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ZYXI Zynex

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

   

FORM 10-Q

  

(Mark One)

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

 

For the quarterly period ended: March 31, 2020

 

OR

 

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

 

For the transition period from                      to                     

 

Commission file number001-38804

  

Zynex, Inc.

(Exact name of registrant as specified in its charter)

 

 

NEVADA 90-0275169

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

   

9555 Maroon Cir.

Englewood, CO

 80112
(Address of principal executive offices) (Zip Code)

 

(303) 703-4906

(Registrant’s telephone number, including area code)

 

 

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

 

 

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

 

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

 

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

 

Large accelerated filer ¨ Accelerated filer x
    
Non-accelerated filer ¨  Smaller reporting company x

        

 Emerging growth company ¨

 

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

 

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

 

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

 

Class Shares Outstanding as of April28, 2020
Common Stock, par value $0.001 33,192,517

 

 

 

 

 

   

ZYNEX, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

   Page
PART I—FINANCIAL INFORMATION3
    
Item 1. Financial Statements3
    
  Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 20193
   
  Unaudited Consolidated Statements of Income for the three months ended March 31, 2020 and 20194
    
  Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 20195
    
  Unaudited Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 20196
    
  Unaudited Notes to Consolidated Financial Statements7
    
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations17
    
Item 3. Quantitative and Qualitative Disclosures About Market Risk19
    
Item 4. Controls and Procedures20
    
PART II—OTHER INFORMATION20
    
Item 1. Legal Proceedings20
    
Item 1A. Risk Factors20
    
Item 2. Unregistered Sales of Equity Securities And Use of Proceeds20
    
Item 3. Defaults Upon Senior Securities20
    
Item 4. Mine Safety Disclosures20
    
Item 5. Other Information20
    
Item 6. Exhibits21
    
SIGNATURES21

 

 2 

 

  

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ZYNEX, INC.

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)

(unaudited)

          

  March 31,  December 31, 
  2020  2019 
       
ASSETS        
Current assets:        
Cash $14,585  $14,040 
Accounts receivable  6,549   5,833 
Inventory, net  3,429   2,378 
Prepaid expenses and other  1,135   315 
                                               Total current assets  25,698   22,566 
         
Property and equipment, net  1,116   858 
Operating lease asset  4,980   3,831 
Finance lease asset  168   180 
Deposits  275   329 
Long term deferred income taxes  985   513 
                                               Total assets $33,222  $28,277 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Accounts payable and accrued expenses $2,292  $2,141 
Lease liability - operating leases  1,678   1,211 
Lease liability - finance leases  53   45 
Income taxes payable  39   52 
Accrued payroll and related taxes  1,772   1,748 
                                              Total current liabilities  5,834   5,197 
Long-term liabilities:        
Lease liability - operating leases  3,954   3,282 
Lease liability - finance leases  126   145 
                                              Total liabilities  9,914   8,624 
         
Commitments and contingencies        
Stockholders' equity:        
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares  issued and outstanding as of March 31, 2020 and December 31, 2019  -   - 
Common stock, $0.001 par value; 100,000,000 shares authorized;  34,348,802 issued and 33,177,582 outstanding as of March 31, 2020 and  33,862,885 issued and 32,791,665 outstanding as of December 31, 2019  34   34 
Additional paid-in capital  9,916   9,198 
Treasury stock 1,071,220 shares, at March 31, 2020  and December 31, 2019, respectively, at cost  (3,846)  (3,846)
Retained earnings  17,293   14,356 
                                              Total Zynex, Inc. stockholders' equity  23,397   19,742 
                                              Non-controlling interest  (89)  (89)
                                              Total stockholders' equity  23,308   19,653 
                                              Total liabilities and stockholders' equity $33,222  $28,277 

 

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

 

 3 

 

   

ZYNEX, INC.

CONSOLIDATED STATEMENTS OF INCOME

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

(unaudited)

 

  For the Three Months Ended March 31, 
  2020  2019 
NET REVENUE        
Devices $3,444  $1,975 
Supplies  11,784   7,221 
Total net revenue  15,228   9,196 
         
COSTS OF REVENUE AND OPERATING EXPENSES        
Costs of revenue - devices and supplies  3,401   1,784 
Sales and marketing  5,209   2,473 
General and administrative  4,160   2,683 
Total costs of revenue and operating expenses  12,770   6,940 
         
Income from operations  2,458   2,256 
         
Other income/(expense)        
Deferred insurance reimbursement  -   880 
Interest income/(expense)  (4)  - 
Other income/(expense), net  (4)  880 
         
Income from operations before income taxes  2,454   3,136 
Income tax (benefit)/expense  (483)  786 
Net Income $2,937  $2,350 
         
Net income per share:        
Basic $0.09  $0.07 
         
Diluted $0.09  $0.07 
         
         
Weighted average basic shares outstanding  32,913   32,233 
Weighted average diluted shares outstanding  34,204   33,721 

