The accompanying notes are an integral part
of these condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
(1)
|
BASIS OF PRESENTATION
|
Organization
Zynex, Inc. (a Nevada corporation) has its headquarters in Lone
Tree, Colorado. As of September 30, 2017, the Company’s only active subsidiary is Zynex Medical, Inc. (“ZMI,”
a wholly-owned Colorado corporation) through which the Company conducts most of its operations. One other subsidiary, Zynex Europe,
ApS (“ZEU,” a wholly-owned Denmark corporation), did not generate any revenue during the three or nine months ended
September 30, 2017 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. Its inactive subsidiaries include Zynex NeuroDiagnostics, Inc. (“ZND,”
a wholly-owned Colorado corporation), Zynex Billing and Consulting, LLC (“ZBC,” an 80% owned Colorado limited liability
company) and Pharmazy, Inc. (“Pharmazy”), which was incorporated in June 2015 as a wholly-owned Colorado corporation.
The Company’s compound pharmacy operated as a division of ZMI dba as Pharmazy through January 2016.
The term “the Company” refers to Zynex, Inc. and its
active and inactive subsidiaries.
Nature of Business
ZMI designs, manufactures and markets U.S. Food and Drug Administration
(FDA) cleared medical devices that treat chronic and acute pain, as well as activate and exercise muscles for rehabilitative purposes
with electrical stimulation. ZEU was formed in 2012 to conduct international sales and marketing for Company products. In addition,
ZMI dba Pharmazy, which sold compound transdermal pain cream, began operations in early 2014 and was closed in January 2016.
ZMS was formed to develop and market medical devices for non-invasive
cardiac monitoring, the products of which are under development. The Company is currently developing a blood volume monitoring
device (Blood Volume Monitor). ZMS produced no revenues during the three or nine months ended September 30, 2017 and 2016.
During the three and nine months ended September 30, 2017 and 2016,
the Company generated substantially all of its revenue (99.99%) in North America from sales and supplies of its products to patients
and health care providers.
Unaudited Condensed Consolidated Financial Statements
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”)
and accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and
footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make
the information presented not misleading. A description of the Company’s accounting policies and other financial information
is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form
10-K for the year ended December 31, 2016. Amounts as of December 31, 2016, are derived from those audited consolidated
financial statements. These interim condensed consolidated financial statements should be read in conjunction with the annual audited
financial statements, accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2016, which has previously been filed with the SEC.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as
of September 30, 2017 and the results of its operations and its cash flows for the periods presented. The results of operations
for the three and nine months ended September 30, 2017, are not necessarily indicative of the results that may be achieved for
a full fiscal year and cannot be used to indicate financial performance for the entire year.
Liquidity
During 2013-2015, the Company suffered operating losses which caused
a lack of liquidity and a substantial working capital deficit. This raised substantial doubt about the Company’s ability
to continue as a going concern.
During 2016, the Company generated net income during Q3 and Q4 and
combined with the profitability in Q1, Q2 and Q3 of 2017, the Company has recorded five consecutive profitable quarters, paid off
its line of credit with Triumph Healthcare Finance, a division of TBK Bank, SSB, formerly known as Triumph Community Bank, (“Triumph”)
(Note 6) and generated cash reserves and positive working capital.
As a result, in accordance with Accounting Standards Codification
(“ASC”) 205-40, Presentation of Financial Statements – Going Concern, as of September 30, 2017, management evaluated
whether there are conditions and events that raise doubt about the entity’s ability to continue as a going concern and concluded
there is not significant doubt. The Company is currently able to meet its obligations as they become due within one year. Management’s
evaluation is based only on relevant conditions and events that are known and reasonably knowable as of the date of these financial
statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Zynex, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Non-controlling Interest
Non-controlling interest in the equity of a subsidiary is accounted
for and reported as stockholders’ (deficit) equity. Non-controlling interest represents the 20% ownership in the Company’s
majority-owned (but currently inactive) subsidiary, ZBC.
Reclassifications
Certain reclassifications have been made to the 2016 financial statements
to conform to the consolidated 2017 financial statement presentation. These reclassifications had no effect on net earnings or
cash flows as previously reported.
Use of Estimates
Preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The most significant management estimates used in the preparation
of the accompanying consolidated financial statements are associated with the allowance for billing adjustments and uncollectible
accounts receivable, the reserve for obsolete and damaged inventory, the life of its rented equipment, stock-based compensation,
and valuation of long-lived assets and realizability of deferred tax assets.
Revenue Recognition, Allowance for Billing Adjustments and
Collectability
The Company recognizes revenue when each of the following four conditions
are met: 1) a contract or sales arrangement exists, 2) products have been shipped and title has transferred, or rental services
have been rendered, 3) the price of the products or services is fixed or determinable, and 4) collectability is reasonably assured.
The Company recognizes revenue when medical units and supplies are shipped or, for medical units sold from consigned inventory,
when it receives notice that the product has been prescribed and delivered to the patient. The Company, prior to recognizing revenue
verifies the patient’s insurance coverage or obtains the insurance company preauthorization, when required. Revenue from
supplies is recognized upon shipment. Revenue from the rental of products is normally on a month-to-month basis and is recognized
ratably over the products’ rental period. Revenue from sales to distributors is recognized when the Company ships its products.
