(2)
BACKGROUND AND MANAGEMENT’S
PLANS
Background
For
the years ended December 31, 2015 and 2014, the Company reported net losses of $2,911 and $6,199, respectively. As of March
31, 2016 the Company had no available borrowing under its line of credit although, based on an interim agreement with the bank,
the lender continues to make additional loans to the Company based on the Company’s cash collections. The Company’s
working capital deficit at March 31, 2016 totaled $(4,972) as compared to ($4,773) at December 31, 2015. In addition, the Company
is in default of its secured line of credit and as a result, if its lender insists upon immediate repayment, the Company will
be insolvent and may be forced to seek protection from its creditors. These losses, limited liquidity and increasing working capital
deficit raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating
to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
The
Company’s operating plans for 2015 and moving forward through 2016 emphasize revenue growth and cash flow; focusing its
attention on increasing the number of sales representatives, promoting its EZ Rx Prescribe program (see description below), continued
improvements to its billing organization and processes and reducing and controlling its administrative expenses.
Total
net revenue for the years ended December 31, 2015 and 2014 was approximately $11.6 million and $11.1 million, respectively. This
was a significant decline from revenues in 2013 and 2012 of approximately $21.7 million and $39.7 million, respectively. The primary
reasons for the decline in revenue were (i) the impact of Medicare and healthcare reform, (ii) a loss of Zynex’s independent
sales force to sell transdermal compounded pain cream from competing pharmacies rather than focusing on selling the Company’s
Electrotherapy products and (iii) in the latter part of 2012, the elimination of Medicare reimbursement for transcutaneous electrical
nerve stimulation (TENS) Electrotherapy products for low-back pain while still covering TENS for other indications. Medicare also
continued increasing the requirements for paperwork and documentation in connection with reimbursement requests. As a result,
late in 2013 Zynex began declining orders for Medicare and Medicaid patients. Commercial and workers’ compensation insurance
plans continue to reimburse at similar levels as in previous years and have not adopted Medicare’s limited coverage.
During
2015 and throughout 2014, in an effort to minimize the impact of the challenges discussed above, the Company restructured its
internal operations, including manufacturing, billing and customer service; and made reductions in its fixed expenses by cutting
its administrative costs by approximately $2.2 million and $9.7 million, respectively, principally through reductions in headcount
and facilities rent. In addition, the Company during the second quarter of 2014 narrowed its focus to the NexWave, InWave and
NeuroMove electrotherapy products and continued to build the sales representative group for its electrotherapy solutions. The
Company continued to narrow this focus by closing its billing consulting services in April 2015 and closing its compound pain
cream operations in January 2016.
During
the fourth quarter of 2015, the electrotherapy industry experienced a significant development when the Company’s largest
competitor (DJO/Empi) announced the closure of their Empi electrotherapy division. Empi previously held a large share of the electrotherapy
market. Management believes this presents a significant growth opportunity for the Company. The Company has recruited many former
Empi sales representatives, including those in areas where we had no previous representation. In addition, during 2016, Company
orders have been steadily increasing as compared to 2015. To focus on growth and the potential for future positive cash flow,
the Company has committed its limited resources to the new salesforce, including the supporting product production and supporting
administrative (customer service and billing) personnel.
The
Company is not in compliance with the financial covenants under the terms of its line of credit with TBK Bank, SSB (the “Lender”).
See Note 7 to the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report for further discussion.
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT
NUMBER OF SHARES AND PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
2016 AND 2015
Management’s Plans
The Company’s business plan for 2016 focuses on the Company’s
effort to attain external financing, the Lender’s continued support, the continued support of the Company’s vendors
on the slow payment of past due invoices and attaining positive cash flow from organic growth. The accomplishment of organic growth
in revenues and cash flows is dependent on taking advantage of the Empi opportunity, increasing the number of sales representatives,
promoting the EZ Rx Prescribe program and continuing improvements to the Company’s billing organization and processes. The
Company’s long-term business plan contemplates organic growth in revenues through an increase in the electrotherapy market
share and the addition of new products such as the ZMS Blood Volume Monitor, which is currently under development.
The Company is actively seeking additional financing through
the issuance of debt or sale of equity. The additional capital is to refinance or replace the line of credit and to provide the
additional working capital necessary to continue the Company’s business operations. The net losses and negative working capital
may make it difficult to raise any new capital and any such capital raised (if any) may result in significant dilution to existing
stockholders. The Company is not certain whether any such financing would be available to the Company on acceptable terms, or at
all. Any additional debt would require the approval of the Lender. A significant component of our negative working capital at March
31, 2016 is the amount due under our line of credit and past due accounts payable, all of which is considered a current liability.
In addition to seeking external financing, the Company has and
will continue to monitor and control its sales growth, product production needs and administrative costs going forward. If the
Company continues to increase its revenue while controlling its administrative costs, the Company may return to profitability in
future periods. The Company believes that as a result of the growth opportunities coupled with the reduced administrative expenses,
the securing of additional capital, the continued support of our Lender, and the continued support of vendors to work with the
Company on the slow payment of past due bills; that the Company’s cash flows from operating activities will be sufficient
to fund the Company’s cash requirements through the next twelve months. Management believes that its cash flow projections
for 2016 are achievable and that sufficient cash will be generated to meet the Company’s currently restrained operating requirements.