  

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

 

 4 

 

  

ZYNEX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

(unaudited)

 

  For the Three Months ended March 31, 
  2020  2019 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income $2,937  $2,350 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation  252   160 
Inventory reserves  249   150 
Stock-based compensation  497   140 
Non-cash lease expense  (10)  153 
Provision for deferred income taxes  (473)  786 
Change in operating assets and liabilities:        
Accounts receivable  (716)  (355)
Prepaid and other assets  (819)  (170)
Accounts payable and other accrued expenses  162   (204)
Inventory  (1,501)  (366)
Deposits  54   - 
Other long-term obligations  -   (880)
Net cash provided by operating activities  632   1,764 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of property and equipment  (297)  (46)
Net cash used in investing activities  (297)  (46)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Payments on finance lease obligations  (11)  (4)
Common stock cash dividends  -   (2,259)
Purchase of treasury stock  -   (171)
Proceeds from the issuance of common stock  221   7 
Net cash used in financing activities  210   (2,427)
         
Net increase in cash and cash equivalents  545   (709)
Cash and cash equivalents at beginning of period  14,040   10,128 
Cash and cash equivalents at end of period $14,585  $9,419 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $(4) $- 
Cash paid for rent $(328) $(206)
Supplemental disclosure of non-cash investing and financing activities:        
Right-of-use assets obtained in exchange for new operating lease liabilities $1,433  $- 
Inventory transferred to property and equipment under lease $187  $112 
Common stock dividend declared and unpaid $-  $2,259 

  

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

 

 5 

 

  

ZYNEX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

(unaudited)

 

        Additional           Total 
  Common Stock  Paid-in  Treasury  Retained  Non-Controlling  Stockholders' 
  Shares  Amount  Capital  Stock  Earnings  Interest  Equity 
Balance, December 31, 2018  32,271,367  $34  $8,157  $(3,675) $4,864  $(89) $9,291 
Exercised and vested stock-based awards  21,832   -   8   -   -   -   8 
Stock-based compensation expense  -   -   140   -   -   -   140 
Treasury stock  (52,000)  -   -   (171)  -   -   (171)
Other  (8)  -   -   -   -   -   - 
Net income  -   -   -   -   2,350   -   2,350 
Balance at March 31, 2019  32,241,191  $34  $8,305  $(3,846) $7,214  $(89) $11,618 
                             

 

        Additional           Total 
  Common Stock  Paid-in  Treasury  Retained  Non-Controlling  Stockholders' 
  Shares  Amount  Capital  Stock  Earnings  Interest  Equity 
Balance, December 31, 2019  32,791,665  $34  $9,198  $(3,846) $14,356  $(89) $19,653 
Exercised and vested stock-based awards  385,917   -   221   -   -   -   221 
Stock-based compensation expense  -   -   497   -   -   -   497 
Net income  -   -   -   -   2,937   -   2,937 
Balance at March 31, 2020  33,177,582  $34  $9,916  $(3,846) $17,293  $(89) $23,308 

  

 6 

 

 

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(1) BASIS OF PRESENTATION

 

Organization

  

Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado.  We operate in one primary business segment, medical devices which include electrotherapy and pain management products. As of March 31, 2020, the Company’s only active subsidiary is Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) through which the Company conducts most of its operations. One other subsidiary, Zynex Europe, ApS (“ZEU,” a wholly-owned Denmark corporation), did not generate material revenues during the three months ended March 31, 2020 and 2019 from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume monitoring device which was approved by the U.S. Food and Drug Administration (“FDA”) in February 2020 and is awaiting approval by the CE Marking in Europe; therefore, ZMS has achieved no revenues to date. Its inactive subsidiaries include Zynex NeuroDiagnostics, Inc. (“ZND,” a wholly-owned Colorado corporation), Zynex Billing and Consulting, LLC (“ZBC,” an 80% owned Colorado limited liability company) and Pharmazy, Inc. (“Pharmazy”), which was incorporated in June 2015 as a wholly-owned Colorado corporation. The Company’s compound pharmacy operated as a division of ZMI doing business as Pharmazy through January 2016.

  

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

 

Nature of Business

 

The Company designs, manufactures and markets medical devices that treat chronic and acute pain, as well as activate and exercise muscles for rehabilitative purposes with electrical stimulation. The Company’s devices are intended for pain management to reduce reliance on drugs and provide rehabilitation and increased mobility through the utilization of non-invasive muscle stimulation, electromyography technology, interferential current (“IFC”), neuromuscular electrical stimulation (“NMES”) and transcutaneous electrical nerve stimulation (“TENS”). All our medical devices are designed to be patient friendly and designed for home use. Our devices are small, portable, battery operated and include an electrical pulse generator which is connected to the body via electrodes. All of our medical devices are marketed in the U.S. and are subject to FDA regulation and approval.  Our products require a physician’s prescription before they can be dispensed in the U.S. Our primary product is the NexWave device, which is marketed to physicians and therapists by our field sales representatives.   The NexWave requires consumable supplies, such as electrodes and batteries, which are shipped to patients on a recurring monthly basis, as needed.  

