| BASIS OF PRESENTATION | (1) BASIS OF PRESENTATION
Organization
Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado. We operate one primary business segment, medical devices which include Electrotherapy and Pain Management Products. As of June 30, 2019, the Company’s only active subsidiary is Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) through which the Company conducts most of its operations. One other subsidiary, Zynex Europe, ApS (“ZEU,” a wholly-owned Denmark corporation), did not generate material revenues during the three and six months ended June 30, 2019 and 2018 from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume monitoring device, but it is awaiting approval by the U.S. Food and Drug Administration (“FDA”) as well as Certificate European (“CE”) Marking in Europe, therefore, ZMS has achieved no revenues to date.
The term “the Company” refers to Zynex, Inc. and its active and inactive subsidiaries.
Nature of Business
The Company designs, manufactures and markets medical devices that treat chronic and acute pain, as well as activate and exercise muscles for rehabilitative purposes with electrical stimulation. The Company’s devices are intended for pain management to reduce reliance on drugs and provide rehabilitation and increased mobility through the utilization of non-invasive muscle stimulation, electromyography technology, interferential current (“IFC”), neuromuscular electrical stimulation (“NMES”) and transcutaneous electrical nerve stimulation (“TENS”). Our medical devices are designed for home use and to be patient friendly. Our devices are small, portable, battery-operated and include an electrical pulse generator which is connected to the body via electrodes. Our medical devices are marketed in the U.S. and are subject to FDA regulation and approval. Our products require a physician’s prescription before they can be dispensed in the U.S. Our primary product is the NexWave device, which is marketed to physicians and therapists by our field sales representatives. The NexWave requires consumable supplies, such as electrodes and batteries, which are shipped to patients on a recurring monthly basis, as needed.
During the three and six months ended June 30, 2019 and 2018, the Company generated substantially all of its revenue (99.99%) in North America from sales of its devices and related supplies to patients and health care providers.
Unaudited Consolidated Financial Statements
The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2018. Amounts as of December 31, 2018, are derived from those audited consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the annual audited financial statements, accounting policies and notes thereto, included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2018, which has previously been filed with the SEC.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of June 30, 2019 and the results of its operations and its cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Zynex, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Non-controlling Interest
Non-controlling interest in the equity of a subsidiary is accounted for and reported as stockholders’ equity. Non-controlling interest represents the 20% ownership in the Company’s majority-owned (but currently inactive) subsidiary, Zynex Billing and Consulting, LLC (“ZBC”).
Reclassifications
During 2019, the Company began reporting costs related to its selling and marketing activities separate from its general and administrative costs. As a result, reclassifications between selling and marketing costs and general and administrative costs have been made to the results of operations for the three and six month periods ending June 30, 2018 to conform to the consolidated 2019 financial statement presentation. These reclassifications had no effect on net earnings, retained earnings or cash flows as previously reported.
Use of Estimates
Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The most significant management estimates used in the preparation of the accompanying consolidated financial statements are associated with the allowance for billing adjustments and uncollectible accounts receivable, the reserve for obsolete and damaged inventory, stock-based compensation, and valuation of long-lived assets and realizability of deferred tax assets.
Revenue Recognition, Allowance for Billing Adjustments and Collectability
On January 1, 2018 the company adopted the new accounting standard on revenue recognition issued by the Financial Accounting Standards Board (“FASB”). Pursuant to the revenue from contracts with customers standard the Company recognizes revenue when it transfers promised goods to customers in an amount that reflects the consideration to which the company expects to be entitled, known as the transaction price.
Revenue is generated primarily from sales in the United States of our electrotherapy devices and associated supplies. Sales are primarily made with, and shipped, directly to the patient with a small amount of revenue generated from sales to distributors. Device sales can be in the form of a purchase or a lease. Revenue related to purchased devices are recognized in accordance with ASU No. 2014‑09—“Revenue from Contracts with Customers” (ASC 606) and is recognized when the device, which has been prescribed by a doctor, is delivered to the patient which is when control is deemed to have transferred to the customer.
Revenue related to devices out on lease is recognized in accordance with ASC 842 (as defined below). These leases are accounted for as operating leases based on the following criteria below:
·
The lease does not transfer ownership of the underlying asset to the lessee by the end of the lease term.
·
The lease does not grant the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
·
The lease term is month to month, which does not meet the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease.
·
There is no residual value guaranteed and the present value of the sum of the lease payments does not equal or exceed substantially all of the fair value of the underlying asset.
·
The underlying asset is expected to have alternative uses to the lessor at the end of the lease term.
Leased units still require a doctor’s prescription and the lease inception is dependent upon delivery. The company retains title to the leased device and those devices are classified as property and equipment on the balance sheet. Since our leases are month-to-month and can be returned by the patient at any time, revenue is typically recognized monthly until the customer returns the unit.