Such cash is projected to be generated by securing external financing, retaining the continued support of the Lender and vendors,
and increasing cash flow from operations generated from organic growth. There is no guarantee that the Company will be able to
meet the requirements of its 2016 cash flow projections or that it will be able to address its working capital shortages; the principal
component of which is the negative working capital.
There can be no assurance that the Company will be able to secure
additional external financing, the Lender will continue to make loan advances, the vendors will continue to work with slow repayment
terms, and the sales and cash flow growth are attainable and sustainable. The Company’s dependence on operating cash flows
means that risks involved in the Company’s business can significantly affect the Company’s liquidity. Contingencies
such as unanticipated shortfalls in revenues or increases in expenses could affect the Company’s projected revenues, cash
flows from operations and liquidity, which may force the Company to curtail its operating plan or impede the Company’ growth.
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT
NUMBER OF SHARES AND PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
2016 AND 2015
(3)
PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2016 and December 31,
2015, consist of the following:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
Useful
lives
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
911
|
|
|
$
|
911
|
|
|
3-7 years
|
Rental inventory
|
|
|
1,207
|
|
|
|
1,216
|
|
|
5 years
|
Vehicles
|
|
|
76
|
|
|
|
76
|
|
|
5 years
|
Leasehold improvements
|
|
|
104
|
|
|
|
104
|
|
|
2-6 years
|
Assembly equipment
|
|
|
125
|
|
|
|
125
|
|
|
7 years
|
|
|
|
2,423
|
|
|
|
2,432
|
|
|
|
Less accumulated depreciation
|
|
|
(1,719
|
)
|
|
|
(1,631
|
)
|
|
|
|
|
$
|
704
|
|
|
$
|
801
|
|
|
|
(4)
LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss
by the weighted-average number of common shares outstanding and the number of dilutive potential common share equivalents during
the period, calculated using the treasury-stock method. For the three months ended March 31, 2016 and 2015, the potential common
stock equivalents totaled 2,218,250 and 1,267,500, respectively, and were excluded from the dilutive loss per share calculation
as their impacts were antidilutive.
The calculation of basic and diluted loss per share for the
three months ended March 31, 2016 and 2015 is as follows:
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(444
|
)
|
|
$
|
(896
|
)
|
Weighted average shares outstanding – basic
|
|
|
31,271,234
|
|
|
|
31,271,234
|
|
Net loss per share – basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(444
|
)
|
|
$
|
(896
|
)
|
Weighted average shares outstanding – basic
|
|
|
31,271,234
|
|
|
|
31,271,234
|
|
Dilutive securities
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares outstanding – diluted
|
|
|
31,271,234
|
|
|
|
31,271,234
|
|
Net loss per share – diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT
NUMBER OF SHARES AND PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
2016 AND 2015
(5)
STOCK-BASED COMPENSATION PLANS
The Company previously reserved 3,000,000 shares of common stock
for issuance under its 2005 Stock Option Plan (the “Option Plan”). The Option Plan expired as of December 31, 2014.
Vesting provisions are determined by the Board of Directors. All stock options under the Option Plan expire no later than ten years
from the date of grant. Since the Option Plan expired, the options granted in 2015 and 2016 have not been approved by the Company’s
shareholders and were issued as non-qualified stock options.
In the three months ended March 31, 2016 and 2015, the Company
recorded compensation expense related to stock options of $143 and $15, respectively. Stock-based compensation recorded in the
accompanying condensed consolidated statement of operations for the three months ended March 31, 2016 and 2015, included $0 and
$2, respectively, in cost of revenue and $143 and $13, respectively, in selling, general and administrative expenses.
During the three months ended March 31, 2016, the Company granted
options to purchase up to 484,000 shares of common stock to employees at a weighted average exercise of $0.25 per share. The 2016
grants were issued as non-qualified stock options.
The Company used the Black Scholes option pricing model to determine
the fair value of stock option grants, using the following assumptions during the three months ended March 31, 2016:
|
2016
|
Weighted average expected term
|
6.23 years
|
Weighted average volatility
|
121.85 %
|
Weighted average risk-free interest rate
|
1.67 %
|
Dividend yield
|
0%
|
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT
NUMBER OF SHARES AND PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
2016 AND 2015
(5)
STOCK-BASED COMPENSATION PLANS
(continued)
A summary of stock option activity under all equity compensation
plans for the three months ended March 31, 2016, is presented below:
|
|
Shares
Under
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2016
|
|
|
1,685,250
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
Granted
|
|
|
484,000
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,000
|
)
|
|
$
|
0.43
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
2,168,250
|
|
|
$
|
0.41
|
|
|
7.31 years
|
|
$
|
-
|
|
Exercisable at March 31, 2016
|
|
|
1,391,204
|
|
|
$
|
0.47
|
|
|
6.66 years
|
|
$
|
-
|
|
A summary of status of the Company’s non-vested share
awards as of and for the nine months ended March 31, 2016, is presented below:
|
|
Nonvested Shares
Under Option
|
|
|
Weighted Average
Grant Date Fair Value
|
|
Non-vested at January 1, 2016
|
|
|
672,155
|
|
|
$
|
0.31
|
|
Granted
|
|
|
484,000
|
|
|
$
|
0.25
|
|
Vested
|
|
|
(378,109
|
)
|
|
$
|
0.23
|
|
Forfeited
|
|
|
(1,000
|
)
|
|
$
|
0.43
|
|
Non-vested at March 31, 2016
|
|
|
777,046
|
|
|
$
|
0.31
|
|
As of March 31, 2016, the Company had approximately $259 of
unrecognized compensation expense related to stock options that will be recognized over a weighted average period of approximately
5 years.