 

During the three months ended March 31, 2020 and 2019, the Company generated substantially all of its revenue in North America from sales of its devices and 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, 2019. Amounts as of December 31, 2019, are derived from those audited consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the annual audited financial statements, accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which has previously been filed with the SEC.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31, 2020 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, 2020 are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.

 

Principles of Consolidation

 

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

 

 7 

 

 

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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.

 

Leases

 

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 lease payments over the lease term. For our finance leases, the Company uses the implicit rate to determine the present value of future lease payments. For our operating leases that do not provide an implicit rate, the Company uses incremental borrowing rates to determine the present value of future lease payments. The Company includes options to extend or terminate a lease in the lease term when it 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 our Consolidated Balance Sheets. For additional information on our leases where the Company is the lessee, see Note 8- Leases.

 

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

 

·The lease does not transfer ownership of the underlying asset to the lessee by the end of the lease term.
·The lease does not grant the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
·The lease term is month to month, which does not meet the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease.
·There is no residual value guaranteed and the present value of the sum of the lease payments does not equal or exceed substantially all of the fair value of the underlying 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 our 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.

 

Revenue Recognition and Accounts Receivable

 

Revenue is derived from sales and leases of our electrotherapy devices and sales of related supplies and complimentary products. The Company recognizes revenue when control of the product has been transferred to the patient, in the amount that reflects the consideration to which the Company expects to receive. In general, revenue from sales of our devices and supplies is recognized once the product is delivered to the patient, which is when control is deemed to have transferred to our patient.

 

Sales of our devices and supplies are primarily made with, and shipped directly to the patient with a small amount of revenue generated from sales to distributors. In the healthcare industry there is often a third party involved that will pay on the 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.

 

 8 

 

 

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following table provides a breakdown of net revenue related to devices accounted for as purchases subject to ASC 606 and leases subject to ASC 842 (in thousands):

 

  For the Three Months Ended March 31, 
  2020  2019 
       
Purchased $1,280  $590 
Leased  2,164   1,385 
   3,444   1,975 

 

Primarily all of the Company’s receivables are due from patients with commercial or government health plans and workers compensation claims with a small portion related to private pay individuals, attorney and auto claims. 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. 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. Due to continuing changes in the health care industry and third-party payer reimbursement, it is possible our forecasting model to estimate collections could change, which could have an impact on our results of operations and cash flows. Any differences between estimated and actual collectability are reflected in the period in which received. Historically these differences have been immaterial and the Company has not had to go back and reassess the adjustments of future periods for past billing adjustments.

 

A change in the way estimates are determined can result from a number of factors, including changes in the reimbursement policies or practices of third-party payers, or changes in industry rates of reimbursement. The Company monitors the variability and uncertain timing over third-party payer types in our portfolios. If there is a change in our third-party payer mix over time, it could affect our net revenue and related receivables. We believe we have a sufficient history of collection experience to estimate the net collectible amounts by third-party payer type. However, changes to constraints for billing adjustments have historically fluctuated and may continue to fluctuate significantly from quarter to quarter and year to year.

 

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 included our operating and finance lease obligations, the carrying value of which approximates fair value because the interest rates on the outstanding borrowings are at rates that approximate market rates for borrowings with similar terms and average maturities.

 

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Inventory

 

Inventories are stated at the lower of cost and net realizable value. Cost is computed using standard costs, which approximates actual costs on an average cost basis. Following are the components of inventory (in thousands):

 

  March 31, 2020  December 31, 2019 
       
Raw Materials $1,381  $953 
Work-in-process  256   200 
Finished Goods  1,944   1,640 
  $3,581   2,793 
Less: reserve  (152)  (415)
  $3,429  $2,378 

 

The Company monitors inventory for turnover and obsolescence and records losses for excess and obsolete inventory, as appropriate. The Company provides reserves for estimated excess and obsolete inventories based upon assumptions about future demand. If future demand is less favorable than currently projected by management, additional inventory write-downs may be required.

 

Segment Information 

 

We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We have identified our Chief Executive Officer, Chief Financial Officer, and Chief Operating 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.

 

The Company is subject to the provisions of the Financial Accounting Standards Board (“FASB”) ASC 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted.

 

Recent Accounting Pronouncements 

 

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, 2022, and interim periods therein for smaller reporting companies. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the impact that the adoption of ASU 2016-13 will have on our financial condition, results of operations and cash flows.

 

In December 2019, FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments simplify the accounting for income taxes by removing certain exceptions to the general principals of Topic 740, “Income Taxes” and also improve consistent application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company is currently evaluating the impact of adopting this guidance.

