Zynex 10Q 2023 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


	☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2023


	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-38804

Zynex, Inc.

(Exact name of registrant as specified in its charter)


NEVADA		90-0275169
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

9655 Maroon Cir.
Englewood, CO		80112
(Address of principal executive offices)		(Zip Code)

(800) 495-6670

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Ticker Symbol		Name of each exchange on which registered
Common Stock, $0.001 par value per share		ZYXI		The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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


Class		Shares Outstanding as of April 27, 2023
Common Stock, par value $0.001		36,655,451

Table of Contents

ZYNEX, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q


		Page
PART I—FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022	3

	Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2023 and 2022	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022	5

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022	6

	Unaudited Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II—OTHER INFORMATION		26

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities And Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	27

Item 4.	Mine Safety Disclosures	27

Item 5.	Other Information	27

Item 6.	Exhibits	28

SIGNATURES		29

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ZYNEX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)


	March 31,		December 31,
	2023		2022
	(unaudited)
ASSETS
Current assets:
Cash	$	16,792	$	20,144
Accounts receivable, net		32,060		35,063
Inventory, net		14,184		13,484
Prepaid expenses and other		2,130		868
Total current assets		65,166		69,559

Property and equipment, net		2,281		2,175
Operating lease asset		11,888		12,841
Finance lease asset		240		270
Deposits		683		591
Intangible assets, net of accumulated amortization		8,843		9,067
Goodwill		20,401		20,401
Deferred income taxes		1,554		1,562
Total assets	$	111,056	$	116,466

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		5,650		5,601
Cash dividends payable		16		16
Operating lease liability		2,003		2,476
Finance lease liability		127		128
Income taxes payable		2,015		1,995
Current portion of debt		5,333		5,333
Accrued payroll and related taxes		5,915		5,537
Total current liabilities		21,059		21,086
Long-term liabilities:
Long-term portion of debt, less issuance costs		3,964		5,293
Contingent consideration		8,600		10,000
Operating lease liability		12,788		13,541
Finance lease liability		159		188
Total liabilities		46,570		50,108

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, 2023 and December 31, 2022		—		—
Common stock, $0.001 par value; 100,000,000 shares authorized; 41,575,386 issued and 36,646,041 outstanding as of March 31, 2023 41,658,132 issued and 36,825,081 outstanding as of December 31, 2022		39		39
Additional paid-in capital		82,343		82,431
Treasury stock of 4,485,713 and 4,253,015 shares at March 31, 2023 and December 31, 2022, respectively, at cost		(36,513)		(33,160)
Retained earnings		18,617		17,048
Total stockholders’ equity		64,486		66,358
Total liabilities and stockholders’ equity	$	111,056	$	116,466

The accompanying notes are an integral part of these condensed consolidated financial statements

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ZYNEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

(unaudited)


	For the Three Months Ended March 31,
	2023		2022
NET REVENUE
Devices	$	11,944	$	6,725
Supplies		30,226		24,358
Total net revenue		42,170		31,083

COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue - devices and supplies		9,269		6,921
Sales and marketing		21,227		14,424
General and administrative		11,390		7,832
Total costs of revenue and operating expenses		41,886		29,177

Income from operations		284		1,906

Other income (expense)
Gain on sale of fixed assets		2		—
Change in fair value of contingent consideration		1,400		200
Interest expense		(84)		(124)
Other income, net		1,318		76

Income from operations before income taxes		1,602		1,982
Income tax expense		33		605
Net income	$	1,569	$	1,377

Net income per share:
Basic	$	0.04	$	0.03
Diluted	$	0.04	$	0.03

Weighted average basic shares outstanding		36,694		39,765
Weighted average diluted shares outstanding		37,442		41,188

The accompanying notes are an integral part of these condensed consolidated financial statements

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ZYNEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

(unaudited)


	For the Three Months Ended March 31,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,569	$	1,377
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		615		500
Amortization		229		229
Non-cash reserve charges		408		(9)
Stock-based compensation		307		589
Non-cash lease expense		(272)		97
Benefit for deferred income taxes		8		(220)
Gain on change in fair value of contingent consideration		(1,400)		(200)
Gain on sale of fixed assets		(2)		—
Change in operating assets and liabilities:
Accounts receivable		2,596		787
Prepaid and other assets		(1,262)		(912)
Accounts payable and other accrued expenses		369		2,583
Inventory		(1,139)		(3,067)
Deposits		(92)		—
Net cash provided by operating activities		1,934		1,754

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(184)		(72)
Proceeds on sale of fixed assets		10		—
Net cash used in investing activities		(174)		(72)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on finance lease obligations		(31)		(28)
Cash dividends paid		—		(3,613)
Purchase of treasury stock		(3,353)		—
Proceeds from the issuance of common stock on stock-based awards		27		3
Principal payments on long-term debt		(1,333)		(1,333)
Taxes withheld and paid on employees’ equity awards		(422)		(76)
Net cash used in financing activities		(5,112)		(5,047)

Net decrease in cash		(3,352)		(3,365)
Cash at beginning of period		20,144		42,612
Cash at end of period	$	16,792	$	39,247

Supplemental disclosure of cash flow information:
Cash paid for interest	$	(90)	$	(89)
Cash paid for rent	$	(1,382)	$	(995)
Supplemental disclosure of non-cash investing and financing activities:
Right-of-use assets obtained in exchange for new operating lease liabilities	$	—	$	211
Inventory transferred to property and equipment under lease	$	438	$	339
Capital expenditures not yet paid	$	77	$	56

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZYNEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

(unaudited)


					Additional						Total
	Common Stock				Paid-in		Treasury		Retained		Stockholders’
	Shares		Amount		Capital		Stock		Earnings		Equity
Balance at December 31, 2021		39,737,890	$	41	$	80,397	$	(6,513)	$	—	$	73,925
Exercised and vested stock-based awards		38,355		—		3		—		—		3
Stock-based compensation expense		—		—		589		—		—		589
Shares of common stock withheld to pay taxes on employees’ equity awards		(10,873)		—		(76)		—		—		(76)
Stock dividend adjustments		11,444		—		—		—		—		—
Net income		—		—		—		—		1,377		1,377
Balance at March 31, 2022		39,776,816		41		80,913		(6,513)		1,377		75,818

