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ZYXI Zynex

Filed: 29 Apr 21, 5:07pm

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, 2021

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 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.)

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      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 28, 2021

Common Stock, par value $0.001

34,846,656

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, 

    

2021

    

2020

ASSETS

Current assets:

 

  

 

  

Cash

$

33,439

$

39,173

Accounts receivable, net

 

14,874

 

13,837

Inventory, net

 

10,957

 

8,635

Prepaid expenses and other

 

1,559

 

1,378

Total current assets

 

60,829

 

63,023

Property and equipment, net

 

2,299

 

1,925

Operating lease asset

5,380

5,993

Finance lease asset

457

321

Deposits

 

340

 

347

Deferred income taxes

 

931

 

566

Total assets

$

70,236

$

72,175

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

3,338

4,717

Operating lease liability

 

2,043

 

2,051

Finance lease liability

 

104

 

77

Income taxes payable

 

266

 

280

Accrued payroll and related taxes

 

3,564

 

2,992

Total current liabilities

 

9,315

 

10,117

Long-term liabilities:

 

  

 

  

Operating lease liability

 

4,371

 

4,920

Finance lease liability

397

283

Total liabilities

 

14,083

 

15,320

Commitments and contingencies

 

 

Stockholders' equity:

 

  

 

  

Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2021 and December 31, 2020

 

0

 

0

Common stock, $0.001 par value; 100,000,000 shares authorized; 36,143,761 issued and 34,849,790 outstanding as of March 31, 2021 and 36,126,698 issued and 34,791,931 outstanding as of December 31, 2020

 

37

 

36

Additional paid-in capital

 

37,313

 

37,235

Treasury stock 1,076,220 shares, at March 31, 2021 and 1,071,220 shares at December 31, 2020, respectively, at cost

 

(3,921)

 

(3,846)

Retained earnings

 

22,724

 

23,430

Total stockholders' equity

 

56,153

 

56,855

Total liabilities and stockholders' equity

$

70,236

$

72,175

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, 

    

2021

    

2020

NET REVENUE

 

  

 

  

Devices

$

6,365

$

3,444

Supplies

 

17,762

 

11,784

Total net revenue

 

24,127

 

15,228

COSTS OF REVENUE AND OPERATING EXPENSES

 

 

Costs of revenue - devices and supplies

 

5,886

 

3,401

Sales and marketing

 

13,827

 

5,584

General and administrative

5,495

3,785

Total costs of revenue and operating expenses

 

25,208

 

12,770

Income/(loss) from operations

 

(1,081)

 

2,458

Other expense

 

  

 

  

Interest expense

 

(9)

 

(4)

Other expense, net

 

(9)

 

(4)

Income/(loss) from operations before income taxes

 

(1,090)

 

2,454

Income tax benefit

 

(384)

 

(483)

Net Income/(Loss)

$

(706)

$

2,937

Net income/(loss) per share:

 

 

Basic

$

(0.02)

$

0.09

Diluted

$

(0.02)

$

0.09

Weighted average basic shares outstanding

 

34,837

 

32,913

Weighted average diluted shares outstanding

 

34,837

 

34,204

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, 

    

2021

    

2020

    

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income/(loss)

$

(706)

$

2,937

Adjustments to reconcile net income/(loss) to net cash provided by operating activities:

 

  

 

  

Depreciation

 

487

 

252

Non-cash reserve charges

2

249

Stock-based compensation

 

108

 

497

Non-cash lease expense

 

55

 

(10)

Provision for deferred income taxes

 

(378)

 

(473)

Change in operating assets and liabilities:

 

 

  

Accounts receivable

 

(1,037)

 

(716)

Prepaid and other assets

 

(182)

 

(819)

Accounts payable and other accrued expenses

 

(798)

 

162

Inventory

 

(2,863)

 

(1,501)

Deposits

 

7

 

54

Net cash provided by/(used in) operating activities

 

(5,305)

 

632

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchase of property and equipment

 

(299)

 

(297)

Net cash used in investing activities

 

(299)

 

(297)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Payments on finance lease obligations

 

(23)

 

(11)

Purchase of treasury stock

 

(75)

 

0

Proceeds from the issuance of common stock on stock-based compensation awards

27

221

Taxes withheld and paid on employees' equity awards

(59)

Net cash (used in)/provided by financing activities

 

(130)

 

210

Net increase/(decrease) in cash

 

(5,734)

 

