(2) BACKGROUND AND MANAGEMENT’S PLANS
Background
For the years ended December 31, 2016 and 2015, we reported
net income of $69 and net loss of $2,911, respectively. The Company’s total net revenue for the year ended December 31, 2016
was $13,313 compared to $11,641 in 2015. Revenue has declined significantly from $39.7 million in 2012 due to challenges with the
company’s sales force focusing on competing lines of compound pain cream, resulting in significant losses, however revenue
has grown consistently since 2014 and the company is now profitable. The Company’s assets, both at December 31, 2016 and
at March 31, 2017, 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.
As described in Item 2, herein, the Company received an investment
of $1,035 on February 28, 2017 from 22 investors through NewBridge Securities Corporation, an investment banking firm. The investment
has allowed the Company to pay additionally down on its loan with Triumph and build sufficient products to keep up with order demand.
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 May 8, 2017, we have recruited 74 former Empi sales representatives, including those in areas where
we had no previous representation. To focus on growth and the potential future positive cash flow, we have committed our limited
resources to the new salesforce, the supporting product production and supporting administrative (customer service and billing)
personnel. Orders had slowed down during 2016 due to lack of available funds to build enough products to fill orders timely and
therefore discouraging physicians from sending recurring orders as well as demotivating sales reps to promote our products. Orders
in Q3 of 2016 were 5,679, Q4 was 4,355 and orders in Q1 2017 was 3,824. The recent infusion of capital combined with improved cash
collections gives the Company an expectation of increasing orders in the near future due to orders being filled instantly and sales
reps being provided with demonstration units.
As of March 31, 2017, the Company had no available borrowing
under our line of credit (which the lender declared to be in default in July 2014) although, based on an interim agreement with
our lender, the lender continues to release cash collateral to us based on our cash collections. The Company’s working capital
deficit at March 31, 2017 totaled ($3,514) as compared to ($4,972) at March 31, 2016. 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. See Note 7 to the Unaudited Condensed Consolidated Financial Statements
in this Quarterly Report for further discussion.
The Company’s 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.
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, 2017 AND
2016
Management’s Plans
The Company’s business plan for 2017 focuses on the Company’s
effort to grow orders, attain additional financing, the Lender’s continued support, the vendors continued support 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 and the increased number of sales representatives and continued improvements to its 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.
The Company has and will continue to seek external financing
and monitor and control its sales growth, product production needs and administrative costs going forward. The Company has continued
to increase its revenue while controlling its administrative costs and the Company has returned to profitability for the quarter
ended March 31, 2017 as compared to the same quarter of the prior several years. The Company believes that:
as a result of the growth opportunities coupled 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
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 2017 are achievable and that sufficient cash will be generated to meet the Company’s currently restrained
operating requirements. There is no guarantee that the Company will be able to meet the requirements of its 2017 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
(principally the line of credit and past due accounts payable which are considered a current liability in their entirety).
While the results from the Company’s first quarter of
2017 coupled with the last quarter of 2016 are positive as compared to the years of losses before, there can be no assurance that
the Company will be able to secure additional external financing if needed, the Lender will continue to release cash collateral,
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)
THREE MONTHS ENDED MARCH 31, 2017 AND
2016
(3)
PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2017 and December 31,
2016, consist of the following:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Useful
lives
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
911
|
|
|
$
|
911
|
|
|
3-7 years
|
Rental inventory
|
|
|
1,410
|
|
|
|
1,411
|
|
|
5 years
|
Vehicles
|
|
|
76
|
|
|
|
76
|
|
|
5 years
|
Assembly equipment
|
|
|
125
|
|
|
|
125
|
|
|
7 years
|
|
|
|
2,522
|
|
|
|
2,523
|
|
|
|
Less accumulated depreciation
|
|
|
(2,000
|
)
|
|
|
(1,943
|
)
|
|
|
|
|
$
|
522
|
|
|
$
|
580
|
|
|
|
(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 outstanding stock options. For the three months ended
March 31, 2017 and 2016, the potential common stock equivalents totaled 2,393,750 and 2,218,250, respectively, and were excluded
from the dilutive income (loss) per share calculation as their impacts of the potential shares would decrease the earnings ( loss
) per share.