 

 10 

 

 

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a material impact on the Company’s consolidated financial statements.

 

(2) PROPERTY AND EQUIPMENT

 

The components of property and equipment are as follows (in thousands):

 

  March 31, 2020  December 31, 2019 
Property and equipment        
Office furniture and equipment $1,431  $1,178 
Assembly equipment  128   128 
Vehicles  181   181 
Leasehold improvements  544   500 
Leased devices  1,077   934 
  $3,361   2,921 
Less accumulated depreciation  (2,245)  (2,063)
  $1,116  $858 

  

The Company monitors devices out on lease for potential loss and places an estimated reserve on the net book value based on historical loss rates.

 

Total depreciation expense related to our property and equipment was $0.1 million for each of the three months ended March 31, 2020 and 2019.

 

Total depreciation expense related to devices out on lease was $0.2 million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively. Depreciation on leased units is reflected on the income statement as cost of revenue.

 

(3)EARNINGS PER SHARE

 

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding and the number of dilutive potential common share equivalents during the period, calculated using the treasury-stock method for outstanding stock options.

 

The calculation of basic and diluted earnings per share for the three months ended March 31, 2020 and 2019 are as follows (in thousands, except per share data):

 

  For the Three Months Ended March 31, 
  2020  2019 
Basic earnings per share        
Net income available to common stockholders $2,937  $2,350 
Basic weighted-average shares outstanding  32,913   32,233 
         
Basic earnings per share $0.09  $0.07 
         
Diluted earnings per share        
Net income available to common stockholders $2,937  $2,350 
Weighted-average shares outstanding  32,913   32,233 
Effect of dilutive securities - options and restricted stock  1,291   1,488 
Diluted weighted-average shares outstanding  34,204   33,721 
         
Diluted earnings per share $0.09  $0.07 

 

 11 

 

 

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

For the three months ended March 31, 2020 and 2019, 0.3 million and 0.4 million shares of common stock were excluded from the dilutive stock calculation because their effect would have been anti-dilutive.

 

(4) STOCK-BASED COMPENSATION PLANS

 

In June 2017, our stockholders approved the 2017 Stock Incentive Plan (the “2017 Stock Plan”) with a maximum of 5,000,000 shares reserved for issuance. Awards permitted under the 2017 Stock Plan include: Stock Options and Restricted Stock. Awards issued under the 2017 Stock Plan are at the discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to the closing price of our common stock on the date of grant and generally vest over four years. Restricted Stock Awards are issued to the recipient upon vesting and are not included in outstanding shares until such vesting and issuance occurs.  

 

During the three months ended March 31, 2020, 14,000 stock option awards were granted under the 2017 Stock Plan. During the three months ended March 31, 2019, 0.3 million stock option awards were granted under the 2017 Stock Plan. At March 31, 2020, the company had 1.3 million stock options outstanding and 0.7 million exercisable under the following plans:

 

  

Outstanding Number of Options

(in thousands)

  

Exercisable Number of Options

(in thousands)

 
Plan Category        
2005 Stock Option Plan  388   388 
Equity Compensation Plans not approved by  Shareholders  59   30 
2017 Stock Option Plan  869   238 
Total  1,316  $656 

 

 

During the three months ended March 31, 2020, 165,000 shares of restricted stock were granted to the Board of Directors and management under the 2017 Stock Plan. During the three months ended March 31, 2019, 5,000 shares of restricted stock were granted. The fair market value of restricted shares for share-based compensation expensing is equal to the closing price of our common stock on the date of grant. The vesting on the Restricted Stock is typically released quarterly over three years for the Board of Directors and annually or quarterly over four years for management.

 

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

 

  For the Three Months Ended March 31, 
  2020  2019 
Cost of Revenue $6  $6 
Sales and marketing expense  29   41 
General, and administrative  462   93 
Total stock based compensation expense $497  $140 

  

During the three months ended March 31, 2020, there were 14,000 options granted at a weighted average exercise price of $10.15 per share. The weighted-average grant date fair value of options granted during the three months ended March 31, 2020 was $8.88. The Company issued 165,000 shares of restricted stock to management during the three months ended March 31, 2020.

 

During the three months ended March 31, 2019, there were 0.3 million options granted at a weighted average exercise price of $4.37 per share. The weighted-average grant date fair value of options granted during the three months ended March 31, 2019 was $3.86. The Company issued 5,000 shares of restricted stock to management during the three months ended March 31, 2019.

 

The Company received proceeds of $0.2 million and $8,000 related to option exercises during the three months ended March 31, 2020 and 2019, respectively.

 

The Company used the Black-Scholes option pricing model to determine the fair value of stock option grants, using the following assumptions for the three months ended March 31, 2020 and March 31, 2019.