545

Cash at beginning of period

 

39,173

 

14,040

Cash at end of period

$

33,439

$

14,585

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

(9)

$

(4)

Cash paid for rent

$

(521)

$

(328)

Supplemental disclosure of non-cash investing and financing activities:

 

 

Right-of-use assets obtained in exchange for new operating lease liabilities

$

162

$

1,433

Inventory transferred to property and equipment under lease

$

473

$

187

Inventory transferred to property and equipment as demo devices

$

67

$

0

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, 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

Additional

Total

Common Stock

Paid-in

Treasury

Retained

Non-Controlling

Stockholders’

    

Shares

    

Amount

    

Capital

    

Stock

    

Earnings

    

Interest

    

Equity

Balance, December 31, 2020

34,791,931

$

36

$

37,235

$

(3,846)

$

23,430

$

$

56,855

Exercised and vested stock-based awards

57,769

1

29

30

Stock-based compensation expense

 

 

108

 

 

 

 

108

Shares of common stock withheld to pay taxes on employees' equity awards

(3,758)

(59)

(59)

Warrants exercised

8,848

Treasury stock

(5,000)

(75)

(75)

Net income

 

 

 

 

(706)

 

 

(706)

Balance at March 31, 2021

34,849,790

$

37

$

37,313

$

(3,921)

$

22,724

$

$

56,153

6

Table of Contents

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, 2021, 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. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume monitoring device which received approval by the U.S. Food and Drug Administration (“FDA”) during 2020 and is still awaiting CE Marking in Europe; therefore, ZMS has achieved no revenues to date. Its inactive subsidiaries include Zynex Europe, Zynex NeuroDiagnostics, Inc. (“ZND,” a wholly-owned Colorado corporation) 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 dba 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 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 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. The NexWave 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, 2021 and 2020, the Company generated all of its revenue in North America from sales and supplies of its devices 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, 2020. Amounts as of December 31, 2020, 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, 2020.

7

Table of Contents

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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, 2021 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, 2021 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.

Reclassifications

During 2020, the Company revised its cost center allocations to better align with its business operations. As a result, reclassifications between general and administrative and selling and marketing expenses have been made to the three months ended March 31, 2020 financial statements to conform to the consolidated 2021 financial statement presentation. These reclassifications had no effect on net earnings, retained earnings or cash flows as previously reported.

Use of Estimates

Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The most significant management estimates used in the preparation of the accompanying consolidated financial statements are associated with the allowance for billing adjustments and uncollectible accounts receivable, the reserve for obsolete and damaged inventory, stock-based compensation, and valuation of long-lived assets and realizability of deferred tax assets.

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 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 7- Leases.

A significant portion of our device revenue is derived from patients who obtain our 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, 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.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

Accounts Receivable, Net

The Company’s accounts receivables represent unconditional rights to consideration and are generated when a patient receives one of the Company’s devices, related supplies or complimentary products. In conjunction with fulfilling the Company’s obligation to deliver a product, the Company invoices the patient’s third-party payor or the patient. Billing adjustments represent the difference between the list price and the reimbursement rates set by third-party payors, including Medicare, commercial payors 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 small portion related to private pay individuals, attorney and auto claims.

Revenue Recognition

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 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 payors, 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 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, 

    

2021

    

2020

    

Device revenue

 

  

 

  

Purchased

$

2,332

$

1,280

Leased

 

4,033

 

2,164

Total Device revenue

6,365

3,444

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Revenues are estimated using the portfolio approach by third-party payor type based upon historical rates of collection, aging of receivables, trends in historical reimbursement rates by third-party payor types, and current relationships and experience with the third-party payors, which includes estimated constraints for third-party payor 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 payor billing arrangements and the uncertainty of reimbursement amounts for certain products from third-party payors or unanticipated requirements to refund payments previously received may result in adjustments to amounts originally recorded. Due to continuing changes in the health care industry and third-party payor 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 the difference is identified. Historically these differences have been immaterial and the Company has not had a significant reversal of revenue from prior periods.

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 payors, or changes in industry rates of reimbursement. The Company monitors the variability and uncertain timing over third-party payor types in our portfolios. If there is a change in our third-party payor mix over time, it could affect our net revenue and related receivables. We believe we have a sufficient history of collection experience to estimate the net collectible amounts by third-party payor 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, Net

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, 2021

    

December 31, 2020

Raw Materials

$

4,102

$

3,213

Work-in-process

 

390

 

1,455

Finished Goods

 

6,617

 

4,119

$

11,109

$

8,787

Less: reserve

 

(152)

 

(152)

$

10,957

$

8,635

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 1 operating segment which includes two revenue types: Devices and Supplies.

