(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 September 30, 2016, the Company had no available borrowing under
its line of credit although, based on an interim agreement with the Company’s senior secured lender, Triumph Healthcare Finance,
a division of TBK Bank, SSB, formerly known as Triumph Community 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 September 30,
2016 totaled ($4,464) as compared to ($4,773) at December 31, 2015. In addition, the Company remains in default of its secured
line of credit and as a result, if its lender insists upon immediate repayment, the Company will be unable to do so and may be
forced to seek protection from its creditors. The Company has not been in compliance with the financial covenants under the agreement
with its primary lender since July 2014. The Company’s assets, both at December 31, 2015 and at September 30, 2016, are significantly
less than the Company’s liabilities, and the Company is dependent on its banking relationship to be able to pay its obligations
as they become due.
The Company’s losses, lack of liquidity, and substantial
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.
Although the Company’s revenues increased during the three
months and nine months ended September 30, 2016 as compared to the same periods in the prior year, the Company has not recovered
from the significant revenue decreases in total net revenue for the years ended December 31, 2015 and 2014 (approximately $11.6
million and $11.1 million, respectively) as compared to 2013 and 2012 (approximately $21.7 million and $39.7 million, respectively).
The primary reasons for the decline in revenue from 2012-2013 to 2014-2015 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. The Company is continuing to
address cost of revenues and overhead expenses in 2016 and as a result has improved the Company’s operating performance for
the three and nine months ended September 30, 2016 (being net income of $532 and net loss of $(140) respectively) as compared to
the same periods of the prior year (being net losses of $(322) and $(1,711) respectively).
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 it had no previous representation. In addition, during 2016, the Company’s 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 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)
NINE MONTHS ENDED SEPTEMBER 30, 2016
AND 2015
Management’s Plans
The Company’s business plan for the remainder of 2016
and into 2017 focuses on the Company’s effort to attain external financing, retaining the Lender’s continued support,
maintaining the continued support of the Company’s vendors on the slow payment of past due invoices, and pursuing organic
growth in our electrotherapy and pain management products with a goal of attaining positive cash flow. 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 (described further below) 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 Company’s history of 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 September 30, 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.
The Company’s efforts to reduce costs and increase revenues have led to net income (loss) from operations for the
three- and nine-month periods in 2016 ($532 and ($140), respectively) as compared to losses for the same periods in 2015
(($322) and ($1,711), respectively). If the Company continues to increase its revenue while controlling its administrative
costs and the Lender permits it to continue to operate, the Company believes that it may continue its 2016 return to
profitability in future periods. The Company believes that as a result of potential growth opportunities coupled with reduced
administrative expenses, the securing of additional capital (if available), the continued support of its Lender (which cannot
be assured), and the continued support of vendors to work with the Company on the slow payment of past due bills (which
cannot be assured); 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, and
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)
NINE MONTHS ENDED SEPTEMBER 30, 2016
AND 2015
(3)
PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 2016 and December 31,
2015, consist of the following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Useful
lives
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
913
|
|
|
$
|
911
|
|
|
3-7 years
|
Rental inventory
|
|
|
1,201
|
|
|
|
1,216
|
|
|
5 years
|
Vehicles
|
|
|
76
|
|
|
|
76
|
|
|
5 years
|
Leasehold improvements
|
|
|
104
|
|
|
|
104
|
|
|
2-6 years
|
Assembly equipment
|
|
|
125
|
|
|
|
125
|
|
|
7 years
|
|
|
|
2,419
|
|
|
|
2,432
|
|
|
|
Less accumulated depreciation
|
|
|
(1,902
|
)
|
|
|
(1,631
|
)
|
|
|
|
|
$
|
517
|
|
|
$
|
801
|
|
|
|
(4)
EARNING (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net
income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings 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 September 30, 2016 and 2015and
the nine months ended September 30, 2016 and 2015, the potential common stock equivalents totaled 2,040,958; 1,450,500 and 2,210,250;
1,450,500, respectively, and were excluded from the dilutive income (loss) per share calculation as their impacts were antidilutive.
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT
NUMBER OF SHARES AND PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 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 nine months ended September 30, 2016 and 2015, the Company
recorded compensation expense related to stock options of $171 and $67, respectively.