Balance at December 31, 2022		36,825,081	$	39	$	82,431	$	(33,160)	$	17,048	$	66,358
Exercised and vested stock-based awards		66,045		—		27		—		—		27
Stock-based compensation expense		—		—		307		—		—		307
Warrants exercised		10,000		—		—		—		—		—
Shares of common stock withheld to pay taxes on employees’ equity awards		(22,387)		—		(422)		—		—		(422)
Purchase of treasury stock		(232,698)		—		—		(3,353)		—		(3,353)
Net income		—		—		—		—		1,569		1,569
Balance at March 31, 2023	$	36,646,041	$	39	$	82,343	$	(36,513)	$	18,617	$	64,486

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE (1) BASIS OF PRESENTATION

Organization

Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado. The term “the Company” refers to Zynex, Inc. and its active and inactive subsidiaries. The Company operates in one primary business segment, medical devices which include electrotherapy and pain management products. As of March 31, 2023, the Company’s only active subsidiaries are Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) through which the Company conducts most of its operations, and Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation). ZMS has developed a fluid monitoring system which received approval by the U.S. Food and Drug Administration (“FDA”) during 2020 and is still awaiting CE Marking in Europe. ZMS has achieved no revenues to date. The Company’s inactive subsidiaries include Zynex Europe, Zynex NeuroDiagnostics, Inc. (“ZND,” a wholly-owned Colorado corporation) and Pharmazy, Inc. (“Pharmazy”, a wholly-owned Colorado Corporation). The Company’s compounding pharmacy operated as a division of ZMI dba as Pharmazy through January 2016.

In December 2021, the Company acquired 100% of Kestrel Labs, Inc. (”Kestrel”), a laser-based, noninvasive patient monitoring technology company. Kestrel’s laser-based products include the NiCO^TM CO-Oximeter, a multi-parameter pulse oximeter, and HemeOx^TM, a total hemoglobin oximeter that enables continuous arterial blood monitoring. Both NiCO and HemeOx are yet to be presented to the FDA for market clearance. All activities related to Kestrel flow through the ZMS subsidiary.

Nature of Business

The Company designs, manufactures and markets medical devices that treat chronic and acute pain, as well as activate and exercise muscles for rehabilitative purposes with electrical stimulation. The Company’s devices are intended for pain management to reduce reliance on medications and provide rehabilitation and increased mobility through the utilization of non-invasive muscle stimulation, electromyography technology, interferential current (“IFC”), neuromuscular electrical stimulation (“NMES”) and transcutaneous electrical nerve stimulation (“TENS”). All the Company’s medical devices are designed to be patient friendly and designed for home use. The devices are small, portable, battery operated and include an electrical pulse generator which is connected to the body via electrodes. All of the medical devices are marketed in the U.S. and are subject to FDA regulation and approval. All of the products require a physician’s prescription before they can be dispensed in the U.S. The Company’s primary product is the NexWave device. The NexWave is marketed to physicians and therapists by the Company’s 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 months ended March 31, 2023 and 2022, the Company generated all of its revenue in North America from sales and supplies of its devices to patients and healthcare providers.

Unaudited Condensed Consolidated Financial Statements

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, 2022. Amounts as of December 31, 2022, 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, 2022.

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, 2023 and the results of its operations and its cash flows for the periods presented. The results of operations for the three months ended March 31, 2023 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.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Zynex, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

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 billing adjustments and uncollectible accounts receivable, the reserve for obsolete and damaged inventory, stock-based compensation, assumptions related to the valuation of contingent consideration, and valuation of long-lived assets and realizability of deferred tax assets.

Accounts Receivable, Net

The Company’s accounts receivable represent unconditional rights to consideration and are generated when a patient receives one of the Company’s devices, related supplies or complementary products. In conjunction with fulfilling the Company’s obligation to deliver a product, the Company invoices the patient’s third-party payer and/or the patient. Billing adjustments represent the difference between the list price and the reimbursement rates set by third-party payers, including Medicare, commercial payers and amounts billed directly to the patient. Specific amounts, if uncollected over a period of time, may be written-off after several appeals, which in some cases may take longer than twelve months. Substantially all of the Company’s receivables are due from patients with commercial or government health plans and workers compensation claims with a smaller portion related to private pay individuals, attorney, and auto claims. The Company maintains a constraint for third-party payer refund requests, deductions and adjustments. The Company recorded an allowance for uncollectible accounts of $0.4 million during the three months ended March 31, 2023, which is included in the general and administrative section of the condensed consolidated statements of income. See Note 14 – Concentrations for discussion of significant customer accounts receivable balances.

Inventory, Net

Inventories are stated at the lower of cost or net realizable value. Cost is computed using standard costs, which approximates actual costs on an average cost basis.

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.

Long-lived Assets

The Company records intangible assets based on estimated fair value on the date of acquisition. Long-lived assets consist of net property and equipment and intangible assets. The finite-lived intangible assets are patents and are amortized on a straight-line basis over the estimated lives of the assets.

The Company assesses impairment of long-lived assets when events or changes in circumstances indicates that their carrying value amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: (i) significant decreases in the market price of the asset; (ii) significant adverse changes in the business climate or legal or regulatory factors; (iii) or, expectations that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.

If the estimated future undiscounted cash flows, excluding interest charges, from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Useful lives of finite-lived intangible assets by each asset category are summarized below:


		Estimated
		Useful Lives
		in years
Patents		11

Goodwill

Goodwill is recorded as the difference between the fair value of the purchase consideration and the estimated fair value of the net identifiable tangible and intangible assets acquired.

Goodwill is not subject to amortization but is subject to impairment testing in the future. The Company utilized the simplified test for goodwill impairment. The amount recognized for impairment is equal to the difference between the carrying value and the asset’s fair value. The valuation methods used in the quantitative fair value assessment was a discounted cash flow method and required management to make certain assumptions and estimates regarding certain industry trends and future profitability of our reporting units. The Company tests more frequently if indicators are present or changes in circumstances suggest that impairment may exist. These indicators include, among others, declines in sales, earnings or cash flows, or the development of a material adverse change in the business climate. The Company assesses goodwill for impairment at the reporting unit level. The estimates of fair value and the determination of reporting units requires management judgment.