(6)
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 0% for both the three months ended March 31, 2016 and 2015
as the realization of any deferred tax assets is not more likely than not. The Company paid no income taxes during the three months
ended March 31, 2016 and 2015.
(7)
LINE OF CREDIT
The Company has an asset-backed revolving credit facility under
a Loan and Security Agreement as amended, (the “Triumph Agreement”) with Triumph Healthcare Finance, a division of
TBK Bank, SSB (formerly known as Triumph Community Bank (the “Lender”). The Triumph Agreement contains certain customary
restrictive and financial covenants for asset-backed credit facilities. The Company has not been in compliance with the financial
covenants under the Triumph Agreement since July 2014.
On July 14, 2014, the Company received notice from the Lender
of an event of default under the Triumph Agreement. The notice relates to the Company’s default under the minimum debt service
coverage ratio requirement for the quarter ended March 31, 2014 and certain other alleged defaults. The Lender notified the Company
that it was exercising its default remedies under the Triumph Agreement, including, among others, accelerating the repayment of
all outstanding obligations under the Triumph Agreement (outstanding principal and accrued interest) and collecting the Company’s
bank deposits to apply towards the outstanding obligations. The Company and the Lender are negotiating the terms of an accelerated
repayment of the amounts outstanding under the Triumph Agreement and the Lender has continued to make additional loans to the Company
based on cash collections. However, no assurance can be given that the Lender will continue to make such additional loans or that
the parties will agree on a repayment plan acceptable to the Company. If the Lender insists upon immediate repayment, the Company
will be insolvent and may be forced to seek protection from creditors.
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT
NUMBER OF SHARES AND PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
2016 AND 2015
As of March 31, 2016 $3,362 was outstanding under the Triumph
Agreement and zero was available for borrowing based on the default status. Borrowings under the Triumph Agreement bear interest
at the default interest rate. As of March 31, 2016, the effective interest rate under the Triumph Agreement was approximately
11.0% (6.75% interest rate plus 3% additional default interest rate and 1.25% fees). The Triumph Agreement requires monthly interest
payments in arrears on the first date of each month. The Triumph Agreement matured on December 19, 2014. Triumph has agreed to
forbear from the exercise of its rights and remedies under the terms of the Triumph Agreement through June 30, 2016, pursuant
to the terms of the March 28, 2016 forbearance agreement. The Triumph Agreement requires a lockbox arrangement whereby all receipts
are swept daily to reduce borrowings outstanding. The Company is obligated to reduce the loan balance by $85 each month. In connection
with the agreement entered into on March 28, 2016, the Lender suspended this monthly payment requirement for February, March and
April of 2016 up to an aggregate cap of $250, in exchange for the issuance of a warrant to purchase 50,000 shares of the Company’s
common stock.
The Company used the Black Scholes option pricing model to
determine the fair value of the stock warrant, using the following assumptions:
Contractual term
|
|
|
5.0 years
|
|
Volatility
|
|
|
122.44
|
%
|
Risk-free interest rate
|
|
|
1.00
|
%
|
Dividend yield
|
|
|
1.44
|
%
|
During the three months ended March 31, 2016, the Company recorded bank fee expense related to this stock
warrant of $15.
(8)
DEFERRED INSURANCE REIMBURSEMENT
During the first quarter of 2016, the Company collected $880
from a single insurance company for accounts receivable. The accounts receivable had been previously reduced to zero by the allowance
for contractual 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 insurance reimbursement
as a deferred insurance liability as of March 31, 2016. However, the Company is disputing the refund request and has initiated
an internal audit of the reimbursement to determine that the original sales arrangement was properly executed, the products had
been shipped and title was transferred (or rental services were rendered), the price of the products or services and the reimbursement
rate is fixed and determinable, and the Company’s ultimate claim to the reimbursement is reasonably assured. The Company
will record the appropriate amount as net revenue when such internal audit is complete and the Company’s claim to the amount
is reasonably assured.
