same as the vesting period).
For the three months ended June 30, 2007 and 2006, the Company recorded compensation expense related to stock options that decreased net income (increased net loss) from operations and decreased net income (increased net loss) by $4,912 and $4,856, respectively. For the six months ended June 30, 2007 and 2006, the Company recorded compensation expense related to stock options that decreased net income (increased net loss) from operations and decreased net income (increased net loss) by $13,368 and $9,710, respectively. The stock compensation expense was included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.
For the three months ended June 30, 2007 the Company granted stock options to acquire 28,000 shares of common stock to employees at an exercise price of $0.42 per share. The fair value of stock options at the date of grant during the three months ended June 30, 2007 was $0.37. During the three months ended June 30, 2006 there were no options granted. The Company used the following assumptions to determine the fair value of stock option grants during the three months ended June 30, 2007:
| 2007 | ||
| Expected life | 7 years | |
| Volatility | 108% | |
| Risk-free interest rate | 4.57% | |
| Dividend yield | 0% |
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ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of our common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents our anticipated cash dividend over the expected life of the stock options.
A summary of stock option activity under the Option Plan for the six months ended June 30, 2007 is presented below:
| Weighted | |||||||||||||
| Weighted | Average | ||||||||||||
| Shares | Average | Remaining | Aggregate | ||||||||||
| Under | Exercise | Contractual | Intrinsic | ||||||||||
| Option | Price | Life | Value | ||||||||||
Outstanding at January 1, 2007 | 286,670 | $ | 0.34 | ||||||||||
Granted | 218,000 | $ | 0.37 | ||||||||||
Exercised | -- | $ | -- | ||||||||||
Forfeited | (48,000 | ) | $ | 0.33 | |||||||||
Outstanding at June 30, 2007 | 456,670 | $ | 0.35 | 8.90 Years | $ | 227,028 | |||||||
Exercisable at June 30, 2007 | 55,167 | $ | 0.35 | 7.95 Years | $ | 27,562 | |||||||
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ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As of June 30, 2007, we had $68,635 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of approximately 4 years.
In addition, stock options to acquire 350,000 shares of common stock that had been granted to an employee prior to January 1, 2007, which were granted separate from the Option Plan, forfeited as a result of the employee’s termination. The options had an exercise price of $0.22 and an original term of 10 years.
5. Earnings Per Share
The Company computes net earnings (loss) per share in accordance with SFAS No. 128, "Earnings per Share", which establishes standards for computing and presenting net earnings (loss) per share. Basic earnings (loss) per share are 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 if-converted and treasury-stock methods. The effects of potential common stock equivalents have not been included in the computation of diluted net loss per share for the six and three months ended June 30, 2006, as their effect is anti-dilutive.
The calculation of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2007 is as follows:
| Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 | |||||||
| Basic: | ||||||||
| Net income applicable to common stockholders | $ | 351,548 | $ | 583,229 | ||||
| Weighted average shares outstanding - basic | 26,427,002 | 26,369,277 | ||||||
| Net income per share - basic | $ | 0.01 | $ | 0.02 | ||||
| Diluted: | ||||||||
| Net income applicable to common stockholders | $ | 351,548 | $ | 583,229 | ||||
| Weighted average shares outstanding - basic | 26,427,002 | 26,369,277 | ||||||
| Dilutive securities | 1,396,335 | 881,157 | ||||||
| Weighted average shares outstanding - diluted | 27,823,336 | 27,250,434 | ||||||
| Net income per share - diluted | $ | 0.01 | $ | 0.02 | ||||
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ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Loans From Stockholder
Effective March 1, 2006 a previously non-interest bearing loan from Thomas Sandgaard, President and Chief Executive Officer, in the amount of $14,980 was converted to a 24 month, 8.25% term loan, with equal monthly payments of principal and interest commencing April 1, 2006. As of June 30, 2007, $4,729 of this amount remained outstanding.
In 2006 Mr. Sandgaard loaned the Company $146,900, of which $50,000 was converted to a 24 month, 8.25% term loan, with equal monthly payments of principal and interest commencing April 1, 2006. As of June 30, 2007, $27,385 of this amount remained outstanding The remaining $96,900 was represented by 8.25% demand notes and will be repaid as the Company's cash position and its financing covenants allow. As of June 30, 2007, $8,183 of this amount remained outstanding. The loans from Mr. Sandgaard were used for working capital purposes.