 

 12 

 

 

 For the Three Months Ended March 31, 
  2020  2019 
Expected term (years)  6.79   6.25 
Risk-free interest rate  1.59%  2.62%
Expected volatility  116.76%  121.98%
Expected dividend yield  -%  -%

  

A summary of stock option activity under all equity compensation plans for the three months ended March 31, 2020, is presented below:

 

        Weighted-    
        Average    
     Weighted-  Remaining  Aggregate 
  Number of  Average  Contractual  Intrinsic 
  Shares  Exercise  Term  Value 
  (in thousands)  Price  (Years)  (in thousands) 
Outstanding at December 31, 2019  1,855  $2.48   6.42  $10,032 
Granted  14  $10.15         
Forfeited  (175) $5.40         
Exercised  (378) $0.58         
Outstanding at March 31, 2020  1,316  $2.72   7.18  $10,991 
                 
Exercisable at March 31, 2020  656  $1.00   5.81  $6,604 

  

A summary of restricted stock award activity under all equity compensation plans for the three months ended March 31, 2019, is presented below:

 

  Number of 
  Shares 
  (in thousands) 
Granted but not vested at December 31, 2019  102 
Granted  165 
Vested  (7)
Granted but not vested at March 31, 2020  260 

  

As of March 31, 2020, the Company had approximately $3.8 million of unrecognized compensation expense related to stock options and restricted stock awards that will be recognized over a weighted average period of approximately 2.5 years.

 

(5)STOCKHOLDERS’ EQUITY

 

Treasury Stock

 

On May 14, 2018, our Board of Directors approved a new program to buy back an additional $2.0 million of our common stock at prevailing market prices either in the open market or through privately negotiated transactions through May 13, 2019. For the three months ending March 31, 2019, the Company purchased 52,000 shares of our common stock for $0.2 million for an average price of $3.29 per share, related to the new program. From May 14, 2018 through March 31, 2019, the Company purchased 576,129 shares of our common stock for $1.8 million or an average price $3.20 per share.

 

 13 

 

 

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Warrants

 

In October 2017, 150,000 common stock warrants were issued in exchange for professional services.

 

In connection with the agreement entered into on March 28, 2016, with Triumph Bank, we issued a common stock warrant to purchase 50,000 shares of the Company’s common stock.

 

A summary of stock warrant activity for the three months ended March 31, 2020 is presented below:

 

  Number of Warrants
(in thousands)
  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Life (Years)
  Aggregate
Intrinsic
Value
(in thousands)
 
Outstanding at December 31, 2019  100  $2.63   4.77  $525 
Granted  -  $-         
Exercised  -  $-         
Forfeited  -  $-         
Outstanding and Exercisable at March 31, 2020  100  $2.63   4.52  $845 

 

(6) INCOME TAXES

 

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, primarily related to excess tax benefits on stock option exercises. For the three months ended March 31, 2020 discrete items adjusted were $1.1 million. At March 31, 2020 the Company is currently estimating an annual effective tax rate of approximately 26%. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to various factors.

 

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s effective income tax rate was (19)% for the three months ended March 31, 2020. Discrete items recognized during the three months ended March 31, 2020 and 2019, resulted in a tax benefit of approximately $1.1 million and $18,000, respectively. The Company recorded an income tax benefit of $483,000 and income tax expense of $786,000 for the three months ended March 31, 2020 and 2019, respectively.

 

On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, net operating loss carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from 30% to 50% of EBITDA. We are analyzing the different aspects of the CARES Act to determine whether any specific provisions may impact us.

 

No taxes were paid during the three months ended March 31, 2020 and 2019.  

 

(7)DEFERRED INSURANCE REIMBURSEMENT

 

During the first quarter of 2016, the Company collected $880,000 from a single insurance company for accounts receivable. The accounts receivable had been previously reduced to zero by the allowance for billing adjustments. Subsequent to March 31, 2016, the insurance company verbally communicated to the Company that this payment was made in error and requested it be refunded to the insurance company. The Company recorded this $880,000 insurance reimbursement as a deferred insurance liability.

 

 14 

 

 

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

During the first quarter of 2019, the Company recognized $880,000 as other income and reversed the liability. The Company has included this amount in other income in order to ensure comparability of the Company’s operating income results for the three months ended March 31, 2019 and 2018. Management’s legal determination that any refund obligation is remote was based on the facts and circumstances related to the dispute, which included reviewing the legal statutes within the jurisdictions the Company operates.

 

(8)LEASES

 

The Company has three operating leases pertaining to its corporate headquarters located in Englewood, CO. Details of each lease are as follows:

 

·The Company entered into a sublease agreement on October 20, 2017 with CSG Systems Inc. for approximately 41,715 square feet. The term of the sublease runs through June 30, 2023, with an option to extend for an additional two years through June 30, 2025. During the first year of the sublease, the rent per square foot is $7.50, increasing to $19.75 during the second year of the sublease and each year thereafter for the initial term increasing by an additional $1 per square foot. The Company has not yet determined whether it is reasonably certain to exercise its renewal option and has therefore only considered the initial term when determining the lease liability and lease asset. The Company is also obligated to pay its proportionate share of building operating expenses. The sub-landlord agreed to contribute approximately $0.2 million toward tenant improvements which is accounted for as a reduction of the operating lease asset and subsequently treated as a reduction of rent expense over the term of the lease. Upon lease commencement, the Company recorded an operating lease liability of $3.9 million and a corresponding right-of-use asset for $3.6 million.