The calculation of basic and diluted earnings (loss) per share
for the three months ended March 31, 2017 and 2016 is as follows:
|
|
2017
|
|
|
2016
|
|
BASIC
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to common stockholders
|
|
$
|
428
|
|
|
$
|
(444
|
)
|
Weighted average shares outstanding—basic
|
|
|
31,417,859
|
|
|
|
31,271,234
|
|
Net earnings (loss) per share—basic
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
DILUTED
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to common stockholders
|
|
$
|
428
|
|
|
$
|
(444
|
)
|
Weighted average shares outstanding—basic
|
|
|
31,417,859
|
|
|
|
31,271,234
|
|
Dilutive securities
|
|
|
146,625
|
|
|
|
—
|
|
Weighted average shares outstanding, diluted
|
|
|
31,564,484
|
|
|
|
31,271,234
|
|
Net earnings (loss) per share, diluted
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
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, 2017 AND
2016
(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 of the expired plan were to be 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 2016 and 2017 have
not been approved by the Company’s shareholders and were issued as non-qualified stock options.
In the three months ended March 31, 2017 and 2016, the Company
recorded compensation expense related to stock options of $24 and $143, respectively.
During the three months ended March 31, 2017, the Company granted
options to purchase up to 165,000 shares of common stock to employees at a weighted average exercise of $0.21 per share. The 2017
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 March 31, 2017:
|
2017
|
Weighted average expected term
|
5.19 years
|
Weighted average volatility
|
129.04 %
|
Weighted average risk-free interest rate
|
1.64 %
|
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, 2017 AND
2016
(5)
STOCK-BASED COMPENSATION PLANS
(continued)
A summary of stock option activity under all equity compensation
plans for the nine months ended March 31, 2017, is presented below:
|
|
Shares
Under
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2017
|
|
|
2,190,250
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
Granted
|
|
|
165,000
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(11,500
|
)
|
|
$
|
0.21
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
2,343,750
|
|
|
$
|
0.39
|
|
|
6.6 years
|
|
$
|
155,146
|
|
Exercisable at March 31, 2017
|
|
|
1,693,295
|
|
|
$
|
0.43
|
|
|
5.9 years
|
|
$
|
121,466
|
|
A summary of status of the Company’s non-vested share
awards as of and for the three months ended March 31, 2017, is presented below:
|
|
Non-vested Shares
Under Option
|
|
|
Weighted Average
Grant Date Fair Value
|
|
Non-vested at January 1, 2017
|
|
|
572,453
|
|
|
$
|
0.27
|
|
Granted
|
|
|
165,000
|
|
|
$
|
0.21
|
|
Vested
|
|
|
(86,998
|
)
|
|
$
|
0.17
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
Non-vested at March 31, 2017
|
|
|
650,455
|
|
|
$
|
0.27
|
|
As of March 31, 2017, the Company had approximately $84 of unrecognized
compensation expense related to stock options that will be recognized over a weighted average period of approximately 2.55 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 2% for the three month ended March 31, 2017 due to alternative
minimum taxes, as the realization of any deferred tax assets is not more likely than not and a full valuation allowance has been
recorded by management. The Company paid no income taxes during the three months ended March 31, 2017.
(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 forbearance agreements which have
been extended through June 30, 2017) continued to release cash collateral to the Company based on cash collections. As a result
of the Company raising capital through a private placement as described in note 8 and increased revenues and cash flow, the Company
was able to make a $600 payment to the Lender against the principal amount of the debt during the first three months of 2017 payment
against principal.