Income Taxes

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

We recognize tax benefits 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.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

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, 2021

    

December 31, 2020

Property and equipment

  

 

  

Office furniture and equipment

$

2,196

$

2,362

Assembly equipment

 

151

 

143

Vehicles

 

198

 

198

Leasehold improvements

 

1,013

 

559

Sales Rep demo units

313

361

Leased devices

 

1,086

 

809

$

4,957

$

4,432

Less accumulated depreciation

 

(2,658)

 

(2,507)

$

2,299

$

1,925

Total depreciation expense related to our property and equipment was $0.1 million for each of the three months ended March 31, 2021 and 2020.

Total depreciation expense related to devices out on lease was $0.2 million for each of the three months ended March 31, 2021 and 2020. Depreciation on leased units is reflected on the income statement as cost of revenue.

Total depreciation expense related to demo unit devices out with sales representatives was $0.1 million and NaN for the three months ended March 31, 2021 and 2020, respectively. Deprecation on demo units is reflected on the income statement as sales and marketing expense.

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.

The Company monitors demo devices for potential losses and places an estimated reserve on the net book value based on an analysis of terminated territory managers that have not yet returned their units

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(3)   EARNINGS PER SHARE

Basic earnings/(loss) 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.

The calculation of basic and diluted earnings per share for the three months ended March 31, 2021and 2020 are as follows (in thousands, except per share data):

For the Three Months Ended March 31, 

    

2021

    

2020

Basic earnings per share

 

  

 

  

Net income available to common stockholders

$

(706)

$

2,937

Basic weighted-average shares outstanding

 

34,837

 

32,913

Basic earnings per share

$

(0.02)

$

0.09

Diluted earnings per share

 

  

 

  

Net income available to common stockholders

$

(706)

$

2,937

Weighted-average shares outstanding

 

34,837

 

32,913

Effect of dilutive securities - options and restricted stock

 

0

 

1,291

Diluted weighted-average shares outstanding

 

34,837

 

34,204

Diluted earnings per share

$

(0.02)

$

0.09

For the three months ended March 31, 2021 and 2020, 1.1 million and 0.3 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.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

During the three months ended March 31, 2021, 0 stock option awards were granted under the 2017 Stock Plan. During the three months ended March 31, 2020, 14,000 stock option awards were granted under the 2017 Stock Plan. At March 31, 2021, the company had 0.8 million stock options outstanding and 0.6 million exercisable under the following plans:

    

Outstanding

    

Exercisable

Number of Options

Number of Options

(in thousands)

(in thousands)

Plan Category

 

  

 

  

2005 Stock Option Plan

 

296

 

296

Equity Compensation Plans not approved by  Shareholders

 

38

 

25

2017 Stock Option Plan

 

490

 

274

Total

 

824

$

595

During the three months ended March 31, 2021, 65,000 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, 2020, 165,000 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, 

    

2021

    

2020

Cost of Revenue

$

15

$

6

Sales and marketing expense

 

15

 

29

General, and administrative

78

462

Total stock based compensation expense

$

108

$

497

The Company received proceeds of $27,000 and $0.2 million related to option exercises during the three months ended March 31, 2021 and 2020, 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, 2021 and March 31, 2020.

For the Three Months

 

Ended March 31, 

 

    

2021

    

2020

 

Expected term (years)

6.79

Risk-free interest rate

0

%

1.59

%

Expected volatility

0

%

116.76

%

Expected dividend yield

0

%

0

%

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

A summary of stock option activity under all equity compensation plans for the three months ended March 31, 2021, 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, 2020

 

1,006

$

3.04

6.47

$

10,483

Granted

 

0

$

0

 

Forfeited

 

(174)

$

7.65

 

Exercised

(8)

$

3.12

Outstanding at March 31, 2021

 

824

$

2.07

5.79

$

10,873

Exercisable at March 31, 2021

 

595

$

1.73

5.23

$

8,061

A summary of restricted stock award activity under all equity compensation plans for the three months ended March 31, 2021, is presented below:

Number of

Shares

    

(in thousands)

Granted but not vested at December 31, 2020

 

268

Granted

 

65

Forfeited

 

(66)

Vested

 

(49)

Granted but not vested at March 31, 2021

 

218

As of March 31, 2021, the Company had approximately $3.5 million of unrecognized compensation expense related to stock options and restricted stock awards that will be recognized over a weighted average period of approximately 2.3 years.