Revenue is reported net, after adjustments for estimated insurance company or governmental agency (collectively “Third-party
Payors”) reimbursement deductions and, for wholesale customers and patient billings, an allowance for uncollectible accounts.
The Third-party Payor reimbursement deductions are known throughout the health care industry as “billing adjustments”
whereby the Third-party Payors unilaterally reduce the amount they reimburse for the Company’s products.
A significant portion of the Company’s revenues are derived,
and the related receivables are due, from Third-party Payors. The nature of these receivables within the medical industry has typically
resulted in long collection cycles. The process of determining what products will be reimbursed by Third-party Payors and the amounts
that they will reimburse is complex and depends on conditions and procedures that vary among providers and may change from time
to time. The Company maintains an allowance for billing adjustments and an allowance for doubtful accounts. Billing adjustments
result from reimbursements from Third-party Payors that are less than amounts claimed and from where the amount claimed by the
Company exceeds the Third-party Payors usual, customary and reasonable reimbursement rate. The Company determines the amount of
the allowance and adjusts it at the end of each reporting period, based on a number of factors, including historical rates of collection,
the aging of the receivables, trends in the historical rates of collection and current relationships and experience with the Third-party
Payors. If the rates of collection of past-due receivables recorded for previous fiscal periods changes, or if there is a trend
in the rates of collection on those receivables, the Company may be required to change the rate at which it provides for additions
to the allowance. A change in the rates of the Company’s collections can result from a number of factors, including experience
and training of billing personnel, changes in the reimbursement policies or practices of Third-party Payors, or changes in industry
rates of reimbursement. We believe we have a sufficient history of collection experience to estimate the net collectible amounts
by payor. However, changes to the allowance for billing adjustments and uncollectible accounts, which are recorded in the income
statement as a reduction of revenue, have historically fluctuated and may continue to fluctuate significantly from quarter to quarter
and year to year.
Due to the nature of the medical industry and the reimbursement
environment in which the Company operates, estimates are required to record net revenues and accounts receivable at their net realizable
values (also known as net collectible value). Inherent in these estimates is the risk that they will have to be revised or updated
as additional information becomes available. Specifically, the complexity of third-party billing arrangements and the uncertainty
of reimbursement amounts for certain products or services from payors or unanticipated requirements to refund payments previously
received may result in adjustments to amounts originally recorded. Due to continuing changes in the health care industry and third-party
reimbursement, as well as changes in our billing practices to increase cash collections, it is possible that management’s
estimates could change in the near term, which could have an impact on our results of operations and cash flows. Any differences
between estimated settlements and final determinations are reflected as an increase or a reduction to revenue in the period when
such final determinations are known.
The Company frequently receives refund requests from insurance providers
relating to specific patients and dates of service. Billing and reimbursement disputes are very common in the Company’s industry.
These requests are sometimes related to a limited number of patients or products; at other times, they include a significant number
of refund claims in a single request. The Company reviews and evaluates these requests and determines if any refund request is
appropriate. The Company also reviews these refund claims when it is rebilling or pursuing reimbursement from insurance providers.
The Company frequently has significant offsets against such refund requests, and sometimes amounts are due to the Company in excess
of the amounts of refunds requested by the insurance providers. Therefore, at the time of receipt of such refund requests, the
Company is generally unable to determine if a refund request is valid and should be accrued. Such refunds are accrued when the
amount is fixed and determinable.
However, no assurances can be given with respect to such estimates
of reimbursements and offsets or the ultimate outcome of any refund requests. In addition to the allowance for billing adjustments,
the Company records an allowance for uncollectible accounts receivable for wholesale (sales to distributors) sales and certain
patient billings. Uncollectible accounts receivable are primarily a result of non-payment from patients who have been direct billed
for co-payments or deductibles, lack of appropriate insurance coverage and disallowances of charges by Third-party Payors. If there
is a change to a material insurance provider contract or policy, application by a provider, a decline in the economic condition
of providers or a significant turnover of Company billing personnel resulting in diminished collection effectiveness, the estimate
of the allowance for uncollectible accounts receivable may not be adequate and may result in an increase in the future.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, accounts
receivable, accounts payable and income taxes, for which current carrying amounts approximate fair value due to their short-term
nature. Financial instruments also include the line of credit and capitalized leases, the carrying value of which approximates
fair value because the interest rates on the outstanding borrowings are at rates that approximate market rates for borrowings with
similar terms and average maturities.
Inventory
Inventory, which primarily represents finished goods, are valued
at the lower of cost (average) or market.
The Company monitors inventory for turnover and obsolescence and
records losses for excess and obsolete inventory, as appropriate. The Company provides reserves for estimated excess and obsolete
inventories equal to the difference between the costs of inventories on hand and the estimated market value based upon assumptions
about future demand. If future demand is less favorable than currently projected by management, additional inventory write-downs
may be required.