Notwithstanding the Company’s improved performance in
2017 and expectations for the future, no assurance can be given that the Lender will continue to forbear exercising its default
remedies or will continue to make such additional loans based on cash collections or in any other manner, or that the parties will
agree on a repayment plan which the Company can meet. If the Lender were to insist upon immediate repayment, the Company 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, 2017 AND
2016
As of May 10, 2017, $1,978 was outstanding under the Triumph
Agreement (as compared to $2,771 at December 31, 2016) 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, 2017, 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 June 30, 2017, pursuant to the terms of the March 31, 2017 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 $100 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) PRIVATE PLACEMENT MEMORANDUM
Commencing in November of 2016, the Company conducted a private
placement on a “best efforts, minimum-maximum” basis of 12% unsecured subordinated promissory notes, for a minimum
of $1,000,000 and a maximum of $1,500,000 pursuant to Sections 4(a)(2) and 4(a)(5) of the Securities Act of 1933, as amended (the
“1933 Act”) and Rule 506(b) of the 1933 Act (the “Offering”). The Offering was conducted through a FINRA
registered broker, Newbridge Securities Corporation (“Newbridge”). On February 28, 2017, the Company conducted a closing
under the Offering and issued promissory notes totaling $1,035,000, with a maturity date of June 28, 2018, with the remaining unpaid
principal balance due. The Offering requires the Company to make monthly repayment commencing on June 1, 2017, until the Senior
Lender has been paid in full, the private placement memorandum limits the funds available for repayment to the note holders to
an amount equal to 5% of the Company’s collections received by the Senior Lender during that month.. Newbridge was compensated
in connection with sales made in the Offering consisting of (i) a cash amount equaling 10% commissions, a 3% non-accountable expense
allowance, and related expenses totaling $154,000 (ii) 776,250 shares of our Common Stock were issued to the placement agent as
additional commission and fees totaling $255, and (iii) the Company has an obligation to issue 776,250 shares of the common stock,
six months after issuance of the notes to the noteholders which nave initially been recorded as a liability totaling $255. In connection
with the Offering, we also paid our Lender $342,000 as repayment of principal and interest on the outstanding obligations. During
the three months ended March 31, 2017, the Company recognized $37 debt issuance cost and debt discount amortization expense included
in interest expense.
The table below summarizes the cash and
non-cash components of the private placement memorandum dated February 28, 2017:
Proceeds from unsecured subordinated promissory notes
|
|
$
|
1,035
|
|
Less debt issuance costs and discount
|
|
|
|
|
Payment of commission and placement agent fees and related expenses
|
|
|
155
|
|
|
|
|
|
|
Non-cash activity
|
|
|
|
|
Common stock issued to placement agent
|
|
|
255
|
|
Obligation to issue common stock to private placement noteholders
|
|
|
255
|
|
Amortization of issuance costs and debt discount
|
|
|
(38
|
)
|
Unsecured subordinated promissory notes, net of issuance and debt discount
|
|
|
408
|
|
|
|
|
|
|
Current portion of unsecured subordinated promissory notes based upon estimated required repayments form expected cash flows
|
|
|
(288
|
)
|
Long-term portion of unsecured subordinated promissory notes
|
|
$
|
120
|
|
(9) 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 billing adjustments. Subsequent to March 31, 2016, the insurance company verbally communicated to the Company that this payment
was made in error and requested it be refunded to the insurance company. The Company recorded this $880 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.
(10)
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 March 31,
2017, the total recorded cost of assets under capital leases was approximately $461. Accumulated depreciation related to these
assets totals approximately $310.
(11)
CONCENTRATIONS
The Company sourced approximately 33% and 35% of components
for its electrotherapy products from one vendor during the three months ended March 31, 2017 and 2016, 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, 2017 and December 31, 2016, that made up approximately13% and 10%, respectively, of the net accounts receivable
balance.
(12)
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.