Device sales between purchased, subject to ASC 606, and leased, subject to ASC 842, are broken down as following (in thousands):
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2019
2018
2019
2018
DEVICE REVENUE
Purchased
$
720
$
488
$
1,310
$
713
Leased
1,568
1,185
2,953
2,548
Total Device revenue
2,288
1,673
4,263
3,261
Supplies revenue is recognized once delivered to the patient, which is when control is deemed to have transferred to the customer. Supplies needed for the device can be set up as a recurring shipment, ordered through the customer support team or our online store as needed.
In the healthcare industry there is often a third party involved that will pay on the patient’s behalf for purchased or leased devices and supplies. The terms of the separate arrangement impact certain aspects of the contracts, with patients covered by Third-party Payors (as defined below), such as contract type, performance obligations and transaction price, but for purposes of revenue recognition the contract with the customer refers to the arrangement between the Company and the patient. The Company does not have any material deferred revenue in the normal course of business as each performance obligation is met upon delivery of goods to the patient. The Company had deferred revenue of $0.9 million as of December 31, 2018 related to an insurance reimbursement claim that was de-recognized during the six months ended June 30, 2019. For additional detail, see description below in Note 7. There are no substantial costs incurred through support or warranty obligations.
Primarily all of the Company’s revenues are derived, and the related receivables are due, from patients with private health insurance carriers and workers compensation claims (collectively “Third-party Payors”), with a small portion related to private pay individuals, attorney and auto claims. The transaction price is estimated with variable consideration using the most likely amount technique for Third-party Payors reimbursement deductions, known throughout the health care industry as “billing adjustments” whereby the Third-party Payors unilaterally reduce the amount they reimburse for the Company’s products, refund requests, and for the timing and values of amounts to be billed. Inherent in these estimates is the risk that they will have to be revised as additional information becomes available and constraints are released. Specifically, the complexity of Third-party Payor billing arrangements and the uncertainty of reimbursement amounts for certain products from Third-party Payors or unanticipated requirements to refund payments previously received may result in adjustments to amounts originally recorded. Due to continuing changes in the health care industry and Third-party Payor reimbursements, as well as changes in our billing practices to increase cash collections, it is possible our forecasting model to estimate collections could change, which could have an impact on our results of operations and cash flows. Any differences between estimated settlements and final determinations are reflected as an increase or a reduction to revenue in the period when such final determinations are known. Historically these differences have been immaterial and the Company has not had to go back and reassess the adjustments in future periods for past billing adjustments.
The basis of estimates includes historical rates of collection, the aging of the receivables, trends in the historical reimbursement rates by Third-party Payors, determined using the portfolio approach, and current relationships and experience with the Third-party Payors. A change in the way estimates are determined can result from a number of factors, including experience and training of billing personnel, changes in the reimbursement policies or practices of Third-party Payors, or changes in industry rates of reimbursement. The Company monitors the variability and uncertain timing over Third-party Payor groups in our portfolios. If there is a change in our Third-party Payor mix over time, it could affect our net revenue and related receivables. We believe we have a sufficient history of collection experience to estimate the net collectible amounts by Third-party Payors. However, changes to the allowance for billing adjustments, which are recorded as a reduction of transaction price, have historically fluctuated and may continue to fluctuate significantly from quarter to quarter and year to year.
The Company frequently receives refund requests from Third-party Payors relating to specific patients and dates of service. Billing and reimbursement disputes are very common in the Company’s industry. These requests are sometimes related to a limited number of patients or products; at other times, they include a significant number of refund claims in a single request. The Company reviews and evaluates these requests and determines if any refund request is appropriate. The Company also reviews these refund claims when it is rebilling or pursuing reimbursement from Third-party Payors. The Company frequently has significant offsets against such refund requests, and sometimes amounts are due to the Company in excess of the amounts of refunds requested by the Third-party Payors. Therefore, at the time of receipt of such refund requests, the Company is generally unable to determine if a refund request is valid and should be accrued. Such refunds are recorded when the amount is fixed and determinable. However, management maintains an allowance for estimated future refunds which we believe is sufficient to cover future claims in connection with its estimates of variable consideration recorded at the time sales are recorded.
The Company estimates the collectability of revenues based upon historical rates of collection, the aging of receivables, trends in the historical reimbursement rates by Third-party Payors, and current relationships and experience with the Third-party Payors. Billing adjustments are recorded as an adjustment of transaction price and are reflected as an increase or a reduction to revenue in the period when such adjustments are identified.
As of June 30, 2019, the Company believes its accounts receivable is reasonably stated at its net collectible value and has an adequate allowance for billing adjustments relating to all known Third-party Payor disputes, adjustments and refund requests.
Stock-based Compensation
The Company accounts for stock-based compensation through recognition of the cost of employee services received in exchange for an award of equity instruments, which is measured based on the grant date fair value of the award that is ultimately expected to vest during the period. The stock-based compensation expenses are recognized over the period during which an employee is required to provide service in exchange for the award (the requisite service period, which in the Company’s case is the same as the vesting period). For awards subject to the achievement of performance metrics, stock-based compensation expense is recognized when it becomes probable that the performance conditions will be achieved over the respective performance period.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, accounts receivable, accounts payable, and accrued liabilities, for which current carrying amounts approximate fair value due to their short-term nature. Financial instruments also include capitalized leases, 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
Inventory, which primarily represents devices, parts and supplies, are valued at the lower of cost (average) or net realizable value.