Revenue Recognition

Revenue is derived from sales and leases of the Company’s electrotherapy devices and sales of related supplies and complementary products. Device sales can be in the form of a purchase or a lease. Supplies needed for the device can be set up as a recurring shipment or ordered through the customer support team or online store as needed. The Company recognizes revenue when the performance obligation has been met and the product has been transferred to the patient, in the amount that reflects the consideration the Company expects to receive. In general, revenue from sales of devices and supplies is recognized once the product is delivered to the patient, which is when the performance obligation has been met and the product has been transferred to the patient.

Sales of devices and supplies are primarily shipped directly to the patient, with a small amount of revenue generated from sales to distributors. In the healthcare industry there is often a third party involved that will pay on the patients’ behalf for purchased or leased devices and supplies. The terms of the separate arrangement impact certain aspects of the contracts, with patients covered by third party payers, such as contract type, performance obligations and transaction price, 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. There are no substantial costs incurred through support or warranty obligations.

The following table provides a breakdown of disaggregated net revenues for the three months ended March 31, 2023 and 2022 related to devices accounted for as purchases subject to Accounting Standards Codification (“ASC”) 606 – “Revenue from Contracts with Customers” (“ASC 606”), leases subject to ASC 842, and supplies (in thousands):


	For the Three Months March 31,
	2023		2022
Device revenue
Purchased	$	4,642	$	2,188
Leased		7,302		4,537
Total device revenue		11,944		6,725
Supplies revenue		30,226		24,358
Total revenue	$	42,170	$	31,083

Revenues are estimated using the portfolio approach by third-party payer type based upon historical rates of collection, aging of receivables, trends in historical reimbursement rates by third-party payer types, and current relationships and experience with the third-party payers, which includes estimated constraints for third-party payer refund requests, deductions and adjustments. Inherent in these estimates is the risk that they will have to be revised as additional information becomes available and constraints are released.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Specifically, the complexity of third-party payer billing arrangements and the uncertainty of reimbursement amounts for certain products from third-party payers or unanticipated requirements to refund payments previously received may result in adjustments to amounts originally recorded. Settlements with third-party payers for retroactive revenue adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price using the expected amount method. These adjustments to transaction price are estimated based on the terms of the payment agreement with the payer, correspondence from the payer and historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Due to continuing changes in the healthcare industry and third-party payer reimbursement, it is possible the Company’s forecasting model to estimate collections could change, which could have an impact on the Company’s results of operations and cash flows. Any differences between estimated and actual collectability are reflected in the period in which received. Historically these differences have been immaterial, and the Company has not had a significant reversal of revenue from prior periods.

The Company monitors the variability and uncertain timing over third-party payer types in the portfolios. If there is a change in the Company’s third-party payer mix over time, it could affect net revenue and related receivables. The Company believes it has a sufficient history of collection experience to estimate the net collectible amounts by third-party payer type. However, changes to constraints related to billing adjustments and refund requests have historically fluctuated and may continue to fluctuate significantly from quarter to quarter and year to year.

Leases

The Company determines if an arrangement is a lease at inception or modification of a contract.

The Company recognizes finance and operating lease right-of-use assets and liabilities at the lease commencement date based on the estimated present value of the remaining lease payments over the lease term. For the finance leases, the Company uses the implicit rate to determine the present value of future lease payments. For operating leases that do not provide an implicit rate, the Company uses incremental borrowing rates to determine the present value of future lease payments. The Company includes options to extend or terminate a lease in the lease term when it is reasonably certain to exercise such options. The Company recognizes leases with an initial term of 12 months or less as lease expense over the lease term and those leases are not recorded on the Company’s condensed consolidated balance sheets. For additional information on the leases where the Company is the lessee, see Note 12- Leases.

A significant portion of device revenue is derived from patients who obtain devices under month-to-month lease arrangements where the Company is the lessor. Revenue related to devices on lease is recognized in accordance with ASC 842, Leases. Using the guidance in ASC 842, the Company concluded the transactions should be accounted for as operating leases based on the following criteria below:

●

The lease does not transfer ownership of the underlying asset to the lessee by the end of the lease term.

●

The lease does not grant the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

●

The lease term is month to month, which does not meet the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease.

●

There is no residual value guaranteed and the present value of the sum of the lease payments does not equal or exceed substantially all of the fair value of the underlying asset

●

The underlying asset is expected to have alternative uses to the lessor at the end of the lease term.

Lease commencement occurs upon delivery of the device to the patient. The Company retains title to the leased device and those devices are classified as property and equipment on the balance sheet. Since the leases are month-to-month and can be returned by the patient at any time, revenue is recognized monthly for the duration of the period in which the patient retains the device.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Debt Issuance Costs

Debt issuance costs are costs incurred to obtain new debt financing. Debt issuance costs are presented in the accompanying condensed consolidated balance sheets as a reduction in the carrying value of the debt and are accreted to interest expense using the effective interest method.

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.

Segment Information

The Company defines operating segments as components of the business enterprise for which separate financial information is reviewed regularly by the Chief Operating Decision Makers to evaluate performance and to make operating decisions. The Company has identified our Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer as our Chief Operating Decision Makers (“CODM”).

The Company currently operates business as one operating segment which includes two revenue types: Devices and Supplies.

Income Taxes

The Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying condensed consolidated balance sheets, as well as operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.

Tax benefits are recognized from uncertain tax positions if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

The Inflation Reduction Act (“IRA”) was enacted into law on August 16, 2022. Included in the IRA was a provision to implement a 15% corporate alternative minimum tax on corporations whose average annual adjusted financial statement income during the most recently completed three year period exceeds $1 billion. This provision is effective for tax years beginning after December 31, 2022. We are in the process of evaluating the provisions of the IRA, but we do not currently believe the IRA will have a material impact on our reported results, cash flows or financial position when it becomes effective.