In May and June 2007, Mr. Sandgaard made 24-month unsecured loans to the Company in the principal amounts of $50,000 and $24,000 for a total amount of $74,000, The loans bear interest at 8.25% per annum and require monthly payments of $2,267, commencing June 2007 and $1,088 commencing July 2007, for a total of $3,355. As of June 30, 2007, $48,077 and $24,000 remain outstanding. The loans from Mr. Sandgaard were used for working capital purposes and repayment of the Note Payable to Ascendiant Capital Group, LLC.
7. 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 effective income tax rate is reevaluated each reporting period. As of June 30, 2007, the Company has estimated its expected effective income tax rate applicable for the year is 27%, which is the statutory rate decreased by the effect of deductible expenses. Therefore, during the six and three months ended June 30, 2007, the Company recorded a provision for income taxes of $216,000 and $130,300. During the six and three months ended June 30, 2006, the Company did not record a provision for income taxes due to a loss position and due to uncertainty regarding the use of a net operating loss carryforwards. The Company anticipates net operating profits for the year ending December 31, 2007, although no assurance can be given. Refer to the Company's 2006 Form 10-KSB, Financial Statement Note 4.
At June 30, 2007, deferred tax assets are reduced by a valuation allowance of $347,000. The valuation allowance was reduced during the six months ended June 30, 2007 by approximately $138,000. In addition, deferred tax assets increased by $198,000 due to the effects of temporary differences primarily attributable to an increase in the allowance for doubtful accounts receivable. Deferred tax liabilities increased by $6,000.
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ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. Notes Payable
On October 18, 2006, the Company entered into a loan transaction with Ascendiant Capital Group, LLC (an affiliate of Ascendiant Securities, LLC) and issued to Ascendiant Capital (a) a secured Note in the total principal amount of $275,000 (the "Note") and (b) a five-year warrant to purchase a total of 429,867 shares of our common stock at a fixed exercise price of $0.39 per share. The Note was convertible into common stock at a fixed conversion price of $0.32 per share. Net proceeds of approximately $206,000 from the transaction were used for general working capital.
In May 2007, the Company and Ascendiant Capital agreed to extend the maturity date of the loan and to modify extension terms of the Note. Under the modified agreement the principal was to be paid in six equal monthly installments plus interest at 21%, although prepayment was permitted without penalty. The entire amount was to be repaid no later than October 18, 2007. For extending the Note, the Company issued 75,000 shares of common stock in May 2007. The shares were valued at $26,250. The extension agreement called for additional shares to be issued every month as long as an outstanding balance remained on the Note. The number of shares to be issued monthly depended upon the balance of the Note, up to an aggregate maximum of 450,000 shares of common stock, which number included the 75,000 shares of common stock issued in May 2007. Previously, 450,000 shares were to be issued upon the extension.
In May 2007, the Company repaid principal of $100,000, interest of $4,812 and issued 50,000 shares of common stock valued at $21,500.
In June 2007, the Company repaid principal of $76,000, interest of $3,062 and issued 25,000 shares of common stock valued at $21,250.
On June 21, 2007, Ascendiant Capital surrendered the Note for conversion into common stock at the fixed conversion price of $0.32 per share. The remaining principal of $99,000 plus accrued interest of $173 were converted into 309,916 shares of common stock.
9. Subsequent Events
In July 2007, the Company received $495 and issued 49,524 shares of common stock from the exercise of warrants. These warrants were originally issued in June 2004 with an exercise price of $0.01 per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following information should be read in conjunction with the Company's condensed consolidated financial statements and related footnotes contained in this report.
Results of Operations
Net Sales and Rental Income. Net sales and rental income for the three and six months ended June 30, 2007, were $1,505,207 and $2,841,938 an increase of $944,347 and $1,775,987 or 168% and 167% compared to $560,860 and $1,065,951 for the three and six months ended June 30, 2006. The increase in net sales and rental income for the three and six months ended June 30, 2007, compared to the three and six months ended June 30, 2006 was due primarily to an increase in prescriptions (orders) for rentals and purchases of the Company’s standard electrotherapy products. The increase resulted from the expansion of the sales force as discussed in the Company's Form 10-KSB filed April 17, 2007; greater awareness of the Company's products by end users and physicians resulting from marketing investments in 2006 and 2005; growing market penetration; and increased rental income from the greater number of Zynex products placed in use during prior periods. With the goal of further accelerating our growth we hired additional experienced sales representatives for a total of 41 outside sales representatives as of July 31, 2007 versus 10 such representatives as of July 31, 2006.