The Company monitors inventory for turnover and obsolescence and records losses for excess and obsolete inventory, as appropriate. The Company provides reserves for estimated excess and obsolete inventories based upon assumptions about future demand. If future demand is less favorable than currently projected by management, additional inventory write-downs may be required.
Inventories, net of reserve, at June 30, 2019 were $1.3 million which was comprised of finished goods, work in progress, and parts and supplies as compared to December 31, 2018 of $0.8 million.
Segment Information
We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We have identified our Chief Executive Officer and Chief Financial Officer as our chief operating decision-makers (“CODM”).
We currently operate our business as one operating segment which includes two revenue types: Devices and Supplies.
Income Taxes
We record deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.
We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing a one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs, among other things.
Recently Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU 2018‑07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The effective date for the standard is for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. The Company determined that adoption did not have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018‑02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018‑02”), which allows companies to reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act (the Tax Act), from accumulated other comprehensive income to retained earnings. The new standard is effective for us beginning January 1, 2019, with early adoption permitted. The Company determined that the adoption did not have a material impact on its consolidated financial statements.
The Company adopted ASU 2016‑02, Leases (Topic 842), as of January 1, 2019, with an effective date of January 1, 2018, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standards, which among other things, allowed us to carry forward the historical lease classification. We also elected the hindsight practical expedient to determine the lease term for existing leases. Our election of the hindsight practical expedient resulted in the lengthening of the lease term related to one of our financing leases.
Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $3.6 million and $3.9 million, respectively, as of January 1, 2018. The Company also recorded an adjustment to the opening balance of retained earnings of $6,000 on January 1, 2018. The difference between the additional lease assets and lease liabilities was recorded as an adjustment to retained earnings. The standard did not have a material impact on our consolidated statement of operations and had no impact on our statement of cash flows. See Note 8, below, for further discussion regarding the Company’s operating and financing leases.
Effect of ASC 842 Adoption on the Company’s Consolidated Balance Sheets (in thousands, except share amounts)
December 31,
Effect of the Adoption of
December 31,
2018
ASC 842
2018
(as previously
(as adjusted)
reported)
ASSETS
Current assets:
Cash
$
10,128
$
—
$
10,128
Accounts receivable, net
2,791
—
2,791
Inventory, net
837
—
837
Prepaid expenses and other
570
(2)
(a)
568
Total current assets
14,326
(2)
14,324
Property and equipment, net
819
—
819
Operating lease asset
—
3,050
(b)
3,050
Financing lease asset
—
19
(c)
19
Deposits
314
—
314
Long term deferred income taxes
725
—
725
Total assets
$
16,184
$
3,067
$
19,251
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
1,552
—
1,552
Operating lease liability
—
671
(b)
671
Financing lease liability
—
14
(c)
14
Deferred rent
57
(57)
(b)
—
Income taxes payable
688
—
688
Dividends payable
2,270
—
2,270
Accrued payroll and related taxes
908
—
908
Deferred insurance reimbursement
880
—
880
Total current liabilities
6,355
628
6,983
Long-term liabilities:
Deferred rent
531
(531)
(b)
—
Operating lease liability
—
2,967
(b)
2,967
Financing lease liability
—
10
(c)
10
Total liabilities
6,886
3,074
9,960
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2019 and December 31, 2018
—
—
—
Common stock, $0.001 par value; 100,000,000 shares authorized; 33,312,411 issued and 32,241,191 outstanding as of March 31, 2019 and 33,290,587 issued and 32,271,367 outstanding as of December 31, 2018
34
—
34
Additional paid-in capital
8,157
—
8,157
Treasury stock 1,071,220 and 1,019,220 shares, at March 31, 2019 and December 31, 2018, respectively, at cost
(3,675)
—
(3,675)
Accumulated earnings
4,871
(7)
(d)
4,864
Total Zynex, Inc. stockholders’ equity
9,387
(7)
9,380
Non-controlling interest
(89)
—
(89)
Total stockholders’ equity
9,298
(7)
9,291
Total liabilities and stockholders’ equity
$
16,184
$
3,067
19,251
a)
Represents prepaid rent reclassified to financing lease assets
b)
Represents capitalization of operating lease assets, recognition of operating lease liabilities and reclassification of tenant incentives and deferred rent balances
c)
Represents impact of changes in finance lease terms under the hindsight practical expedient
d)
Represents the impact of changes in financing lease terms for certain leases due to the application of the hindsight practical expedient
Recent Accounting Pronouncements
In August 2017, the FASB issued ASU 2017‑12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017‑12”), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU 2017‑12 is effective for us in the first quarter of fiscal 2020, and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2017‑12 on our consolidated financial statements.
In June 2016, FASB issued ASU 2016‑13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016‑13"), Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We are currently evaluating the impact that the adoption of ASU 2016‑13 will have on our financial condition, results of operations and cash flows.
Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a material impact on the Company’s consolidated financial statements. |