(9)
CAPITAL
LEASES AND OTHER OBLIGATIONS
On October 31, 2014, the Company entered into a Lease Termination
Agreement (“LTA”) and new Lease Agreement (“LA”) with its landlord relating to the Company’s headquarters
location in Lone Tree, Colorado, under which the Company reduced the amount of space leased at its headquarters. The following
is a summary of the key terms of the LTA:
|
·
|
The term of the LA is two years commencing on January 1, 2015 and is to end, unless sooner terminated, on December 31,
2016;
|
|
·
|
Fixed rental payments of $49 per month; and
|
|
·
|
The Company and landlord shall each have the right to terminate the lease at any time, without liability to the other, with
six months prior written notice to the Company and three months written notice to the Landlord.
|
The Company also leases certain equipment under capital leases
which expire on various dates through 2018. Imputed interest rates on the leases range from approximately 5% to 10%. At March 31,
2016, the total recorded cost of assets under capital leases was approximately $461. Accumulated depreciation related to these
assets totals approximately $218.
(10)
CONCENTRATIONS
The Company sourced approximately 35% and 40% of components
for its electrotherapy products from one vendor during the three months ended March 31, 2016 and 2015, respectively. Management
believes that its relationships with suppliers are good; however, the Company has delayed and extended payments to many of its
vendors for cash flow reasons, which has caused many of its vendors to require pre-payment for products or services. 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 a private health insurance carrier
at March 31, 2016 and December 31, 2015, that made up approximately15% and 5%, respectively, of the net accounts receivable balance.
(11)
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 provide
for them if losses are determined to be both probable and estimable.
The Company is currently not a party to any material pending
legal proceedings.
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 need for additional
capital in order to grow our business, our ability to avoid insolvency and 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 rented 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, and other risks described herein and in our Annual Report on Form
10-K for the year ended December 31, 2015.
These interim financial statements should be read in conjunction
with the annual audited consolidated financial statements, and notes to consolidated financial statements, included in the Company’s
2015 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission.
General
We operate in one primary business segment, Electrotherapy
and Pain Management Products. Our active subsidiaries are Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation),
Zynex Europe, ApS (“ZEU,” a wholly-owned Denmark corporation) and Zynex Monitoring Solutions, Inc. (“ZMS,”
a wholly-owned Colorado corporation). Our 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. Our compound
pharmacy, which operated as a division of ZMI dba as Pharmazy, was closed in January 2016
The following information should be read in conjunction with
our Consolidated Financial Statements and related notes contained in the Annual Report Form 10-K for the year ended December 31,
2015.
RESULTS OF OPERATIONS (
dollars in thousands, except
per share
)
Summary
For the three months ended March 31, 2016, net loss was $(444)
as compared to a net loss of $(896) for the three months ended March 31, 2015. This reflects increased net revenues and gross margins
offset by increased selling, general and administrative expense; all of which will be discussed below. This amount does not reflect
receipt of $880 as a deferred insurance reimbursement which has been classified as a deferred insurance liability as of March 31,
2016. The Company will record the appropriate amount as revenue when an internal audit is complete and the Company’s claim
to the amount is reasonably assured.
Background
For the years ended December 31, 2015, 2014 and 2013, we
reported net losses of $(2.9) million, $(6.2) million and $(7.3) million, respectively. As of March 31, 2016 we had a working capital
deficit of $(4,972) as compared to $(4,773) at December 31, 2015 and had no available borrowing under our line of credit (which
the lender declared to be in default in July 2014). Based on an interim agreement with our lender, the lender continues to make
additional loans to us based on our cash collections. These historical losses, limited liquidity and continuing working capital
deficit raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities
in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability
and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue
as a going concern.
Our operating plans for 2015 and moving forward through 2016
emphasize revenue growth and cash flow; focusing our attention on increasing the number of sales representatives, promoting our
EZ Rx Prescribe program (see description below), continued improvements to our billing organization and processes and reducing
and controlling administrative expenses.
Total net revenue for the three months ended March 31, 2016
was $3,477 compared to $3,183 for the three months ended March 31, 2015. Although net revenues improved in the first quarter of
2016 as compared to the same period of 2015, this continues to be a significant decrease, when annualized, from revenues in 2013
and 2012 of approximately $21.7 million and $39.7 million, respectively. The primary reasons for the decline in revenue were (i)
the impact of Medicare and healthcare reform, (ii) a loss of Zynex’s independent sales force to sell transdermal compounded
pain cream from competing pharmacies rather than focusing on selling the our Electrotherapy products and, (iii) in the latter part
of 2012, the elimination of Medicare reimbursement for transcutaneous electrical nerve stimulation (TENS) Electrotherapy products
for low-back pain while still covering TENS for other indications. Medicare also continued increasing the paperwork and documentation
requirements for reimbursement. As a result, late in 2013 Zynex began declining orders for Medicare and Medicaid patients. Commercial
and workers’ compensation insurance plans continue to reimburse at similar levels as in previous years and have not adopted
Medicare’s limited coverage.
During the years ending December 31, 2015 and 2014, in an effort
to minimize the impact of the challenges discussed above, we restructured our internal operations, including manufacturing, billing
and customer service; and made reductions in our fixed expenses by cutting our administrative costs by approximately $2.2 million
and $9.7 million, respectively, principally through reductions in headcount and facilities rent. In addition, during the second
quarter of 2014 we narrowed our focus to the NexWave, InWave and NeuroMove electrotherapy products and continued to build the sales
representative group for our electrotherapy solutions. We continued to narrow our focus by closing our billing consulting services
in April 2015 and closing our compound pain cream operations in January 2016.