Recent Accounting Pronouncements

Management has evaluated 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.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE (3) INVENTORY

The components of inventory as of March 31, 2023, and December 31, 2022 are as follows (in thousands):


	March 31, 2023		December 31, 2022
Raw materials	$	3,225	$	3,506
Work-in-process		1,614		1,205
Finished goods		7,854		7,750
Inventory in transit		1,759		1,291
	$	14,452	$	13,752
Less: reserve		(268)		(268)
	$	14,184	$	13,484

NOTE (4) PROPERTY AND EQUIPMENT

The components of property and equipment as of March 31, 2023 and December 31, 2022 are as follows (in thousands):


	March 31, 2023		December 31, 2022
Property and equipment
Office furniture and equipment	$	3,034	$	2,819
Assembly equipment		138		110
Vehicles		203		203
Leasehold improvements		1,173		1,173
Leased devices		1,249		1,162
	$	5,797	$	5,467
Less accumulated depreciation		(3,516)		(3,292)
	$	2,281	$	2,175

Total depreciation expense related to property and equipment was $0.2 million for the three months ended March 31, 2023 and 2022.

Total depreciation expense related to devices out on lease was $0.4 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively. Depreciation on leased units is reflected in the condensed consolidated statement of operations as cost of revenue.

The Company monitors devices out on lease for potential loss and places an estimated reserve on the net book value based on an analysis of the number of units of which are still with patients for which the Company cannot determine the current status.

NOTE (5) BUSINESS COMBINATIONS

On December 22, 2021, the Company and its wholly-owned subsidiary Zynex Monitoring Solutions, Inc., entered into a Stock Purchase Agreement (the “Agreement”) with Kestrel and each of the shareholders of Kestrel (collectively, the ‘Selling Shareholders’). Under the Agreement, the Selling Shareholders sold all of the outstanding common stock of Kestrel (the “Kestrel Shares”) to the Company. The consideration for the Kestrel Shares consisted of $16.1 million cash and 1,467,785 shares of the Company’s common stock (the “Zynex Shares”). All of the Zynex Shares are subject to a lockup agreement for a period of one year from the closing date under the Agreement (the “Closing Date”). The Agreement provides the Selling Shareholders with piggyback registration rights. 978,524 of the Zynex Shares were deposited in escrow (the “Escrow Shares”). The number of Escrow Shares were subject to adjustment on the one-year anniversary of the Closing Date (or in connection with any Liquidation Event (as defined in the Agreement) that occurs prior to such anniversary date) based on the number of shares equal to $10.0 million divided by a 30-day volume weighted average closing price of the Company’s common stock. The Escrow Shares were adjusted on the anniversary date, which resulted in the cancellation of 156,673 Escrow Shares. Half of the Escrow Shares will be released on submission of a dossier on a laser-based photoplethysmographic device (the “Device”) to the FDA for permission to market and sell the Device in the United States. The other half of the Escrow Shares will be released upon determination by the FDA that the Device can be marketed and sold in the United States. The amount of escrow shares were recalculated at March 31, 2022, and are included in the calculation of diluted earnings per share for March 31, 2022. No additional calculation was required for the Escrow Shares at March 31, 2023, as the Escrow

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Share number was finalized on the anniversary date, and the shares are included in the Company’s calculation of basic earnings per share. The maximum amount of Zynex Shares that may be released are limited to 19.9% of the total number of common shares and total voting power of common shares of the Company (see Note 13 for more information regarding this liability).

The acquisition of Kestrel has been accounted for as a business combination under ASC 805. Under ASC 805, assets acquired, and liabilities assumed in a business combination must be recorded at their fair values as of the acquisition date.

NOTE (6) GOODWILL AND OTHER INTANGIBLE ASSETS

During the year ended December 31, 2021 the Company completed the acquisition of Kestrel, which resulted in goodwill of $20.4 million (see Note 5).

For the three months ended March 31, 2023, there was no change in the carrying amount of goodwill, there were no impairment indicators of the Company’s net asset value.

The following table provides the summary of the Company’s intangible assets as of March 31, 2023.


							Weighted-
							Average
	Gross						Remaining
	Carrying		Accumulated		Net Carrying		Life (in
	Amount		Amortization		Amount		years)
Acquired patents at December 31, 2022	$	10,000	$	(933)	$	9,067	10
Amortization expense				(224)		(224)
Acquired patents at March 31, 2023	$	10,000	$	(1,157)	$	8,843	9.73

The following table summarizes the estimated future amortization expense to be recognized over the remainder of 2023, the next five fiscal years, and periods thereafter:


	(In thousands)
April 1, 2023 through December 31, 2023	$	684
2024		911
2025		908
2026		908
2027		908
2028		911
Thereafter		3,613
Total future amortization expense	$	8,843

NOTE (7) EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding and the number of dilutive potential common share equivalents during the period, calculated using the treasury-stock method for outstanding stock options. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other potential common shares outstanding would be anti-dilutive.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The calculation of basic and diluted earnings per share for the three months ended March 31, 2023 and 2022 are as follows (in thousands, except per share data):


	For the Three Months Ended March 31,
	2023		2022
Basic earnings per share
Net income available to common stockholders	$	1,569	$	1,377
Basic weighted-average shares outstanding		36,694		39,765
Basic earnings per share	$	0.04	$	0.03
Diluted earnings per share
Net income available to common stockholders	$	1,569	$	1,377
Weighted-average shares outstanding		36,694		39,765
Effect of dilutive securities - options and restricted stock		748		1,423
Diluted weighted-average shares outstanding		37,442		41,188
Diluted earnings per share	$	0.04	$	0.03

For the three months ended March 31, 2023 and 2022, 12,000 and 450,000 shares of common stock were excluded from the dilutive stock calculation because their effect would have been anti-dilutive.

NOTE (8) NOTES PAYABLE

The Company entered into a loan agreement (the “Loan Agreement”) with Bank of America, N.A. (the “Bank”) in December 2021. Under this Loan Agreement, the Bank extended two facilities to the Company. Specified assets have been pledged as collateral. One facility is a line of credit in the amount of $4.0 million available until December 1, 2024 (“Facility 1”). Interest on Facility 1 is due on the first day of each month beginning January 1, 2022. The interest rate is an annual rate equal to the sum of (i) the greater of the BSBY Daily Floating Rate or (ii) the Index Floor (as defined in the Loan Agreement), plus 2.00%. As of March 31, 2023, the Company had not utilized this facility.