During the nine months ended September 30, 2016, the Company
granted options to purchase up to 804,000 shares of common stock to employees at a weighted average exercise of $0.27 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 nine months ended September 30, 2016:
|
|
2016
|
Weighted average expected term
|
|
6.25 years
|
Weighted average volatility
|
|
122.73%
|
Weighted average risk-free interest rate
|
|
1.51%
|
Dividend yield
|
|
0%
|
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT
NUMBER OF SHARES AND PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 2016
AND 2015
(5)
STOCK-BASED COMPENSATION PLANS
(continued)
A summary of stock option activity under all equity compensation
plans for the nine months ended September 30, 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
|
|
|
804,000
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(329,000
|
)
|
|
$
|
0.36
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
2,160,250
|
|
|
$
|
0.40
|
|
|
6.91 years
|
|
$
|
-
|
|
Exercisable at September 30, 2016
|
|
|
1,537,048
|
|
|
$
|
0.45
|
|
|
6.23 years
|
|
$
|
-
|
|
A summary of status of the Company’s non-vested share
awards as of and for the nine months ended September 30, 2016, is presented below:
|
|
Non-vested Shares
Under Option
|
|
|
Weighted Average
Grant Date Fair Value
|
|
Non-vested at January 1, 2016
|
|
|
672,155
|
|
|
$
|
0.31
|
|
Granted
|
|
|
804,000
|
|
|
$
|
0.34
|
|
Vested
|
|
|
(523,953
|
)
|
|
$
|
0.31
|
|
Forfeited
|
|
|
(329,000
|
)
|
|
$
|
0.31
|
|
Non-vested at September 30, 2016
|
|
|
623,202
|
|
|
$
|
0.23
|
|
As of September 30, 2016, the Company had approximately $252
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 and nine months ended September 30, 2016
and 2015, respectively, as the realization of any deferred tax assets is not more likely than not. The Company paid no income taxes
during the three and nine months ended September 30, 2016 and 2015.
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT
NUMBER OF SHARES AND PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 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 have been discussing the terms of an accelerated
repayment of the amounts outstanding under the Triumph Agreement and the Lender has (pursuant to a forbearance agreement which
has been extended through December 31, 2016) continued to make additional loans to the Company based on cash collections. As a
result of the Company’s increased revenues and cash flow, the Company was able to make a $976 payment to the Lender against
the principal amount of the debt during the first nine months of 2016 as compared to only a $120 payment against principal during
the same period in 2015. This payment during 2016 resulted from increased accounts receivable collections, principally from a single
insurance carrier which (as described in Note 8 to the unaudited financial statements below) we may be obligated to refund to the
insurance carrier.
Notwithstanding the Company’s improved performance in
2016 and expectations for the future, 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 may be forced to seek protection from creditors.
As of September 30, 2016, $3,027 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 September 30, 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 day 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 December 31, 2016, pursuant to the
terms of the September 29, 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 nine months ended September 30, 2016, the Company
recorded bank fee expense related to this stock warrant of $15.
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT
NUMBER OF SHARES AND PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 2016
AND 2015
(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. 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
The Company had previously 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. Subsequently,
on August 12, 2016, the Company entered into an amended Lease Agreement to extend and amend the terms and conditions of the LA.
The following is a summary of the key terms of the LA, as amended:
|
·
|
The original term of the LA term was extended by two years and as amended is to end, unless sooner terminated, on December 31, 2018;
|
|
·
|
Fixed rental payments were decreased from $49 to $38 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 ninety days (originally six months) prior written notice to the Company and ninety days 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 September
30, 2016, the total recorded cost of assets under capital leases was approximately $461. Accumulated depreciation related to these
assets totals approximately $264.
(10)
CONCENTRATIONS
The Company sourced approximately 35% and 40% of components
for its electrotherapy products from one vendor during the nine months ended September 30, 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 September 30, 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 Company’s
difficulty in paying its debts as they become due, 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 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 2015 Annual Report on Form 10-K and subsequently
filed reports, which have previously been filed with the Securities and Exchange Commission.
General
We operate in one primary business segment, Electrotherapy and
Pain Management Products. We only have a single active subsidiary: Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado
corporation). Another subsidiary, Zynex Europe, ApS (“ZEU,” a wholly-owned Denmark corporation), produced nominal revenues
during 2015 and 2016 from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned
Colorado corporation) is developing a blood volume monitoring device, but it is not yet developed or ready for market and, as a
result, ZMS has achieved no revenues to date. 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. None of our inactive subsidiaries
are expected to product revenue for the Company in the foreseeable future.