Our sales and rental income is reported net, after deductions for bad debt and estimated insurance company reimbursement deductions. The deductions are known throughout the health care industry as “contractual adjustments” and describe the process 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 amounts deducted from net sales and rental income for these charges in the three and six months ended June 30, 2007, were $1,517,770 and $2,789,626 an increase of $1,107,351 and $2,006,793 or 269% and 256% compared to $410,419 and $782,833 for the three and six months ended June 30, 2006. This increase is higher in proportion to the increase in net sales because we increased the expected deductions based upon experience.
Gross Profit. Gross profit for the three and six months ended June 30, 2007, was $1,329,460 and $2,566,556 or 88.3 and 90.3 % of net revenue. For the three and six months ended June 30, 2007, this represents an increase of $876,210 and $1,624,608 or 193.3% and 172.5% from the gross profit of $453,250 or 80.8% and $941,948 or 88.4% of net revenue for the three and six months ended June 30, 2006. The increase in gross profit for the three and six months ended June 30, 2007 as compared with the same periods in 2006 is primarily because revenue increased from the prior periods. The increase in gross profit percentage for the three months and six months ended June 30, 2007 as compared with the same periods in 2006 is primarily because of an increase in rental income as a percentage of total revenue (rental equipment is depreciated and not part of the cost of goods sold) offset in part by an increase in the estimated deduction for contractual adjustments as described above.
Selling, General and Administrative. Selling, general and administrative expenses for the three and six months ended June 30, 2007 were $716,400 and $1,484,194 an increase of $209,714 and $499,890 or 41.4% and 50.8%, compared to $506,686 and $984,304 for the same periods in 2006. The increase was primarily due to increases in sales representative commissions, payroll, public company expenses, legal expenses, accounting services and office expenses. The increases were in part offset by lower advertising, marketing and promotion costs, utilities and temporary services.
Depreciation. Depreciation expense for the three and six months ended June 30, 2007 were $32,659 and $62,497 an increase of $10,622 and $20,263 or 48.2% and 48.0%, compared to $22,037 and $42,233 for the same periods in 2006. Depreciation expense increased because of more equipment out on rental which is considered property and equipment.
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Interest and other expense. Interest and other expense for the three and six months ended June 30, 2007 were $98,553 and $220,636 an increase of $80,818 and $189,583 or 455.7% and 610.5%, compared to $17,735 and $31,053 for the same periods in 2006. The increases resulted primarily from the Company's increase in commercial bank debt, the note issued to Ascendiant Capital as well as loans from its majority stockholder, which is described in Note 3 to the consolidated financial statements in our Annual Report on Form 10-KSB for the year ended December 31, 2006 and in Note 6 to the Condensed Consolidated Financial Statements in this Report.
Income tax expense. We reported expenses for income taxes in the amount of $130,300 and $216,000 for the three and six months ended June 30, 2007. This is primarily due to our having an income before taxes of $481,848 and $799,229 respectively. We expect to consume our net operating loss carry-forward, and therefore we will have to pay taxes on income going forward.
Liquidity and Capital Resources. We have limited liquidity.
Our cash requirements increase as our operations expand for the reasons indicated below for our limited liquidity. We have begun to see our operations provide enough cash for our current requirements, and our planned operations might also provide sufficient cash to implement our business plan. However, there can be no assurance that our operations will provide enough cash in the future. For this reason we may raise additional capital through debt or equity financing in 2007. There can be no assurance that we will be able to raise such additional financing or do so on terms that are acceptable to the Company.
Our limited liquidity is primarily a result of (a) the required high levels of consignment inventory that are standard in the electrotherapy industry, (b) the payment of commissions to salespersons based on sales or rentals prior to reimbursement for such transaction, (c) the high level of outstanding accounts receivable because of the deferred payment practices of third party health payers, and (d) the delayed cost recovery inherent in rental transactions. Our growth results in higher cash needs.
Contingencies such as unanticipated shortfalls in revenues or increases in expenses could affect our projected revenue, cash flows from operations and liquidity.
Cash provided by operating activities was $185,380 for the six months ended June 30, 2007 compared to $222,021 of cash used by operating activities for the six months ended June 30, 2006. The primary reasons for the increase in cash flow was the net income in 2007 compared to 2006, an increase in non-cash expenses including provision for loss on accounts receivable and amortization of note payable discount, a decrease in prepaid expenses, an increase in accounts receivable due to the increase in gross revenue and a larger increase in accounts payable in 2007 than in 2006.