 

·The Company entered into an amendment to its sublease agreement, above, on March 11, 2019 for an additional 21,420 square feet of office space. The term of the sublease for the additional space began on June 1, 2019 and runs through June 30, 2023, with an option to extend the term for an additional two years through June 30, 2025. During the first seven months of the Amendment to the Sublease, the rent per square foot is $10.00, increasing to $20.75 from January 1, 2020 through October 31, 2020. For annual periods beginning November 1, 2020, the price per square foot increases by an additional $1 per square foot. The expansion work was completed, and the lease commenced, on June 1, 2019. Upon lease commencement, the Company recorded an operating lease liability and a corresponding right-of-use asset for $1.6 million each.

 

·The Company entered into an amendment to its sublease agreement, above, on January 3, 2020 for an additional 22,546 square feet of office space. The term of the sublease began on March 9, 2020 and will run through June 30, 2025. From the commencement date through October 31, 2020, the rent per square foot is $13.00, increasing to $21.75 per square foot from November 1, 2020 through October 31, 2021. The price per square foot increases by an additional $1 annually beginning November 1, 2021. Upon lease commencement, the Company recorded an operating lease liability and a corresponding right-of-use asset for $1.4 million each.

 

The Company has one finance lease for office equipment as follows:

 

·The Company entered into an equipment lease on September 20, 2019 with Konica Minolta Premier Finance for a copier/printer and related software located at its corporate offices. The term of the equipment lease agreement is 5 years with the option to purchase the equipment at the end of the lease. The Company does not expect to exercise the option to purchase the equipment and, accordingly, has not considered the effect of the purchase in the evaluation of the lease asset and liability. Rent is to be paid monthly at a fixed rate for the term of the equipment lease agreement. Upon lease commencement, the Company recorded a finance lease liability and a corresponding right-of-use asset for $0.2 million each.

 

The Company’s operating leases 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 incremental borrowing rate was determined to be 4.5% for its operating lease liabilities. The Company’s equipment lease agreement has an implicit rate of 8.3%, which was used to measure its finance lease liability. The remaining lease term was 3.3 years for the Company’s operating leases and 4.6 years for its finance leases.

 

 15 

 

 

  Operating lease liability  Financing lease liability 
April 1, 2020 through December 31, 2020  1,246   42 
2021  1,878   45 
2022  1,964   45 
2023  1,017   45 
2024  -   34 
 Total undiscounted future minimum lease payments  6,105   211 
Less:  Difference between undiscounted lease payments and discounted  lease liabilities:  (473)  (32)
Total  lease liabilities $5,632  $179 

  

Operating lease costs were $0.4 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively, which were included in general and administrative expenses on the consolidated statement of operations.

 

(9) CONCENTRATIONS

 

For the three months ended March 31, 2020, the Company sourced approximately 40% of the components for its electrotherapy products from two significant vendors (defined as supplying at least 10%). For the three months ended March 31, 2019 the company sourced approximately 57% of components from two significant vendors.

 

Management believes that its relationships with suppliers are good; however, if the relationships were to be replaced, there may be a short-term disruption to operations, a period of time in which products may not be available and additional expenses may be incurred.

 

The Company had receivables from two third-party payers at March 31, 2020 and December 31, 2019, that made up approximately 39% of the net accounts receivable balance.

 

(10) LITIGATION

 

From time to time, the Company may become party to litigation and other claims in the ordinary course of business. To the extent that such claims and litigation arise, management would accrue the estimated exposure for such events when losses are determined to be both probable and estimable.

 

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

 

(11) SUBSEQUENT EVENT

 

In December 2019, a novel Coronavirus disease (“COVID-19”) was reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. While the Company did not incur significant disruptions to its operations during the first quarter of 2020 from COVID-19, it is unable at this time to predict the impact that COVID-19 will have on its business, financial position and operating results in future periods due to numerous uncertainties. The Company has been and continues to closely monitor the impact of the pandemic on all aspects of its business. See also the risk factor relating to COVID-19 disclosed in Item 1A of Part II, below.

 

The Company evaluated subsequent events up to April 28, 2020 and concluded that there were no additional subsequent events.

  

 16 

 

 

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

 

Cautionary Notice Regarding Forward-Looking Statements

 

This quarterly report contains statements that are forward-looking, such as statements relating to plans for future organic growth and other business development activities, as well as the impact of reimbursement trends, other capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks include the ability to engage effective sales representatives, the need to obtain 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, 2019.