RESULTS OF OPERATIONS (
dollars in thousands, except
per share data
)
Summary
For the nine months ended September 30, 2016, net loss was $(140)
as compared to a net loss of $(1,711) for the nine months ended September 30, 2015. This reflects increased net revenue and decreased
cost of revenue offset by increased selling, general and administrative expense; all of which will be discussed below. This amount
does not reflect receipt of $880 from a single insurance company which has been classified as a deferred insurance liability on
our balance sheet. We will record the appropriate amount as revenue when an internal audit is complete and our claim to the amount
is reasonably assured. See Note 8 to the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report for
further discussion of the classification of the $880 as a deferred insurance reimbursement.
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 September 30, 2016 we had a working
capital deficit of $(4,464) 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 principal lender (Triumph Healthcare
Finance, a division of TBK Bank, SSB (formerly known as Triumph Community Bank (the “Lender”)), the Lender continues
to make additional loans to us based on our cash collections. Our historical losses, limited liquidity and continuing working capital
deficit, and the possibility for the continuation of losses, limited liquidity, and working capital deficits through 2016 and beyond
raise substantial doubt about our ability to continue as a going concern unless we can raise and deploy to operations (not repayment
of debt) a significant amount of investment capital in the near future. 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 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 nine months ended September 30, 2016
was $10,390 compared to $8,923 for the nine months ended September 30, 2015. Although net revenues improved in the first three
quarters of 2016 as compared to the same period of 2015, this continues to be a significant decrease, when annualized as compared
to 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 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 and 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 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, resulting
in the fact that it represented over 75% of new orders by December 2015. The EZ Rx Prescribe program has also 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 whether 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). During
the fourth quarter of 2015, the Company 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 nine months ended September 30,
2016, the Company held no inventory in the field and the Company expects to hold minimum inventory in the filed on a going forward
basis.
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 September 30, 2016, we have recruited and retained over 70 former Empi sales representatives, including
those in geographic areas where we had no previous representation. During 2016, our electrotherapy product orders have averaged
2,337 per month as compared to an average of 996 per month in the first 9 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 and the
supporting product production and supporting administrative (customer service and billing) personnel.
We continue to make progress on the development (through ZMS)
of the Blood Volume Monitor, a noninvasive device that monitors a patient’s fluid level during surgery and recovery. The
device is intended to 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 submitted our response in October 2016 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”) and we have not been in compliance since July 2014. 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 has agreed to forbear from the exercise of its rights and remedies under the terms of the
credit agreement and continues to make additional loans to us based on our cash collections. Our current forebearance agreement
with the Lender expires December 31, 2016. We are obligated to decrease the Lender’s outstanding balance by $85 per month.
As of October 31, 2016, we had $2,921 of outstanding borrowings under the credit agreement, as compared to $3,027 at September
30, 2016 and $4,002 as of December 31, 2015. This reduction in the line of credit from December 31, 2015 primarily results from
increased accounts receivable collections, principally from a single insurance carrier which we may be obligated to refund to the
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 equity, but we cannot offer any assurance that we will be able to do so, or if we are able to reach an agreement for
a debt or equity investor, that it will be accomplished on reasonable commercial terms. The additional capital is to pay-down in
part, 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 September 30, 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 the remainder of 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 invoices for products and 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 or, if obtained, that it will be sufficient for our needs. We can also offer no assurance that 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 our operating plan or impede our growth.
Net Revenue
Net revenues are comprised of (i) sales (which includes sales
of our TENS products, consumable supplies, and transdermal pain creams, and, through the first quarter of 2015, our billing consulting
services) and (ii) rental billings of our TENS Products, 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.
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 September 30, 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, such as the potential obligation
to refund all or a portion of the $880 received from an insurance carrier as described in Note 8 to the financial statements.
Net revenue for the nine months ended September 30, 2016 and
2015 consisted of the following:
|
|
2016
|
|
|
2015
|
|
Product Rentals
|
|
$
|
3,226
|
|
|
|
31.0
|
%
|
|
$
|
1,768
|
|
|
|
19.8
|
%
|
Product Sales
|
|
|
3,576
|
|
|
|
34.5
|
%
|
|
|
2,105
|
|
|
|
23.6
|
%
|
Supplies Sales
|
|
|
3,555
|
|
|
|
34.2
|
%
|
|
|
3,906
|
|
|
|
43.8
|
%
|
Pharmazy Sales*
|
|
|
19
|
|
|
|
0.2
|
%
|
|
|
1,106
|
|
|
|
12.4
|
%
|
Other
|
|
|
14
|
|
|
|
0.1
|
%
|
|
|
38
|
|
|
|
0.4
|
%
|
|
|
$
|
10,390
|
|
|
|
100.0
|
%
|
|
$
|
8,923
|
|
|
|
100.0
|
%
|
* Discontinued
in January, 2016.