The other facility being extended by the Bank to the Company is a fixed rate term loan in the amount of $16.0 million (“Facility 2”). Facility 2 was entered into and funded in conjunction with the purchase of Kestrel Labs. The interest rate is equal to 2.8% per year. The Company must pay interest on the first day of each month which began January 1, 2022 and the Company also repays the principal amount in equal installments of $444,444 per month through December 1, 2024.

The following table summarizes future principal payments on long-term debt as of March 31, 2023:


	March 31,
	(In thousands)
April 1, 2023 through December 31, 2023	$	4,000
2024		5,333
Future principal payments		9,333
Less current portion		(5,333)
Less debt issuance costs		(36)
Long-term debt, net of debt issuance costs	$	3,964

NOTE (9) STOCK-BASED COMPENSATION PLANS

In June 2017, the Company’s stockholders approved the 2017 Stock Incentive Plan (the “2017 Stock Plan”) with a maximum of 5.5 million shares reserved for issuance. Awards permitted under the 2017 Stock Plan include: Stock Options and Restricted Stock. Awards issued under the 2017 Stock Plan are at the discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to the closing price of the Company’s common stock on the date of grant and generally vest over four years. Restricted Stock Awards are issued to the recipient upon grant and are not included in outstanding shares until such vesting and issuance occurs.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the three months ended March 31, 2023 and 2022, no stock option awards were granted under the 2017 Stock Plan. At March 31, 2023, the Company had 0.6 million stock options outstanding and exercisable under the following plans:


	Outstanding	Exercisable
	Number of Options	Number of Options
	(in thousands)	(in thousands)
Plan Category
2005 Stock Option Plan	211	211
2017 Stock Option Plan	356	355
Total	567	566

During the three months ended March 31, 2023, and 2022, 62,000 shares and 48,000 shares of restricted stock, respectively, were granted to management under the 2017 Stock Plan. The fair market value of restricted shares for share-based compensation expensing is equal to the closing price of the Company’s common stock on the date of grant. The vesting on the Restricted Stock Awards typically occurs quarterly over three years for the Board of Directors and quarterly or annually over two to four years for management.

The following summarizes stock-based compensation expenses recorded in the condensed consolidated statements of operations (in thousands):


	For the Three Months Ended March 31,
	2023		2022
Cost of Revenue	$	8	$	15
Sales and marketing expense		61		59
General, and administrative		238		515
Total stock based compensation expense	$	307	$	589

The Company received cash proceeds of $27,000 and $3,000 related to option exercises during the three months ended March 31, 2023 and 2022, respectively.

A summary of stock option activity under all equity compensation plans for the three months ended March 31, 2023, is presented below:


				Weighted-
		Weighted-		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Shares	Exercise		Contractual	Value
	(in thousands)	Price		Term (Years)	(in thousands)
Outstanding at December 31, 2022	793	$	2.67	5.03	$	8,908
Granted	—		—
Forfeited	(206)		6.30
Exercised	(20)		6.07
Outstanding at March 31, 2023	567	$	1.24	3.32	$	6,104

Exercisable at March 31, 2023	566	$	1.22	3.31	$	6,099

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A summary of restricted stock award activity under all equity compensation plans for the three months ended March 31, 2023, is presented below:


	Number of	Weighted
	Shares	Average
	(in thousands)	Grant Date Fair Value
Granted but not vested at December 31, 2022	431	$	11.92
Granted	62		12.10
Forfeited	(3)		14.51
Vested	(46)		12.96
Granted but not vested at March 31, 2023	444	$	11.82

As of March 31, 2023, the Company had approximately $4.5 million of unrecognized compensation expense related to stock options and restricted stock awards that will be recognized over a weighted average period of approximately 2.39 years.

NOTE (10) STOCKHOLDERS’ EQUITY

Treasury Stock

On April 11, 2022, the Company’s Board of Directors approved a program to repurchase up to $10.0 million of its common stock at prevailing market prices either in the open market or through privately negotiated transactions through April 11, 2023. From the inception of the plan through May 31, 2022 the Company purchased 1,419,874 shares of its common stock for $10.0 million or an average price of $7.04 per share which completed this program.

On June 9, 2022, the Company’s Board of Directors approved a program to repurchase up to $10.0 million of the Company’s common stock at prevailing market prices either in the open market or through privately negotiated transactions through June 9, 2023. From the inception of the plan through October 4, 2022, the Company purchased 1,091,604 shares of its common stock for $10.0 million for an average price of $9.06 per share which completed this program.

On October 31, 2022, the Company’s Board of Directors approved a program to repurchase up to $10.0 million of the Company’s common stock at prevailing market prices either in the open market or through privately negotiated transactions through October 31, 2023. From the inception of the plan through December 31, 2022, the Company purchased 495,138 shares of its common stock for $6.6 million or an average price of $13.43 per share. From the inception of the plan through March 31, 2023, the Company purchased 727,836 shares of its common stock for $10 million or an average price of $13.74 per share which completed this program.

Warrants

A summary of stock warrant activity for the three months ended March 31, 2023 is presented below:


				Weighted
		Weighted		Average		Aggregate
	Number of	Average		Remaining		Intrinsic
	Warrants	Exercise		Contractual		Value
	(in thousands)	Price		Life (Years)		(in thousands)
Outstanding and exercisable at December 31, 2022	99	$	2.39		1.76	$	1,140
Granted	—	$	—
Exercised	(8)	$	2.27
Forfeited	(2)	$	—
Outstanding and exercisable at March 31, 2023	89	$	2.41		1.52	$	853

(1)Warrants were exercised under a net exercise provision in the warrant agreement. As a result, approximately 2,000 warrants were forfeited in lieu of cash payment for shares during the three months ended March 31, 2023.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE (11) INCOME TAXES

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, primarily related to excess tax benefits from stock option exercises and the tax impact of the change in fair value of contingent consideration. For the three months ended March 31, 2023 and 2022, discrete items adjusted were $1.5 million and $0.5 million, respectively. At March 31, 2023 and 2022, the Company is currently estimating an annual effective tax rate of approximately 24.5% and 25.1%, respectively. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to various factors.