 

These interim financial statements and the information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the annual audited consolidated financial statements, and notes to consolidated financial statements, included in the Company’s 2019 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 one primary business segment, medical devices which include Electrotherapy and Pain Management Products. As of March 31, 2020, the Company’s only active subsidiary is Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) through which the Company conducts most of its operations. One other subsidiary, Zynex Europe, ApS (“ZEU,” a wholly-owned Denmark corporation), did not generate material revenues during the three months ended March 31, 2020 and 2019 from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume monitoring device which was approved by the U.S. Food and Drug Administration (“FDA”) in February 2020 and is awaiting approval by the CE Marking in Europe, therefore, ZMS has achieved no revenues to date.

 

RESULTS OF OPERATIONS

 

Summary

 

Net revenue was $15.2 million and $9.2 million for the three months ended March 31, 2020 and 2019, respectively. Net revenue increased 66% for the three-month period ended March 31, 2020. Net income increased 25% to $2.9 million during the three months ended March 31, 2020 from $2.4 million during the three months ended March 31, 2019. We generated cash flows from operating activities of $0.6 million during the three months ended March 31, 2020. Working capital at March 31, 2020 was $19.9 million, an increase of 14% from $17.4 million as of December 31, 2019.

 

Net Revenue

 

Net revenues are comprised of device and supply sales, constrained by estimated third-party payor reimbursement deductions and estimated uncollectible amounts. Product device revenue is primarily comprised of sales and rentals of our electrotherapy products and also includes our cervical traction, lumbar support and hot/cold therapy products.

 

Supplies revenue is primarily comprised of sales of our consumable supplies to patients using our electrotherapy products, consisting primarily of surface electrodes and batteries.

 

Revenue related to both devices and supplies is reported net, after adjustments for estimated third-party payor reimbursement deductions and estimated uncollectible amounts. Estimates for third-party payor reimbursement deductions and uncollectible accounts are adjusted on an ongoing basis in conjunction with the processing of third-party payor insurance claims and other customer collection history. Billing allowance adjustments are common in our industry whereby third-party payors unilaterally reduce the amount they reimburse for our products as compared to the sales price charged by us. These deductions from gross revenue 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 1 to the Consolidated Financial Statements for a more complete explanation of our revenue recognition policies.

 

 17 

 

 

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 $6.0 million or 66% to $15.2 million for the three months ended March 31, 2020, from $9.2 million for the same period in 2019. The growth in net revenue is primarily related to the 126% growth in device orders which 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 products. Device revenue increased $1.4 million or 74% to $3.4 million for the three months ended March 31, 2020, from $2.0 million for the same period in 2019. The increase in device revenue is primarily related to growth in orders which is attributable to our increased sales force.

 

Supplies Revenue

 

Supplies revenue is related to the sale of supplies, primarily electrodes and batteries, for our products. Supplies revenue increased $4.6 million or 63% to $11.8 million for the three months ended March 31, 2020, from $7.2 million for the same period in 2019. The increase in supplies revenue is primarily related to an increased customer base from increased device sales in 2019 and 2020, plus improvements in our billing and collection procedures.

 

Operating Expenses

 

Cost of Revenue – Device and Supply

 

Cost of Revenue – device and supply consist primarily of device and supply costs, operations labor and overhead, shipping and depreciation. Cost of revenue for the three months ended March 31, 2020 increased 91% to $3.4 million from $1.8 million for the three months ended March 31, 2019. The increase in cost of revenue is primarily due to an increase of 126% in device orders. As a percentage of revenue, cost of revenue –device and supply increased to 22% for the three months ended March 31, 2020 from 19% for the same period in 2019. The increase as a percentage of revenue is due to lower collections from certain commercial insurance payors.

 

Sales and Marketing Expense

 

Sales and marketing expenses primarily consist of employee related costs, including commissions and other direct costs associated with these personnel including travel expenses and marketing campaign and related expenses. Sales and marketing expense for the three months ended March 31, 2020 increased 111% to $5.2 million from $2.5 million for the three months ended March 31, 2019. The increase in sales and marketing expense is primarily due to the expansion of our sales force including adding 117 new sales representatives and the related costs associated with increased headcount. As a percentage of revenue, sales and marketing expense increased to 34% for the three months ended March 31, 2020 from 27% for the same period in 2019. The increase as a percentage of revenue is primarily due to the increase aforementioned expenses, partially offset by the increase in revenue during the period. 

 

General and Administrative Expense

 

General and administrative expenses primarily consist of employee related costs, and other direct costs associated with these personnel including facilities and travel expenses and professional fees, depreciation and amortization. General and administrative expense for the three months ended March 31, 2020 increased 55% to $4.2 million from $2.7 million for the three months ended March 31, 2019. The increase in general and administrative expense is primarily due to increased compensation and benefit expense related to headcount growth, an increase in non-cash stock-based compensation expense as a result of several key hires during the second half of 2019 and increases in rent and facilities expense as we expanded our corporate headquarters during June 2019 and March 2020. As a percentage of revenue, general and administrative expense decreased to 27% for the three months ended March 31, 2020 from 29% for the same period in 2019. The decrease as a percentage of revenue is primarily due to the increase in revenue during the period, partially offset by the aforementioned expenses. 