(
13) RELATED PARTY TRANSACTIONS
The Company employs Mr. Martin Sandgaard and Mr. Joachim Sandgaard,
both sons of Thomas Sandgaard. Compensation was $43 and $30 for the three months ended March 31, 2017 and 2016, respectively. To
meet Mr. Sandgaard’s obligation to his former wife under a settlement agreement, the Company, during the fourth quarter of
2015, entered into 3 year employment arrangement totaling $100,000 per year with Mr. Joachim Sandgaard.
Related party payables primarily consist of advances made to
the Company and inventory purchases made on behalf of the Company. Accrued liabilities as of March 31, 2017 and December 31, 2016
include a net payable to Thomas Sandgaard of $23 and $75 respectively, and a net payable to an employee of $109 and $112 respectively.
During the three months ending March 31, 2017 the company made a repayment to Thomas Sandgaard and an employee of $52 and $3 respectively.
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, 2016.
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 2016 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 have three active subsidiaries: Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation);
Zynex Europe, ApS (“ZEU,” a wholly-owned Denmark corporation), produced minimum revenues during 2016 and 2017 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 produce revenue for the Company in the foreseeable future.
RESULTS OF OPERATIONS (
dollars in thousands, except
per share data
)
Summary
For the three months ended March 31, 2017, income was $353 as
compared to a $(444) loss in the same quarter of 2016. This reflects flat net revenue compared to the same period the prior year
and decreased cost of revenue, selling, general and administrative expense.
Background
For the years ended December 31, 2016 and 2015, we reported
net income of $69 and net loss of $2,911, respectively. As of March 31, 2017 we had a working capital deficit of $(3,514) as compared
to $(4,323) at December 31, 2016 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 release cash collateral 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 condensed 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 2017 emphasize revenue
growth and cash flow; focusing our attention on increasing the number of sales representatives, continued improvements to our billing
organization and processes and reducing and controlling administrative expenses.
Total net revenue for the three months ended March 31, 2017
was $3,436 compared to $3,477 for the three months ended March 31, 2016.
During the years ending December 31, 2016 and 2015, 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 relatively flat in 2016 and
first quarter of 2017, 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.
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 agreed to forbear from the exercise of its rights and remedies under the terms of the credit
agreement through June 30, 2017 and continues to release cash collateral to us based on our cash collections.
We are obligated to decrease the Lender’s outstanding
balance by $100 per month. As of May 3, 2017, we had $1,978 of outstanding borrowings under the credit agreement, as compared to
$2,171 at March 31, 2017 and $2,771 as of December 31, 2016. This reduction in the line of credit primarily results from increased
accounts receivable collections and proceeds from a private placement completed through Newbridge Securities Corporation in February
2017. 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 release cash collateral, 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. Our prior 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, 2017 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 2017 focuses on our effort to attain external
financing, the Lender’s continued support, the vendors continued support and attaining positive cash flows 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 increase the number of sales representatives selling Zynex products, successfully promoting our EZ Rx Prescription
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.
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 or recovery. The device alerts
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 comments in October 2016 and responded to the FDA in November.
We have and will continue to seek external financing and monitor
and control our sales growth, product production needs and administrative costs going forward. We believe 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 our vendors to work with us on the slow payment of past due bills, that the cash flows
from operating activities will be sufficient to fund the our cash requirements through the next twelve months. Management believes
that its cash flow projections for 2017 are achievable and that sufficient cash will be generated to meet our 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 we
will be able to meet the requirements of our 2017 cash flow projections or that we will be able to address our working capital
shortages; the principal component of which is the negative working capital (principally the line of credit and past due accounts
payable which are considered a current liability in their entirety).
There can be no assurance that we will be able to secure additional
external financing, the Lender will continue to release cash collateral, 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 sales (purchased or rented products,
transdermal pain cream sales, and consumable supplies) reduced by estimated Third-party Payors reimbursement deductions and an
allowance for uncollectible amounts. The reserve for billing allowance adjustments and allowance for uncollectible accounts are
adjusted on an ongoing basis in conjunction with the processing of Third-party 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.