The provision for income taxes is recorded at the end of each interim period based on the Company’s estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s effective income tax rate was 2% and 30% for the three months ended March 31, 2023 and 2022, respectively. The decrease in the Company’s effective income tax rate for the three months ended March 31, 2023 compared to the same period in 2022, primarily relate to the tax impact of discrete items. Discrete items recognized during the three months ended March 31, 2023 and 2022, resulted in a tax benefit of approximately $0.4 million and a tax expense of approximately $0.1 million, respectively. The Company recorded an income tax expense of $33,000 and a tax expense of $605,000 for the three months ended March 31, 2023 and 2022, respectively.

No taxes were paid during the three months ended March 31, 2023 and 2022.

NOTE (12) LEASES

The Company categorize leases at their inception as either operating or financing leases. Leases include various office and warehouse facilities which have been categorized as operating leases while certain equipment is leased under financing leases.

The Company’s operating leases do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring the lease liability. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company’s weighted average borrowing rate was determined to be 4.01% for its operating lease liabilities. The Company’s equipment lease agreements have a weighted average rate of 9.40% which was used to measure its finance lease liability. The weighted average remaining lease term was 4.64 years and 2.42 years for operating and finance leases, respectively, as of March 31, 2023.

As of March 31, 2023, the maturities of the Company’s future minimum lease payments were as follows (in thousands):


	Operating Lease Liability		Finance Lease Liability
April 1, 2023 through December 31, 2023		1,672		114
2024		3,571		116
2025		3,586		76
2026		3,362		15
2027		3,149		—
2028		1,064		—
Total undiscounted future minimum lease payments	$	16,404	$	321
Less: Difference between undiscounted lease payments and discounted lease liabilities:		(1,613)		(35)
Total lease liabilities	$	14,791	$	286

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The components of lease expenses were as follows:


	Three Months Ended
	March 31,
	2023		2022
Lease cost:
Operating lease cost:
Total operating lease expense	$	1,121	$	1,105
Finance lease cost:
Total amortization of leased assets		30		30
Interest on lease liabilities		7		10
Total net lease cost	$	1,158	$	1,145

For the three months ended March 31, 2023 and 2022, $0.1 million of operating lease costs were incurred at the Company’s manufacturing and warehouse facility and were included in cost of sales. For the three months ended March 31, 2023 and 2022, $1.0 million of operating lease costs were included in selling, general and administrative expenses on the condensed consolidated statement of income.

NOTE (13) FAIR VALUE MEASUREMENTS

The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

The Company’s asset and liability classified financial instruments include cash, accounts receivable, accounts payable, accrued liabilities, and contingent consideration. The carrying amounts of financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. The Company measures its long-term debt at book value which approximates fair value as the long-term debt bears market rates of interest. The fair value of acquisition-related contingent consideration is based on a Monte Carlo model. The valuation policies are determined by management, and the Company’s Board of Directors is informed of any policy change.

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:

Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to Zynex for identical assets or liabilities;

Level 2: Inputs include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and

Level 3: Unobservable inputs that are supported by little or no market activity.

The Company’s assets and liabilities which are measured at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change in circumstances caused the transfer. The Company has consistently applied the valuation techniques discussed below in all periods presented.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents Company’s financial liabilities that were accounted for at fair value on a recurring basis as of March 31, 2023, by level within the fair value hierarchy:


			Fair Value Measurements at March 31, 2023
			Quoted
			Priced in
			Active
			Markets		Significant
			for		Other		Significant
	Fair Value at		Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs
	2023		(Level 1)		(Level 2)		(Level 3)

		(In thousands)
Contingent consideration	$	8,600	$	—	$	—	$	8,600

Total	$	8,600	$	—	$	—	$	8,600

The following table sets forth a summary of changes in the contingent consideration for the three months ended March 31, 2023 (in thousands):


	Contingent Consideration
Balance as of December 31, 2022	$	10,000
Change in fair value of contingent consideration		(1,400)
Balance as of March 31, 2023	$	8,600

NOTE (14) CONCENTRATIONS

For the three months ended March 31, 2023, the Company sourced approximately 39% of the components for its electrotherapy products from three significant vendors. For the three months ended March 31, 2022 the Company sourced approximately 30% of components from two significant vendors. At March 31, 2023, the Company had receivables from one third-party payer that made up approximately 13% of the net accounts receivable balance. At December 31, 2022, the Company had receivables from one third-party payer which made up approximately 14% of the net accounts receivable balance.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE (15) COMMITMENTS AND CONTINGENCIES

See Note 12 for details regarding commitments under the Company’s long-term leases.

From time to time, the Company may become party to litigation and other claims in the ordinary course of business. To the extent that such claims and litigation arise, management would accrue the estimated exposure for such events when losses are determined to be both probable and estimable. On occasion, the Company engages outside counsel related to a broad range of topics including employment law, third-party payer matters, intellectual property and regulatory and compliance matters.

The Company is currently not a party to any material pending legal proceedings that would give rise to potential loss contingencies.

NOTE (16) SUBSEQUENT EVENTS

No subsequent events identified through April 27, 2023.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Notice Regarding Forward-Looking Statements

This quarterly report contains statements that are forward-looking, such as statements relating to plans for future organic growth and other business development activities, as well as the impact of reimbursement trends, other capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks include the ability to engage effective sales representatives, the need to obtain 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 leased to our customers, acceptance of our products by health insurance providers for reimbursement, larger competitors with greater financial resources, the need to keep pace with technological changes, our dependence on third-party manufacturers to produce key components of our products on time and to our specifications, implementation of our sales strategy including a strong direct sales force, the impact of COVID-19 on our business, and other risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2022.

These interim financial statements and the information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the annual audited consolidated financial statements, and notes to consolidated financial statements, included in the Company’s 2022 Annual Report on Form 10-K and subsequently filed reports, which have previously been filed with the Securities and Exchange Commission.