(5)   STOCKHOLDERS’ EQUITY

Treasury Stock

On March 8, 2021, our Board of Directors approved a program to repurchase up to $10.0 million of our common stock at prevailing market prices either in the open market or through privately negotiated transactions through September 8, 2021. From the inception of the plan through March 31, 2021, the Company purchased 5,000 shares of our common stock for $0.1 million or an average price of $14.79 per share.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Warrants

A summary of stock warrant activity for the three months ended March 31, 2021 is presented below:

Weighted

Weighted

Average

Aggregate

Number of

Average

Remaining

Intrinsic

Warrants

Exercise

Contractual

Value

    

(in thousands)

    

Price

    

Life (Years)

    

(in thousands)

Outstanding at December 31, 2020

 

100

$

2.63

 

3.76

$

1,084

Granted

 

0

$

0

 

Exercised

 

(10)

$

2.50

 

3.52

 

192

Forfeited

 

0

$

0

 

 

Outstanding and Exercisable at March 31, 2021

 

90

$

2.64

 

3.52

$

1,137

(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, 2021 discrete items adjusted were $0.4 million. At March 31, 2021 the Company is currently estimating an annual effective tax rate of approximately 25.2%. 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 35% for the three months ended March 31, 2021. Discrete items recognized during the three months ended March 31, 2021 and 2020, resulted in a tax benefit of approximately $0.1 million and $1.1 million, respectively. The Company recorded an income tax benefit of $0.4 million and $0.5 million for the three months ended March 31, 2021 and 2020, respectively.

NaN taxes were paid during the three months ended March 31, 2021 and 2020.

(7)   LEASES

The Company has 5 operating leases; 4 pertaining to its corporate headquarters and 1 for its warehouse facility 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, which increased to $19.75 during the second year of the sublease and each year thereafter 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 was 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

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

operating lease liability of $3.9 million and a corresponding right-of-use asset for $3.6 million. The remaining lease term was 2.3 years at March 31, 2021.
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 was $10.00, which increased 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. Upon lease commencement, the Company recorded an operating lease liability and a corresponding right-of-use asset for $1.6 million each. The remaining lease term was 2.3 years at March 31, 2021.
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 remaining lease term was 2.3 years at March 31, 2021.
The Company entered into a lease agreement on September 17, 2020 with GIG CW Compark, LLC for approximately 50,488 square feet. The term of the lease began on January 5, 2021 and will run through June 5, 2026. The lease includes an option to extend the lease for one additional five year period. Base rent began at $9.40 per square feet increasing each year thereafter by an additional $0.30 per square foot. The Company has not yet determined whether or not it is reasonably certain to exercise its renewal option. The Company is also obligated to pay its proportional share of building operating expenses. The landlord agreed to contribute approximately $0.4 million toward tenant improvements. The Company determined that lease commencement occurred earlier than lease inception on January 5, 2021 as the Company began making significant tenant improvements and storing inventory at this location during December 2020. Upon lease commencement, the Company recorded an operating lease liability of $2.4 million and a corresponding right-of-use asset of $2.1 million. The remaining lease term was 5.2 years at March 31, 2021.
Subsequent to March 31, 2021, the Company entered into a sublease agreement on April 9, 2021 with Cognizant Trizetto Software Group, Inc. for approximately 166,912 square feet of office space as its new corporate headquarters. The term of the sublease will begin upon move in at some point during second quarter and will run through April 29, 2028. The Company is entitled to rent credits equal to twenty-one months of base rent at the initial rate. During the first thirty-three months of the sublease, the rent per square foot is $26.50. The price per square foot increases by an additional $0.50 during each subsequent twelve-month period of the sublease. The Company estimates that it will record a right-of-use asset and liability of $13.4 million each upon lease commencement.

The Company has 5 finance leases 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 remaining lease term was 3.6 years at March 31, 2021.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company entered into an equipment lease on March 3, 2020 with Konica Minolta Premier Finance for copiers/printers and related software located at its corporate offices. The term of the equipment lease agreement is 4 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 $0.1 million each. The remaining lease term was 3.0 years at March 31, 2021.
The Company entered into an equipment lease on November 25, 2020 with Konica Minolta Premier Finance for copiers/printers and related software located at its Grasslands warehouse facility in Colorado. The term of the equipment lease 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 $0.1 million each. The remaining lease term was 4.7 years at March 31, 2021.