In early 2014, ZMI slowly introduced the EZ Rx Prescribe program,
a new distribution model for dispensing ZMI products to patients. The program is known to prescribers, as EZ Rx Prescribe and has
streamlined the way physicians prescribe, patients receive our products, and how ZMI utilizes inventory. Under the program prescriptions
are faxed directly to ZMI reducing the requirements on the physician or office staff to spend time with filling out device paperwork
and educating patients on how to use the device. After receiving a prescription, ZMI contacts the patient directly to process the
necessary paperwork and ships the device directly to the patient. Upon the patient receiving the device, they are taught how to
use the device via instructional videos on the ZMI website. The EZ Rx Prescribe program ramped up significantly during 2015 whereas
it represented over 75% of new orders by December 2015. The EZ Rx Prescribe program has significantly reduced the number of units
consigned to clinics for patient dispensing, thus virtually eliminating the amount of consignment inventory. In addition, the EZ
Rx Prescribe program provides ZMI more control over the decision to ship a unit to a patient.
During 2014 and 2015, in conjunction with the introduction and
ramp up of the EZ Rx Prescribe program, industry conditions driven by health care reforms and the ongoing evaluation of field inventory
reserves, we provided significant reserve for field inventory ($916 in 2014 and $655 during the first nine months of 2015) and,
during the fourth quarter of 2015, wrote off the remaining non-productive field inventory. The Company wrote-off and/or provided
a reserve for field inventory during 2015 and 2014 of $1,256 and $916, respectively. During the three months ended March 31, 2016
and 2015, the Company provided a reserve for field inventory of $0 and $235, respectively. Going forward, the Company expects to
hold a minimal amount of inventory in the field.
During the fourth quarter of 2015, the electrotherapy industry
experienced a significant development when our largest competitor, Empi announced closing their business in the electrotherapy
market immediately. Empi previously held a large share of the electrotherapy market. We believe this presents us a significant
growth opportunity. Through March 30, 2016, we have recruited over 70 former Empi sales representatives, including those in geographic
areas where we had no previous representation. During 2016, our electrotherapy product orders have been steadily increasing to
approximately 3,000 in March 2016 as compared to an average of 1,000 in the first 11 months of 2015. To focus on growth and the
potential future positive cash flow from the electrotherapy products, we have committed our limited resources to the new salesforce,
the supporting product production and supporting administrative (customer service and billing) personnel.
We continue to make progress on the development of the Blood
Volume Monitor, a noninvasive device that monitors a patient’s fluid level during surgery and recovery. The device is intended
alert the doctors or nurses in real time that a patient is losing fluid (blood). We filed our complete application for clearance
with the FDA during the third quarter of 2015, received and responded to comments in October 2015, received updated comments in
May 2016 and are preparing our answers to the FDA. In addition, we are continuing to collect data from certain international test
sites and hospitals.
As discussed herein, we are not in compliance with the financial
covenants under the terms of our line of credit with Triumph Healthcare Finance, a division of TBK Bank, SSB (formerly known as
Triumph Community Bank (the “Lender”). In July 2014, the Lender notified us that it would no longer make additional
loans under the credit agreement and that it was exercising its default remedies under the credit agreement. The Lender agreed
to forbear from the exercise of its rights and remedies under the terms of the credit agreement through June 30, 2016 and continues
to make additional loans to us based on our cash collections. We are obligated to decrease the Lender’s outstanding balance
by $85 per month. As of April 30, 2016, we had $3,422 of outstanding borrowings under the credit agreement. This reduction in
the line of credit from December 31, 2015 primarily results from increased accounts receivable collections, principally from a
single insurance carrier. Refer to Note 8 to the unaudited condensed consolidated financial statements for further information
regarding the payment received from this single insurance carrier. The Company and the Lender continue to negotiate the terms
of an accelerated repayment of the amounts outstanding under the credit agreement and continued extension of the forbearance agreement.
However, no assurance can be given that the Lender will continue to make such additional loans, or that the parties will agree
on a repayment plan acceptable to us.
We are actively seeking additional financing through the issuance
of debt or sale of equity. The additional capital is to refinance or replace the line of credit and to provide the additional working
capital necessary to continue our business operations. The net losses and negative working capital may make it difficult to raise
any new capital and any such capital raised (if any) may result in significant dilution to existing stockholders. We are not certain
whether any such financing would be available to us on acceptable terms, or at all. In addition, any additional debt would require
the approval of the Lender. A significant component of our negative working capital at March 31, 2016 is the amount due under our
line of credit and past due accounts payable, all of which is considered a current liability.
Our business plan for 2016 focuses on our effort to attain external
debt or equity financing, the Lender’s continued support, maintaining vendors continued support on the payment of past due
services and maintaining positive cash flow from operations from organic growth. The accomplishment of organic growth in revenues
and cash flows is dependent on taking advantage of the Empi opportunity to gain market share and the resulting increase in the
number of sales representatives selling Zynex products, successfully promoting our EZ Rx Prescribe program and continued improvements
to our billing organization and processes. Our long-term business plan contemplates organic growth in revenues through an increase
in the electrotherapy market share and the addition of new products such as the ZMS Blood Volume Monitor, which is still under
development.