Cash used in investing activities for the six months ended June 30, 2007 was $185,191 compared to cash used in investing activities of $40,139 for the same period in 2006. Cash used in investing activities primarily represents the purchase and in-house production of rental products as well as some purchases of computers.
Cash used in financing activities was $244,332 for the six months ended June 30, 2007 compared with cash provided by financing activities of $320,250 for the six months ended June 30, 2006. The primary financing use of cash in 2007 were the payments on notes payable including the note payable to Ascendiant Capital Group, LLC. This was partially offset by the issuance of common stock used in the conversion of the remaining portion of the Ascendiant note. Loan proceeds from a stockholder was another source of financing cash in 2007. The primary financing sources of cash in 2006 were loan proceeds from our bank, our stockholder and the issuance of common stock.
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Recently issued accounting pronouncement:
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109". This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. We adopted this statement effective for our fiscal year beginning January 1, 2007. We have described the impact of adopting FIN 48 in our condensed consolidated financial statements in Note 3, Recent Accounting Pronouncement.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain information included in 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 as 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 to obtain additional capital in order to grow our business, larger competitors with greater financial resources, the need to keep pace with technological changes, our dependence on the reimbursement from insurance companies for products sold or rented to our customers, our dependence on third party manufacturers to produce our goods on time and to our specifications, the acceptance of our products by hospitals and clinicians, implementation of our sales strategy including a strong direct sales force and other risks described in our 10-KSB Report for the year ended December 31, 2006.
ITEM 3. 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 design and operation of the Company’s disclosure controls and procedures as of June 30, 2007. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, because of a material weakness in internal control over financial reporting relating to inventory, as discussed in Note 12 to the December 31, 2005 Condensed Consolidated Financial Statements filed as part of the Amendment No. 1 to the December 31, 2005 Form 10-KSB, the Company’s disclosure controls and procedures were not effective as of June 30, 2007.
Remediation Efforts
In the fourth quarter of 2006, we implemented systems, procedures and controls relating to the cost and quantity of our inventory and in particular our rental products and finished goods. These systems and procedures include a comprehensive tracking by serial number of inventory throughout our organization and on rental with our customers. We will continue to review our internal controls and procedures and will take further action as appropriate.
Changes in Internal Control Over Financial Reporting
There were no changes in internal control over financial reporting that occurred during the first half of 2007 that have materially affected, or are reasonably likely to 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 or threatened legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the second quarter of 2007 we issued 150,000 shares of common stock to modify the extension terms of the note issued in 2006 to Ascendiant Capital Group, LLC and the extension of the maturity date. On June 21, 2007, we issued 309,916 shares of common stock upon the conversion of the note by Ascendiant Capital at a conversion price of $0.32 per share. The information in Note 8 to the Condensed Consolidated Financial Statements in this Report as to the stock issuances is incorporated herein by reference. In these issuances, we made no general solicitation, and we believe Ascendiant Capital is an accredited investor or met the standards for purchase in a non-public offering. We relied upon an exemption from securities registration for a non-public offering and, in the case of the conversion, also for an exchange under Section 3(a)(9) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
(a) Exhibits
10.1 | Promissory Note dated May 16, 2007 by Zynex Medical Holdings, Inc., to Thomas Sandgaard incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed June 29, 2007 | |
10.2 | Promissory Note dated June 15, 2007 by Zynex Medical Holdings, Inc., to Thomas Sandgaard incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed June 29, 2007 | |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350 |
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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 MEDICAL HOLDINGS, INC. | ||
| Dated August 15, 2007 | /s/ Thomas Sandgaard | |
| Thomas Sandgaard | ||
| President, Chief Executive Officer and Treasurer | ||
| Dated August 15, 2007 | /s/ Fritz G. Allison | |
| Fritz G. Allison | ||
| Chief Financial Officer | ||
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INDEX TO EXHIBITS
Exhibit Number | Description | |
10.1 | Promissory Note dated May 16, 2007 by Zynex Medical Holdings, Inc., to Thomas Sandgaard incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed June 29, 2007 | |
10.2 | Promissory Note dated June 15, 2007 by Zynex Medical Holdings, Inc., to Thomas Sandgaard incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed June 29, 2007 | |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350 |
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