·

The Company entered into an equipment lease on December 14, 2020 with Konica Minolta Premier Finance for mail solution and related software located at its Grasslands warehouse facility in Colorado. The term of the equipment lease is 5.3 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 remaining lease term was 5.3 years at March 31, 2021.

The Company entered into an equipment lease on November 3, 2020 with Altitude Leasing for a baler located at its Grasslands warehouse facility in Colorado. The term of the equipment lease is 3 years with no option to purchase the equipment at the end of the lease. 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 $8,000 each. The remaining lease term was 2.8 years at March 31, 2021.

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 4.0% for its operating lease liabilities. The Company’s equipment lease agreements have implicit rates from 8.3% to 20.7%, which were used to measure its finance lease liability.

    

Operating lease liability

    

Financing lease liability

April 1, 2021 through December 31, 2021

1,768

110

2022

 

2,447

 

147

2023

 

1,514

 

147

2024

 

512

 

116

2025

 

528

 

73

2026

223

19

Total undiscounted future minimum lease payments

 

6,992

 

612

Less: Difference between undiscounted lease payments and discounted lease liabilities:

 

(578)

 

(111)

Total lease liabilities

$

6,414

$

501

Operating lease costs were $0.6 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021, $0.2 million of operating lease costs incurred primarily at our manufacturing and warehouse facility were included in cost of sales and $0.4 million were included in general and administrative expenses on the consolidated statement of operations. All operating lease costs for the three months ended March 31, 2020 were included in general and administrative expenses on the consolidated statement of operations.

(8)   CONCENTRATIONS

For the three months ended March 31, 2021, the Company sourced approximately 32% of the components for its electrotherapy products from two significant vendors (defined as supplying at least 10%). For the three months ended March 31, 2020 the company sourced approximately 40% 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.

At March 31, 2021, the Company had receivables from 2 third-party payers that made up approximately 37% of the net accounts receivable balance. At December 31, 2020, the Company had receivables from 1 third-party payer that made up approximately 26% of the net accounts receivable balance.

(9) 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.

19

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, 2020.

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 2020 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 include electrotherapy and pain management products. As of December 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. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume monitoring device which received approval by the U.S. Food and Drug Administration (“FDA”) during 2020 and is still awaiting CE Marking in Europe; therefore, ZMS has achieved no revenues to date. Its inactive subsidiaries include Zynex Europe, Zynex NeuroDiagnostics, Inc. (“ZND,” a wholly-owned Colorado corporation) 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 dba as Pharmazy through January 2016.

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

RESULTS OF OPERATIONS

Summary

Net revenue was $24.1 million and $15.2 million for the three months ended March 31, 2021 and 2020, respectively. Net revenue increased 58% for the three-month period ended March 31, 2021. The Company had a net loss of $0.7 million during the three months ended March 31, 2021 as compared with net income of $2.9 million during the three months ended March 31, 2020. Cash flows used in operating activities were $5.3 million during the three months ended March 31, 2021.Working capital at March 31, 2021 was $51.5 million, a decrease of 3% from $52.9 million as of December 31, 2020.

20

Net Revenue

Net revenues are comprised of device and supplies 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 other complimentary 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.

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 $8.9 million or 58% to $24.1 million for the three months ended March 31, 2021, from $15.2 million for the same period in 2020. The growth in net revenue is primarily related to the 140% 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 $3.0 million or 85% to $6.4 million for the three months ended March 31, 2021, from $3.4 million for the same period in 2020.The increase in device revenue is primarily related to increased orders which are attributable to the growth of our sales force.

Supplies Revenue

Supplies revenue is related to the sale of supplies, primarily electrodes and batteries, for our products. Supplies revenue increased $6.0 million or 51% to $17.8 million for the three months ended March 31, 2021, from $11.8 million for the same period in 2020.The increase in supplies revenue is primarily related to an increased customer base from increased device sales in 2020 and 2021.

21

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, 2021 increased 73% to $5.9 million from $3.4 million for the three months ended March 31, 2020. The increase in cost of revenue is primarily due to an increase of 140% in device orders. As a percentage of revenue, cost of revenue – device and supply increased to 24% for the three months ended March 31, 2021 from 22% for the same period in 2020. The increase as a percentage of revenue is due to lower collections from certain commercial insurance payors as well an increase in overhead costs related to the new manufacturing and warehouse facility that the Company began operating out of in January 2021.