General

Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado. We operate in one primary business segment, medical devices which includes electrotherapy and pain management products. As of March 31, 2023, the Company’s only active subsidiaries are Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) through which the Company conducts most of its operations, and Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation). The Company’s inactive subsidiaries include Zynex Europe, Zynex NeuroDiagnostics, Inc. (“ZND,” a wholly-owned Colorado corporation) and Pharmazy, Inc. (“Pharmazy”, a wholly-owned Colorado Corporation). The Company’s compounding pharmacy operated as a division of ZMI dba as Pharmazy through January 2016.

In December 2021, the Company acquired 100% of Kestrel Labs, Inc. (“Kestrel”), a laser-based, noninvasive patient monitoring technology company. Kestrel’s laser-based products include the NiCO^TM CO-Oximeter, a multi-parameter pulse oximeter, and HemeOx^TM, a total hemoglobin oximeter that enables continuous arterial blood monitoring. Both NiCO and HemeOx are yet to be presented to the U.S. FDA for market clearance. All activities related to Kestrel flow through our ZMS subsidiary.

The term “the Company” refers to Zynex, Inc. and its active and inactive subsidiaries.

RESULTS OF OPERATIONS

Summary

Net revenue was $42.2 million and $31.1 million for the three months ended March 31, 2023 and 2022, respectively. Net revenue increased 36% for the three-month period ended March 31, 2023. The Company had net income of $1.6 million during the three months ended March 31, 2023 as compared with net income of $1.4 million during the three months ended March 31, 2022. Cash flows provided by operating activities increased $0.1 million to $1.9 million during the three months ended March 31, 2023 as compared with cash flows used in operating activities of $1.8 million during the three months ended March 31, 2022. Working capital was $44.1 and $48.5 million at March 31, 2023 and December 31, 2022, respectively.

Net Revenue

Net revenues are comprised of device and supply sales, constrained by estimated third-party payer reimbursement deductions. The reserve for billing allowance adjustments and allowance for uncollectible accounts are adjusted on an ongoing basis in conjunction with the processing of third-party payer insurance claims and other customer collection history. Product device revenue is primarily comprised of sales and rentals of our electrotherapy products and also includes complementary products such as our cervical traction, lumbar support and hot/cold therapy products.

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Supplies revenue is primarily comprised of sales of our consumable supplies to patients using our electrotherapy products, consisting primarily of surface electrodes and batteries. Revenue related to both devices and supplies is reported net, after adjustments for estimated third-party payer reimbursement deductions and estimated allowance for uncollectible accounts. The deductions are known throughout the healthcare industry as billing adjustments whereby the healthcare insurers unilaterally reduce the amount they reimburse for our products as compared to the sales prices charged by us. The deductions from gross revenue also take into account the estimated denials, net of resubmitted billings of claims for products placed with patients which may affect collectability. See our Significant Accounting Policies in Note 2 to the condensed consolidated financial statements for a more complete explanation of our revenue recognition policies.

We occasionally receive, and expect to continue to receive, refund requests from insurance providers relating to specific patients and dates of service. Billing and reimbursement disputes are very common in our industry. These requests are sometimes related to a few patients and other times include a significant number of refund claims in a single request. We review and evaluate these requests and determine if any refund is appropriate. We also review claims that have been resubmitted or where we are 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.

Net revenue increased $11.1 million or 36% to $42.2 million for the three months ended March 31, 2023, from $31.1 million for the same period in 2022. The growth in net revenue is primarily related to the continued growth in device orders. In 2022, we saw annual order growth of 23% and additional order growth for the three months ended March 31, 2023 of 61%. Increased order growth has led to an increased customer base and drove higher sales of consumable supplies.

Device Revenue

Device revenue is related to the sale or lease of our electrotherapy and complimentary products. Device revenue increased $5.2 million or 78% to $11.9 million for the three months ended March 31, 2023, from $6.7 million for the same period in 2022. The growth in device revenue is primarily related to an increase in orders of 61%.

Supplies Revenue

Supplies revenue is related to the sale of supplies, primarily electrodes and batteries, for our electrotherapy products. Supplies revenue increased $5.8 million or 24% to $30.2 million for the three months ended March 31, 2023, from $24.4 million for the same period in 2022. The increase in supplies revenue is primarily related to an increased customer base from increased device sales in 2023 and 2022.

Operating Expenses

Cost of Revenue – Device and Supply

Cost of Revenue – device and supply consist primarily of device and supply costs, operations labor and overhead, shipping and depreciation. Cost of revenue for the three months ended March 31, 2023 increased 34% to $9.3 million from $6.9 million for the three months ended March 31, 2022. The increase in cost of revenue is primarily due to increased revenue. As a percentage of revenue, cost of revenue – device and supply remained flat at 22% for the three months ended March 31, 2023 and 2022.

Sales and Marketing Expense

Sales and marketing expenses primarily consist of employee related costs, including commissions and other direct costs associated with these personnel including travel expenses and marketing campaign and related expenses. Sales and marketing expense for the three months ended March 31, 2023 increased 47% to $21.2 million from $14.4 million for the three months ended March 31, 2022. The increase in sales and marketing expense is primarily due to increased headcount and related salary and incentive compensation expenses. As a percentage of revenue, sales and marketing expense increased to 50% for the three months ended March 31, 2023 from 46% for the same period in 2022. The increase as a percentage of revenue is primarily due to the increased headcount and related salary and incentive compensation expenses, offset by an increase in revenue.

General and Administrative Expense

General and administrative expenses primarily consist of employee related costs, and other direct costs associated with these personnel including facilities and travel expenses and professional fees, depreciation and amortization. General and administrative expense for

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the three months ended March 31, 2023 increased 45% to $11.4 million from $7.8 million for the three months ended March 31, 2022. The increase in general and administrative expense is primarily due to increased head count within our billing department, increased professional and legal service expenses, a recorded allowance for uncollectible accounts, and increased headcount and research & development costs at ZMS. As a percentage of revenue, general and administrative expense increased to 27% for the three months ended March 31, 2023 from 25% for the same period in 2022. The increase as a percentage of revenue is primarily due to the aforementioned expenses, partially offset by increased revenue.