There can be no assurance that we will be able to secure additional
external financing, the Lender will continue to make loan advances, the vendors will continue to work with slow repayment terms
and the sales and cash flow growth are attainable and sustainable. Our dependence on operating cash flows means that risks involved
in our business can significantly affect our liquidity. Contingencies such as unanticipated shortfalls in revenues or increases
in expenses could affect our projected revenues, cash flows from operations and liquidity, which may force us to curtail its operating
plan or impede our growth.
Net Revenue
Net revenues are comprised of sales (product, transdermal pain
creams and consumable supplies) and rental billings, reduced by estimated Third-party Payors reimbursement deductions and an allowance
for uncollectible amounts. The reserve for contractual adjustments and allowance for uncollectible accounts are adjusted on an
ongoing basis in conjunction with the processing of Third-party Payor insurance claims and other customer collection history. Net
revenue includes the rental of our transcutaneous electrical nerve stimulation (TENS) products, the sale of our TENS products,
consumable supplies and transdermal pain creams and, through the first quarter of 2015, our billing consulting services. During
January 2016, we ceased our transdermal pain creams for sale and they will not form a significant part of our 2016 revenue base.
Our electrotherapy products may be rented on a monthly basis or
purchased. Renters and purchasers are primarily patients and healthcare insurance providers on behalf of patients. Our electrotherapy
products may also be purchased by dealers and distributors. If a patient is covered by health insurance, the Third-party Payor
typically determines whether the patient will rent or purchase a unit depending on the anticipated time period for its use. Under
certain Third-party Payor contracts, a rental continues until an amount equal to the purchase price is paid then we transfer ownership
of the product to the patient and cease rental charges; while other rentals continue during the period of patient use of the equipment.
For all patients using our electrotherapy products, we also sell consumable supplies, consisting primarily of surface electrodes
and batteries. Revenue for the electrotherapy products is reported net, after adjustments for estimated insurance company reimbursement
deductions and estimated allowance for uncollectible accounts. The deductions are known throughout the health care industry as
“contractual adjustments” whereby the healthcare insurers unilaterally reduce the amount they reimburse for our products
as compared to the rental rates and sales prices charged by us. The deductions from gross revenue also take into account the estimated
denials, net of resubmitted billings of claims for products placed with patients which may affect collectability. See Note 2 to
the Consolidated Financial Statements included within our Annual Report on Form 10-K for the year ended December 31, 2015 for a
more complete explanation of our revenue recognition policies.
We continually pursue improvements to our processes of billing
insurance providers. We review all claims which are initially denied or not received and rental claims not billed for the full
period of use. As these situations are identified and resolved, the appropriate party is appropriately rebilled (resubmitted) or,
for those claims not previously billed, billed.
We frequently 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 where we are rebilling or 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 and should be accrued as a liability.
As of March 31, 2016, we believe we have an adequate allowance
for contractual adjustments relating to known insurance disputes and refund requests. However, no assurances can be given with
respect to such estimates of reimbursements and offsets or the ultimate outcome of any refund requests.
Net revenue for the three months ended March 31, 2016 and 2015
consisted of the following:
|
|
2016
|
|
|
2015
|
|
Product Rentals
|
|
$
|
1,079
|
|
|
|
31.0
|
%
|
|
$
|
327
|
|
|
|
10.3
|
%
|
Product Sales
|
|
|
1,477
|
|
|
|
42.5
|
%
|
|
|
756
|
|
|
|
23.8
|
%
|
Supplies Sales
|
|
|
894
|
|
|
|
25.7
|
%
|
|
|
1,564
|
|
|
|
49.2
|
%
|
Pharmazy Sales
|
|
|
19
|
|
|
|
0.6
|
%
|
|
|
494
|
|
|
|
15.6
|
%
|
Other
|
|
|
8
|
|
|
|
0.2
|
%
|
|
|
42
|
|
|
|
1.1
|
%
|
|
|
$
|
3,477
|
|
|
|
100.0
|
%
|
|
$
|
3,183
|
|
|
|
100.0
|
%
|
Overall, net revenue for the three months ending March 31, 2016
increased $294 (9%) to $3,477 as compared to $3,183 in for the three months ended March 31, 2015. The increase reflects an increase
in patient orders (approximately 8,400 in 2016 as compared to approximately 2,900 for the same period in 2015) resulting from our
expansion into the market upon Empi exiting the market, and the related increase in the number of our sales representatives, offset
by the decrease in Pharmacy revenue ($19 for the three months ended March 31, 2016 as compared to $494 for the three months ended
March 31, 2015) and an increase in deferred revenue ($366 at March 31, 2016 as compared to $89 at December 31, 2015).