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, 2021 increased 148% to $13.8 million from $5.6 million for the three months ended March 31, 2020. The increase in sales and marketing expense is primarily due to the expansion of our sales force and the related costs associated with increased headcount. As a percentage of revenue, sales and marketing expense increased to 57% for the three months ended March 31, 2021 from 37% for the same period in 2020. 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, 2021 increased 45% to $5.5 million from $3.8 million for the three months ended March 31, 2020.The increase in general and administrative expense is primarily due to increased compensation and benefit expense related to headcount growth and increases in rent and facilities expense as we expanded our corporate headquarters during March 2020 as well as leased a new manufacturing and warehouse facility in December 2020. As a percentage of revenue, general and administrative expense decreased to 23% for the three months ended March 31, 2021 from 25% for the same period in 2020. The decrease as a percentage of revenue is primarily due to the increase in revenue during the period, partially offset by the aforementioned expenses.

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 35% for the three months ended March 31, 2021. Discrete items, primarily related to excess tax benefits on stock option exercises, of $0.1 million and $1.1 million were recognized as a benefit against income tax expense for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021 the company has an income tax benefit of approximately $0.4 million. For the three months ended March 31, 2020 the company had an income tax benefit of approximately $0.5 million.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed operations through cash flows from operations, debt and equity transactions. At March 31, 2021, our principal source of liquidity was $33.4 million in cash and $14.9 million in accounts receivable.

22

Net cash used in operating activities for the three months ended March 31, 2021 was $5.3 million compared with net cash provided by operating activities of $0.6 million for the three months ended March 31, 2020. The increase in cash used in operating activities for the three months ended March 31, 2021 was primarily due to the significant increase in inventory in 2021 as well as an increase in receivables balances. The increase in inventory is related to our order growth plus increased stockpiles in anticipation of possible supply chain shortages related to the COVID-19 virus.

Net cash used in investing activities for each of the three months ended March 31, 2021 and 2020 was $0.3 million. Cash used in investing activities for both periods was primarily related to office furniture and equipment and leasehold improvements at our new manufacturing and warehouse facility for the three months ended March 31, 2021 and at our corporate headquarters for the three months ended March 31, 2020.

Net cash used in financing activities for the three months ended March 31, 2021 was $0.1 million compared with net cash provided by financing activities of $0.2 million for the same period in 2020.  The cash used in financing activities for the three months ended March 31, 2021 was primarily due to treasury stock purchase activity. 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.

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, 2021 of $33.4 million;
Our working capital balance of $51.5 million; and
Our projected income and cash flows for the next 12 months.

On March 8, 2021, our Board of Directors approved a program to repurchase up to $10.0 million of our common stock at prevailing market prices either in the open market or through privately negotiated transactions through September 8, 2021. From the inception of the plan through March 31, 2021, the Company purchased 5,000 shares of our common stock for $0.1 million or an average price of $14.79 per share.

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, 2020, filed with the Securities and Exchange Commission on February 25, 2021.

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 three months ended March 31, 2021 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.

23

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.

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, 2021, 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, 2021, there were no changes that materially affected or are reasonably likely to affect our internal control over financial reporting.

24

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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, 2020, filed with the SEC on February 25, 2021.

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

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

(c) Stock Repurchases.

Issuer Purchases of Equity Securities

    

(a)

    

(b)

    

(c)

    

(d)

Total

Number of

Average

Total Number of 

Approximate Dollar 

 Shares

Price Paid

Shares Purchased as Part of

Value (in thousands) of Shares that may 

Purchased

per Share

Publicly Announced Program

yet be Purchased under the Program

March 8 to March 31, 2021

 

5,000

$

14.79

 

5,000

$

9,926

On March 8, 2021, our Board of Directors approved a program to repurchase up to $10.0 million of our common stock at prevailing market prices either in the open market or through privately negotiated transactions through September 8, 2021. From the inception of the plan through March 31, 2021, the Company purchased 5,000 shares of our common stock for $0.1 million or an average price of $14.79 per share.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

N/A

ITEM 5. OTHER INFORMATION

None

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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 29, 2021

Daniel J. Moorhead

 

Chief Financial Officer

 

(Principal Financial and Accounting Officer)

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