Income Taxes

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s effective income tax rate was 2.5% and 30% for the three months ended March 31, 2023 and 2022, respectively. Discrete items, primarily related to tax benefits on change in fair value of contingent consideration and stock option exercises, of $0.4 million were recognized as a benefit against income tax expense for the three months ended March 31, 2023. Discrete items, primarily related to tax expense on stock option exercises of $0.1 million were recognized as a benefit against income tax expense for the three months ended March 31, 2022. For the three months ended March 31, 2023 and 2022 the Company has an income tax expense of approximately $33,000 and $605,000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed operations through cash flows from operations, debt and equity transactions. At March 31, 2023, our principal source of liquidity was $16.8 million in cash and $32.1 million in accounts receivable. Net cash provided by operating activities for the three months ended March 31, 2023 was $1.9 million compared with net cash provided by operating activities of $1.8 million for the three months ended March 31, 2022. The increase in cash used in operating activities for the three months ended March 31, 2023 was primarily due to an increase in net income.

Net cash used in investing activities for each of the three months ended March 31, 2023 and 2022 was $0.2 and $0.1 million, respectively. Cash used in investing activities for the three months ended March 31, 2023 was primarily related to the purchase of property and equipment. Cash used in investing activities for the three months ended March 31, 2022 was primarily related to the purchase office furniture and equipment and leasehold improvements at our corporate headquarters.

Net cash used in financing activities for the three months ended March 31, 2023 was $5.1 million compared with net cash used in financing activities of $5.0 million for the same period in 2022. Cash used in financing activities for the three months ended March 31, 2023 was primarily due to the repurchase of our common stock of $3.4 million and principal payments on notes payable of $1.3 million. Cash used in financing activities for the three months ended March 31, 2022 was primarily due to the payment of a $0.10 dividend to common shareholders totaling $3.6 million, and principal payments on notes payable of $1.3 million.

We believe our cash and cash equivalents, together with anticipated cash flow from operations will be sufficient to meet our working capital, and capital expenditure requirements for at least the next twelve months. In making this assessment, we considered the following:

●

Our cash balance at March 31, 2023 of $16.8 million;

●

Our working capital balance of $44.1 million; and

●

Our projected income and cash flows for the next 12 months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

Please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and Note 2 to the consolidated financial statements located within our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 14, 2023.

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RISKS AND UNCERTAINTIES

In December 2019, a novel Coronavirus disease (“COVID-19”) was reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. While the Company did not incur significant disruptions to its operations during the three months ended March 31, 2023 from COVID-19, it is unable at this time to predict the impact that COVID-19 will have on its business, financial position and operating results in future periods due to numerous uncertainties. The Company has been and continues to closely monitor the impact of the pandemic on all aspects of its business.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

N/A

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Evaluation of disclosure controls and procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as amended, or the Exchange Act, as of March 31, 2023. Based on management’s review, with participation of our Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended March 31, 2023, our disclosure controls and procedures were not effective due to the material weakness in internal control over financial reporting as described below.

Material Weakness in Internal Control

We identified a material weakness related to Information Technology General Controls (ITGCs) that were not designed and operating effectively to ensure (i) appropriate segregation of duties was in place to perform program changes and (ii) the activities of individuals with access to modify data and make program changes were appropriately monitored. Business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.

The material weakness identified above did not result in any material misstatements in our financial statements or disclosures, and there were no changes to previously released financial results. Our management concluded that the consolidated financial statements included in the Annual Report on Form 10-K, present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP.

The effectiveness of our internal control over financial reporting as of December 31, 2022, has been audited by Marcum LLP as stated in their report, which is included in Item 8 of the Annual Report on Form 10-K.

Remediation Plan

Our management is committed to maintaining a strong internal control environment. In response to the identified material weakness above, management will take comprehensive actions to remediate the material weakness in internal control over financial reporting. We are in the process of developing and implementing remediation plans to address the material weakness described above.

Changes in Internal Control over Financial Reporting

Except for the items referred to above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Inherent Limitation on the Effectiveness of Internal Control

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met.

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Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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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

Other than the additional risk factor disclosed below, there are no other material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March 14, 2023.

Adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our business, financial condition or results of operations.

Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. Most recently, on March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. Although we assess our banking and customer relationships as we believe necessary or appropriate, our access to funding sources and other credit arrangements in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impacted.

In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Any decline in available funding or access to our cash and liquidity resources could, among other risks, adversely impact our ability to meet our operating expenses, financial obligations or fulfill our other obligations, result in breaches of our contractual obligations or result in violations of federal or state wage and hour laws. Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors not described above, could have material adverse impacts on our liquidity and our business, financial condition or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Items 2(a) and 2(b) are not applicable.

Issuer Purchases of Equity Securities

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				Total Number of	In Thousands
				Shares	Maximum Value
				Purchased as	of Shares That
	Total	Average		Part of a	May Yet Be
	Number of	Price		Publicly	Purchased
	Shares	Paid Per		Announced	Under the
Period	Purchased	Share		Plan	Plan
January 1 - January 31, 2023
Share repurchase program (1)	116,000	$	15.66	611,138	1,536

February 1 - February 28, 2023
Share repurchase program (1)	116,698	$	13.16	727,836	—

March 1 - March 31, 2023
Share repurchase program (1)	—	$	—	727,836	—
Quarter Total

Share repurchase program (1)	232,698	$	14.41	727,836	—

(1)	Shares were purchased through the Company’s publicly announced share repurchase program approved by the Company’s Board of Directors on October 31, 2022. The program was fully utilized during the Company’s first quarter.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

N/A

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS

Exhibit Number		Description

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*		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**		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.

32.2**		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.

101.INS*		XBRL Instance Document.

101.SCH*		XBRL Taxonomy Extension Schema Document.

101.CAL*		XBRL Taxonomy Calculation Linkbase Document.

101.LAB *		XBRL Taxonomy Label Linkbase Document.

101.PRE *		XBRL Presentation Linkbase Document.

101.DEF *		XBRL Taxonomy Extension Definition Linkbase Document.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Filed herewith

**Furnished 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.

		/s/ Daniel J. Moorhead
Dated: April 27, 2023		Daniel J. Moorhead
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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Zynex (ZYXI) 10-Q2023 Q1 Quarterly report

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