As of January 2016, we no longer offered our transdermal pain creams for sale and they are not part of our 2017 or 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
“billing 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, 2016 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, 2017, we believe we have an adequate allowance
for billing 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, 2017 and 2016
consisted of the following:
|
|
2017
|
|
|
2016
|
|
Product and Rental Sales
|
|
$
|
1,862
|
|
|
|
54.2
|
%
|
|
$
|
2,556
|
|
|
|
73.5
|
%
|
Supplies Sales
|
|
|
1,574
|
|
|
|
45.8
|
%
|
|
|
894
|
|
|
|
25.7
|
%
|
Pharmazy Sales*
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
19
|
|
|
|
0.6
|
%
|
Other
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
8
|
|
|
|
0.2
|
%
|
|
|
$
|
3,436
|
|
|
|
100.0
|
%
|
|
$
|
3,477
|
|
|
|
100.0
|
%
|
|
*
|
Discontinued in January, 2016.
|
Overall, net revenue for three months ended March 31, 2017 decreased
$41(1%) as compared to $3,477 for three months ending March 31, 2016. The decrease in Product and Rental Sales Revenue for 2017
reflects lower orders total of 3,824 compared to the same period last year of 8,369. Lower orders reflect Zynex’s inability
to produce our goods on time to meet the demand for our products. Supplies Sales Revenue for the three months ended March 31, 2017
increased to $1,574 from $894 for the same period in 2016 as a result of an expanded customer base provided by the 83% 2016 orders
increase from 2015.
Pharmazy Sales Revenue for 2017 is zero compared to $19 in 2016.
This was a result of shutting down this business to focus on our core (Electrotherapy products) and future (blood volume monitor)
business.
Other revenue includes billing consulting revenue totaling $0
and $8 for the three months ended March 31, 2017 and 2016, respectively. In order to focus on our core Electrotherapy products,
we terminated the billing consulting services.
Operating Expenses
Cost of Revenue – rental, product and supply
for
the three months ended March 31, 2017 and 2016 consisted of the following:
|
|
2017
|
|
|
2016
|
|
Rental depreciation
|
|
$
|
20
|
|
|
$
|
51
|
|
Product and supply costs
|
|
|
518
|
|
|
|
448
|
|
Operations labor and overhead
|
|
|
224
|
|
|
|
323
|
|
Shipping costs
|
|
|
161
|
|
|
|
147
|
|
Pharmazy costs
|
|
|
—
|
|
|
|
14
|
|
Field inventory write-off
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
923
|
|
|
$
|
983
|
|
The rental depreciation represents the net change in the depreciation
of rental assets, which are included in property and equipment.
Product and supply costs remained consistent for the three months
ended March 31, 2017 as compared to the three months ended March 31, 2016. Operations labor and overhead, which includes the production
department labor and associated overhead, decreased $99 (31%). The decreased costs primarily reflect a $30 reduction of rent and
$69 reduction of administrative labor costs.
Pharmazy material costs decreased as a result of closing the
Pharmacy operation in January 2016.
Selling General and Administrative Expenses
Selling, general, and administrative expenses for the three-month
ended March 31, 2017 was $2,030, compared to $2,844 for the same period in 2016. Reduction primarily related to commissions $(413)
due to fewer orders, Salaries $(155) associated with the reduction of Finance, Management, and R&D personnel, Temporary Services
$(193) from the elimination of staffing agencies, and stock compensation $(119) offset by an increase in public company expenses
of $66 due to increases of audit and publishing fees.
Other income (expense)
is comprised of interest expense.
Interest expense for the three-month ended March 31, 2017 was
$121, compared to $94 for the same period in 2016. The interest expense is based on a floating rate. To the extent that interest
rates increase generally as a result of action by the Federal Reserve Board, the Company’s interest expense can be expected
to increase even if the amount outstanding remains consistent or even reduces.
In connection with the Offering discussed in Note 8, we also
paid our Lender $342,000 as repayment of principal and interest on the outstanding obligations. During the three months ended March
31, 2017, the Company recognized $37 debt issuance cost and debt discount amortization expense included in interest expense.