Deferred revenue increased principally due to delays in shipping
supplies to patients, which resulted from a lack of available supply inventory as a result of cash constraints.
|
·
|
Product Rental Revenue for the three months ended March 31, 2016 increased to $1,079 from $327 for the same period in 2015. The increase in Product Rental Revenue for 2016 reflects the cumulative increase in the number of patients using our Electrotherapy products, and the increase in the number of patient orders in 2016.
|
|
·
|
Product Sales Revenue for the three months ended March 31, 2016 increased to $1,477 from $756 for the same period in 2015. The increase in Product Sales Revenue for 2016 reflects the increase in the number of patient orders in 2016.
|
|
·
|
Supplies Sales Revenue for the three months ended March 31, 2016 decreased to $894 from $1,564 for the same period in 2015. The decrease in Supplies Revenue for 2016 reflects the cumulative increase in the number of patients using our Electrotherapy products (both sold and rented devices), offset by the deferred revenue ($366) and changes in the allowance for contractual adjustments.
|
Pharmazy
Sales Revenue for 2016 declined to $19 from $494 during 2015. We shut down our compound pharmacy business in January 2016 as we
struggled with the constantly changing pharmacy insurance reimbursements and to focus on our core (Electrotherapy products) and
future (blood volume monitor) business.
Other
revenue includes billing consulting revenue totaling $0 and $32 for the three months ended March 31, 2016 and 2015,
respectively. In order to focus on our core Electrotherapy products, we terminated the billing consulting services in the
second quarter of 2015.
Operating
Expenses
Cost of Revenue – rental, product and supply
for
the three months ended March 31, 2016 and 2015 consisted of the following:
|
|
2016
|
|
|
2015
|
|
Rental depreciation
|
|
$
|
51
|
|
|
$
|
18
|
|
Product and supply costs
|
|
|
448
|
|
|
|
478
|
|
Operations labor and overhead
|
|
|
323
|
|
|
|
282
|
|
Shipping costs
|
|
|
147
|
|
|
|
155
|
|
Pharmazy costs
|
|
|
14
|
|
|
|
77
|
|
Field inventory write-off
|
|
|
-
|
|
|
|
235
|
|
|
|
$
|
983
|
|
|
$
|
1,245
|
|
The
rental depreciation represents the net change in the depreciation of rental assets, which are included in property and equipment.
Product and supply costs decreased $30 (6%) for the three months
ended March 31, 2016 as compared to the three months ended March 31, 2015. The lower costs reflects our tightening of costs and
reduced overall per unit costs of current products and the sale (as substitute product) of previously written off (discontinued)
TruWave and TruWave Plus devices $(110). Operations labor and overhead, which includes the production department labor and associated
overhead (principally rent), increased $41 (14%). The increased costs reflect an increase in production compensation, offset by
reduced administrative overhead expenses.
Shipping expenses decreased $8 (5%) for the three months ended
March 31, 2016 as compared to 2015. The lower costs reflect better control over shipping.
Pharmazy
material costs decreased as a result of closing the Pharmacy operation in January 2016.
Field
inventory reserves decreased to $0 for the three months ended March 31, 2016 as compared to $235 in 2015. During 2014 and 2015,
in conjunction with the introduction and ramp up of the EZ Rx Prescribe program, industry conditions driven by health care reforms
and the ongoing evaluation of field inventory shrinkage, management provided significant allowances for shrinkage of field inventory
($916 in 2014 and $655 during the first nine months of 2015). During the fourth quarter of 2015 we wrote off the remaining non-productive
field inventory. In total, we wrote-off and/or provided an allowance for shrinkage of field inventory during 2015 and 2014 of
$1,256 and $916, respectively.
Selling, general and administrative
expense for the three
months ended March 31, 2016 increased to $2,844 from $2,710 in 2015. The increase is principally resulting from sales commission
(increasing to $827 in 2016 from $601 in 2015), which reflects the increase in our sales force. We have increased orders, reflecting
the opportunity provided by Empi withdrawing from the market in late 2015 (discussed above) and the hiring of additional sales
representatives.
Other income (expense)
is comprised of interest and other
expense.
Interest expense for the three months ended March 31, 2016
was $94, compared to $132 for the same period in 2015. The decrease in interest expense is the result of lower average borrowings
in the 2016 periods.
LIQUIDITY AND CAPITAL RESOURCES (
dollars in thousands
)
Line of Credit
We have an asset-backed revolving credit facility under a Loan
and Security Agreement as amended, (the “Triumph Agreement”) with TBK Bank, SSB, a division of Triumph Community Bank
(the “Lender”). The Triumph Agreement contains certain customary restrictive and financial covenants for asset-backed
credit facilities.
As of March 31, 2016, we were not in compliance with the financial
covenants under the Triumph Agreement. On July 14, 2014, we received notice from the Lender of an event of default under the Triumph
Agreement. The notice relates to our default under the minimum debt service coverage ratio requirement for the quarter ended March
31, 2014 and certain other alleged defaults. The Lender notified us that it was exercising its default remedies under the Triumph
Agreement, including, among others, accelerating the repayment of all outstanding obligations under the Triumph Agreement (outstanding
principal and accrued interest) and collecting our bank deposits to apply towards the outstanding obligations. The Company and
the Lender are negotiating the terms of an accelerated repayment of the amounts outstanding under the Triumph Agreement and the
Lender has continued to make additional loans to us based on cash collections. However, no assurance can be given that the Lender
will continue to make such additional loans or that the parties will agree on a repayment plan acceptable to us. If the Lender
insists upon immediate repayment, we may be forced to seek protection from creditors.