 

 18 

 

 

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 (19)% for the three months ended March 31, 2020. Discrete items, primarily related to excess tax benefits on stock option exercises, of $1.1 million and $18,000 were recognized as a benefit against income tax expense for the three months ended March 31, 2020 and 2019, respectively. For the three months ended March 31, 2020 the company has an income tax benefit of approximately $0.5 million. For the three months ended March 31, 2019 the company had an income tax expense of approximately $0.8 million.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We have historically financed operations through cash flows from operations, debt and equity transactions. At March 31, 2020, our principal source of liquidity was $14.6 million in cash and $6.5 million in accounts receivable. 

 

Net cash provided by operating activities for the three months ended March 31, 2020 and 2019 was $0.6 million and $1.8 million, respectively.  The decrease in cash provided by operating activities for the three months ended March 31, 2020 was primarily due to the significant increase in inventory in 2020. The increase in inventory is related to our order growth plus excess stockpiles in anticipation of possible supply chain shortages related to the COVID-19 virus.

 

Net cash used in investing activities for the three months ended March 31, 2020 and 2019 was $0.3 million and $46,000, respectively.  Cash used in investing activities for both the three months ended March 31, 2020 and 2019 was primarily related to office furniture and equipment and leasehold improvements at our corporate headquarters.

 

Net cash provided by financing activities for the three months ended March 31, 2020 was $0.2 million compared with net cash used in financing activities of $2.4 million for the same period in 2019.  The cash provided by financing activities for the three months ended March 31, 2020 was primarily due to proceeds from the issuance of common stock upon exercises of stock options. Cash used in financing activities for the three months ended March 31, 2019 was primarily due to the payment of a dividend of $2.3 million to stockholders of record on January 2, 2019 and re-purchases of our common stock of $0.2 million.

 

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

 

·Our cash and cash equivalents balance at March 31, 2020 of $14.6 million;
·Our working capital balance of $19.9 million;
·Our profitability during the last 15 quarters; 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, 2019, filed with the Securities and Exchange Commission on February 27, 2020.

 

OFF BALANCE SHEET ARRANGEMENTS

 

The Company had no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

 

RISKS AND UNCERTAINTIES

 

In December 2019, a novel Coronavirus disease (“COVID-19”) was reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. While the Company did not incur significant disruptions to its operations during the first quarter of 2020 from COVID-19, it is unable at this time to predict the impact that COVID-19 will have on its business, financial position and operating results in future periods due to numerous uncertainties. The Company has been and continues to closely monitor the impact of the pandemic on all aspects of its business. See also the risk factor relating to COVID-19 disclosed in Item 1A of Part II, below.

  

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

In the ordinary course of business, we are exposed to certain market risks, including changes in interest rates. Uncertainties that are either non-financial or non-quantifiable such as political, economic, tax, other regulatory, or credit risks are not included in the following assessment of market risks.

 

 19 

 

  

ITEM 4.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer (CEO) and chief financial officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of March 31, 2020, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC), and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Changes in Internal Control Over Financial Reporting

 

During the three months ended March 31, 2020, there were no changes that materially affected or are reasonably likely to affect our internal control over financial reporting.

 

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 as set forth below, as of the filing date of this Quarterly Report on Form 10-Q, there have been no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 27, 2020.

 

We face risks related to health pandemics, particularly the recent outbreak of COVID-19, which could adversely affect our business and results of operations.

 

Our business could be materially adversely affected by a widespread outbreak of contagious disease, including the recent outbreak of the novel coronavirus, known as COVID-19, which has spread to many countries throughout the world, including the United States. The effects of this outbreak on our business have included and could continue to include temporary closures of our providers and clinics and suspensions of elective surgical procedures. This has and could continue to impact our interactions and relationships with our customers.

 

In addition to temporary closures of the providers and clinics that we serve, we could also experience temporary closures of the facilities of our suppliers, contract manufacturers, or other vendors in our supply chain, which could impact our business, interactions and relationships with our third-party suppliers and contractors, and results of operations. The extent to which the COVID-19 outbreak will impact business and the economy is highly uncertain and cannot be predicted. Accordingly, we cannot predict the extent to which our financial condition and results of operations will be affected.

 

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

 

None.

 

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

 

*Filed herewith

  

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SIGNATURES

 

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

 

 ZYNEX, INC.
  
  
 /s/ Daniel J. Moorhead
 Dated: April 28, 2020Daniel J. Moorhead
 Chief Financial Officer
 (Principal Financial and Accounting Officer)

 

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