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, 2017, 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. Pursuant to the lockbox arrangement, the Lender sweeps daily our collected cash, withholds fees and the $100 per month
in principal reduction we have agreed to pay (as discussed herein) and releases the remaining cash flow to us. However, no assurance
can be given that the Lender will continue to permit such an agreement 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, 2017, $2,171 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, 2017, 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, 2017, pursuant to
the terms of the March 31, 2017 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 at least $100 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. In March of 2017 and in connection with the Offering (described below), we paid our Lender $342 as reduction of borrowings
outstanding.
Limited Liquidity
As a result of the minimal income during the year ended December
31, 2016 and during the first quarter of 2017 and the significant losses we suffered in the years ended December 31, 2015, 2014
and 2013, the default under our Credit Agreement, and other factors, we have significant working capital deficits of $(3,514) at
March 31, 2017 as compared to $(4,323) at December 31, 2016. 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, 2016. Our
Lender could, in its discretion, cease releasing cash collateral 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 (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 $(3,514) as of March 31, 2017
and limited liquidity may restrict our ability to carry out our current business plans and curtail our future revenue growth. For
the period ended March 31, 2017, we reported cash provided by operating activities of $23 and a net income of $353 for the same
period. 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 historical 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.
Commencing in November of 2016, the Company conducted a private placement on a “best efforts,
minimum-maximum” basis of 12% unsecured subordinated promissory notes, for a minimum of $1,000,000 and a maximum of $1,500,000
pursuant to Sections 4(a)(2) and 4(a)(5) of the Securities Act of 1933, as amended (the “1933 Act”) and Rule 506(b)
of the 1933 Act (the “Offering”). The Offering was conducted through a FINRA registered broker, Newbridge Securities
Corporation (“Newbridge”). On February 28, 2017, the Company conducted a closing under the Offering and issued promissory
notes totaling $1,035,000, with a maturity date of June 28, 2018, with the remaining unpaid principal balance due. The Offering
requires the Company to make monthly repayment commencing on June 1, 2017, until the Senior Lender has been paid in full, the
private placement memorandum limits the funds available for repayment to the note holders to an amount equal to 5% of the Company’s
collections received by the Senior Lender during that month.. Newbridge was compensated in connection with sales made in the Offering
consisting of (i) a cash amount equaling 10% commissions, a 3% non-accountable expense allowance, and related expenses totaling
$154,000 (ii) 776,250 shares of our Common Stock were issued to the placement agent as additional commission and fees totaling
$255, and (iii) the Company has an obligation to issue 776,250 shares of the common stock, six months after issuance of the notes
to the noteholders which nave initially been recorded as a liability totaling $255. In connection with the Offering, we also paid
our Lender $342,000 as repayment of principal and interest on the outstanding obligations. During the three months ended March
31, 2017, the Company recognized $37 debt issuance cost and debt discount amortization expense included in interest expense.
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. There is no guarantee that we will be able to meet the
requirements of its 2017 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 $23 and $666 for the
three months ended March 31, 2017 and 2016, respectively. The change in cash from operating activities for the three months ended
March 31, 2017 was primarily the result of a decrease in accounts payable and increase in prepaid expenses and inventory offset
by net income in 2017.
Cash (used in) provided by investing activities was $(57) and
$10 for the three months ended March 31, 2017 and 2016, 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) provided by financing activities was $249 and
$(660) for the three months ended March 31, 2017 and 2016, respectively. The primary changes in cash during these periods
were net repayments on the line of credit, borrowings on note payable, and debt issuance costs. During the three months ended March
31, 2017, the Company recognized $37 debt issuance cost and debt discount amortization expense included in interest expense.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
Our discussion and analysis of our financial condition and results
of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. There has been no change to critical accounting policies and estimates during the quarter.
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, 2016, filed with the Securities and Exchange Commission on April
17, 2017.
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.