As of March 31, 2016, $3,362 was outstanding under the Triumph
Agreement and zero was available for borrowing based on the default status. Borrowings under the Triumph Agreement bear interest
at the default interest rate. As of March 31, 2016, the effective interest rate under the Triumph Agreement was approximately 11.0%
(6.75% interest rate plus 3% additional default interest rate and 1.25% fees). The Triumph Agreement requires monthly interest
payments in arrears on the first date of each month. The Triumph Agreement matured on December 19, 2014. The Lender has agreed
to forbear from the exercise of its rights and remedies under the terms of the Triumph Agreement through June 30, 2016, pursuant
to the terms of a the March 28, 2016 forbearance agreement. The Triumph Agreement requires a lockbox arrangement whereby all receipts
are swept daily to reduce borrowings outstanding. We are obligated to reduce the loan balance by $85 each month. In connection
with the agreement entered into on March 28, 2016, the Lender suspended this monthly payment requirement for February, March and
April of 2016 up to an aggregate cap of $250, in exchange for the issuance of a warrant to purchase 50,000 shares of the Company’s
common stock.
Limited Liquidity
As a result of the losses we suffered in the years ended December
31, 2015, 2014 and 2013, the default under the Triumph Agreement, and other factors, we continue to have significant working capital
deficits of $(4,972) at March 31, 2016 as compared to $(4,773) at December 31, 2015. As a result of this negative working capital
and resulting limited liquidity, our independent registered public accounting firm has included an explanatory paragraph with respect
to our ability to continue as a going concern in its report on our consolidated financial statements for the year ended December
31, 2015. Our Lender could, in its discretion, cease making additional loans to us based on our cash collections and, at that point
we would have no remaining liquidity or ability to pay our debts.
The Triumph Agreement default and resulting limited liquidity
are primarily a result of (a) significant reduction of revenue and inability to cut costs at the same pace in 2013 and 2014, (b)
the high level of outstanding accounts receivable because of deferred payment practices of Third-party Payors, (c) the previously
required high levels of inventory kept with sales representatives or held at the offices of health care providers that are standard
in the electrotherapy industry, (d) the delayed cost recovery inherent in rental transactions, and (e) expenditures required for
on-going product development.
Our negative working capital of $(4,972) as of March 31, 2016
and limited liquidity may restrict our ability to carry out our current business plans and curtail our future revenue growth.
In addition, we reported a net loss of $2,911 for the year ended December 31, 2015. As noted above, we are not in compliance with
the financial covenants under the terms of our line of credit. These conditions raise substantial doubt about our ability to continue
as a going concern.
We are actively seeking additional financing through the issuance
of debt or sale of equity and monitoring and controlling our sales growth, product production needs and administrative costs going
forward. The additional capital is to refinance or replace the line of credit and to provide the additional working capital necessary
to continue our business operations. The net losses and negative working capital may make it difficult to raise any new capital
and any such capital raised (if any) may result in significant dilution to existing stockholders. We are not certain whether any
such financing would be available to us on acceptable terms, or at all. In addition, any additional debt would require the approval
of the Lender.
We believe that as a result of identified growth opportunities
(primarily with respect to the Empi, Inc. closure discussed elsewhere herein) coupled with the reduced administrative expenses,
the securing of additional capital, the continued support of our Lender, and the continued support of our vendors to work with
us on the slow payment of past due bills; that our cash flows from operating activities will be sufficient to fund our cash requirements
through the next twelve months. There is no guarantee that we will be able to meet the requirements of its 2016 cash flow projection
or will be able to address its working capital shortages; the principal component of which is the negative working capital (importantly
the line of credit and past due accounts payable which are considered a current liability in their entirety).
Our dependence on operating cash flow means that risks involved
in our business can significantly affect our liquidity. Contingencies such as unanticipated shortfalls in revenues or increases
in expenses could affect our projected revenues, cash flows from operations and liquidity, which may force us to curtail our operating
plan or impede our growth.
Cash provided by operating activities was $666 and $163 for
the three months ended March 31, 2016 and 2015, respectively. The change in cash from operating activities for the three months
ended March 31, 2016 was primarily the result of the net income for the three months ended March 31, 2016 plus an increase in collections
of accounts receivable, a reduction of inventory, and increases in accounts payable, accrued expenses and accrued payroll expenses.
Cash provided by investing activities was $10 and $40 for the
three months ended March 31, 2016 and 2015, respectively. Cash provided by investing activities, primarily represents cash flows
relating to the change in inventory held for rental offset by the purchase of equipment.
Cash provided by (used by) financing activities was $(660) and
$82 for the three months ended March 31, 2016 and 2015, respectively. The primary use of cash during these periods was net
repayments on the line of credit and payments on capital lease obligations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
There are several accounting policies that involve management’s
judgments and estimates and are critical to understanding our historical and future performance, as these policies and estimates
affect the reported amounts of revenue and other significant areas in our reported financial statements.
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, 2015, filed with the Securities and Exchange Commission on March
31, 2016.
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.