Net revenue for three months ended September 30, 2016 was $3,627
compared to $2,667 for three months ending September 30, 2015. Net revenue for the nine months ended September 30, 2016 increased
$1,467 (16.4%) to $10,390 as compared to $8,923 in for the nine months ended September 30, 2015. The increase reflects an increase
in patient orders (approximately 21,036 in 2016 as compared to approximately 8,972 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 nine months ended September 30, 2016 as compared to $1,106 for the nine
months ended September 30, 2015) and an increase in deferred revenue ($528 at September 30, 2016 as compared to $89 at December
31, 2015).
Deferred revenue represents amounts paid by Third-party Payors
for consumable supplies that were not yet shipped to patients as of that date. The increase in deferred revenue is 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 nine months ended September 30, 2016 increased to $3,226 from $1,768 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 nine months ended September 30, 2016 increased to $3,576 from $2,105 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 nine months ended September 30, 2016 decreased to $3,555 from $3,906 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 ($528) and changes in the allowance for contractual adjustments.
|
Pharmazy Sales Revenue for 2016 declined to $19 from $1,106
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 nine months ended September 30, 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 nine months ended September 30, 2016 and 2015 consisted of the following:
|
|
2016
|
|
|
2015
|
|
Rental depreciation
|
|
$
|
162
|
|
|
$
|
92
|
|
Product and supply costs
|
|
|
1,280
|
|
|
|
1,431
|
|
Operations labor and overhead
|
|
|
887
|
|
|
|
762
|
|
Shipping costs
|
|
|
460
|
|
|
|
454
|
|
Pharmazy costs
|
|
|
14
|
|
|
|
250
|
|
Field inventory write-off
|
|
|
--
|
|
|
|
372
|
|
|
|
$
|
2,803
|
|
|
$
|
3,361
|
|
Total Cost of Revenue was $880 for three months ended September
30, 2016 compared to $950 September 30, 2015. Total Cost of Revenue was $2,803 for nine months ended September 30, 2016 compared
to $3,361 September 30, 2015.
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 $151 (11%) for the nine months
ended September 30, 2016 as compared to the nine months ended September 30, 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 $125 (16%). The increased costs reflect an increase in production compensation, offset by
reduced administrative overhead expenses.
Pharmazy material costs decreased as a result of closing the
Pharmacy operation in January 2016.
Field inventory reserves decreased to $0 for the nine months
ended September 30, 2016 as compared to $372 for the nine months ended September 30, 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 September 30, 2016 was $2,125 compared to $1,943 same period 2015. For the nine months ended September 30, 2016, the
selling, general and administrative increased to $7,465 from $6,923 for the same period in 2015. The increase is principally a
result of increased sales commission (increasing to $2,216 in 2016 from $1,595 in 2015), which reflects the increase in our sales
force and resulting increase in orders, reflecting the opportunity provided by Empi withdrawing from the market in late 2015 (discussed
above).
Other income (expense)
is comprised of interest expense.
Interest expense for the three month ended September 30, 2015
was $90, compared to $98 for the same period in 2015. Interest expense for the nine months ended September 30, 2016 was $262, compared
to $368 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 September 30, 2016 and since July 2014, we were not and
have not been 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 September 30, 2016, $3,027 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 September 30, 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 day 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 December 31, 2016, pursuant
to the terms of the September 29, 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 $(4,464) at September 30, 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 $(4,464) as of September 30,
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 $1,183 and $82 for
the nine months ended September 30, 2016 and 2015, respectively. The change in cash from operating activities for the nine months
ended September 30, 2016 was primarily the result of the decrease in net loss for the nine months ended September 30, 2016 compared
to 2015 plus an increase in accounts receivable, a reduction of inventory, and increases in accounts payable, deferred revenue,
and accrued payroll expenses, and the deferred insurance reimbursement of $880 received in the first quarter of 2016 (which amount
may be refunded in whole or in part to the insurance carrier, which refund would likely increase the amount due to the Lender).
Cash (used in) provided by investing activities was $(73) and
$63 for the nine months ended September 30, 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 used in financing activities was $(1,027) and $(167) for
the nine months ended September 30, 2016 and 2015, respectively. The primary changes in cash during these periods were net
repayments on the line of credit and payments/borrowings 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.