Segment Information
We define operating segments as components of our enterprise for
which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to
make operating decisions. We have identified our Chief Executive Officer and Chief Financial Officer as our chief operating decision-makers
(“CODM”).
We currently operate our business as one operating segment which
includes two revenue types: Product devices and Product supplies.
Recent Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements
to Accounting for Hedging Activities (“ASU 2017-12”), which amends and simplifies existing guidance
in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements.
ASU 2017-12 is effective for us in the first quarter of fiscal 2020, and earlier adoption is permitted. We are currently
evaluating the impact of our pending adoption of ASU 2017-12 on our consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit
Losses (Topic 326) ("ASU 2016-13"), Measurement of Credit Losses on Financial Instruments. The standard significantly
changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured at
fair value through net income. The standard will replace today's "incurred loss" approach with an "expected loss"
model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances
rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the
accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual periods beginning after
December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018,
and interim periods therein. We are currently evaluating the impact that the adoption of ASU 2016-13 will have on our financial
condition, results of operations and cash flows.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic
842)” (“ASU 2016-02”). These amendments require the recognition of lease assets and lease liabilities on the
balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases”. These amendments
also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Entities
are required to apply the amendments at the beginning of the earliest period presented using a modified retrospective approach.
We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our financial condition, results of operations
and cash flows.
In May 2014, the FASB issued ASU No. 2014-09—“Revenue
from Contracts with Customers” (Topic 606) which amended revenue recognition guidance to clarify the principles for recognizing
revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or
services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those
goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about
customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a
contract. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2018,
using one of two prescribed retrospective methods. The Company is evaluating the impact of the amended revenue recognition guidance
on the Company’s consolidated financial statements.
Management has evaluated other recently issued accounting pronouncements
and does not believe that any of these pronouncements will have a material impact on the Company’s consolidated financial
statements.
Recent Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU No. 2016-09, Stock
Compensation (Topic 718), which includes provisions intended to simplify various aspects related to how share-based payments are
accounted for and presented in the financial statements. The standard is effective for annual periods beginning after December 15,
2016. We adopted this ASU during the first quarter 2017. The key effects of the adoption on our financial statements include
that the Company will now recognize windfall tax benefits as deferred tax assets instead of tracking the windfall pool and recording
such benefits in equity. Additionally, we have elected to recognize forfeitures as they occur rather than estimating them at the
time of grant. The adoption of this ASU did not have a material impact on our consolidated financial statements.
(2)
PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 2017 and December 31,
2016, consist of the following (in thousands):
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
Useful
lives
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
967
|
|
|
$
|
911
|
|
|
3-7 years
|
Rental inventory
|
|
|
1,503
|
|
|
|
1,411
|
|
|
5 years
|
Vehicles
|
|
|
76
|
|
|
|
76
|
|
|
5 years
|
Assembly equipment
|
|
|
125
|
|
|
|
125
|
|
|
7 years
|
|
|
|
2,671
|
|
|
|
2,523
|
|
|
|
Less accumulated depreciation
|
|
|
(2,333
|
)
|
|
|
(1,943
|
)
|
|
|
|
|
$
|
338
|
|
|
$
|
580
|
|
|
|
Total depreciation expense related to our property and equipment
was $0.1 million for the three months ended September 30, 2017 and 2016.
Total depreciation expense related to our property and equipment
was $0.2 million and $0.3 million for the nine months ended September 30, 2017 and 2016, respectively.
(3)
EARNING (LOSS) PER SHARE
Basic earnings (loss) per share are 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.
The calculation of basic and diluted earnings (loss) per share for
the three and nine months ended September 30, 2017 and 2016 is as follows:
|
|
For the Three Months Ended September
30,
|
|
|
For the Nine Months Ended September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
2,200
|
|
|
$
|
532
|
|
|
$
|
4,058
|
|
|
$
|
(140
|
)
|
Basic weighted average shares outstanding
|
|
|
32,327
|
|
|
|
31,271
|
|
|
|
31,931
|
|
|
|
31,271
|
|
Basic income per share:
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.13
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
2,200
|
|
|
$
|
532
|
|
|
$
|
4,058
|
|
|
$
|
(140
|
)
|
Weighted average shares outstanding
|
|
|
32,327
|
|
|
|
31,271
|
|
|
|
31,931
|
|
|
|
31,271
|
|
Effect of dilutive securities - options and restricted stock
|
|
|
1,218
|
|
|
|
170
|
|
|
|
859
|
|
|
|
-
|
|
Diluted weighted average shares outstanding
|
|
|
33,545
|
|
|
|
31,441
|
|
|
|
32,790
|
|
|
|
31,271
|
|
Diluted income per share:
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.12
|
|
|
$
|
(0.00
|
)
|
For the three and nine months ended September 30, 2017, 0.1 million
and 0.8 million shares, respectively, of common stock were excluded from the dilutive stock calculation because their exercise
prices were greater than the average fair value of our common stock for the period.
For the three months ended September 30, 2016, 1.6 million shares
of common stock were excluded from the dilutive stock calculation because their exercise prices were greater than the average fair
value of our common stock for the period. For the nine months ended September 30, 2016, 2.2 million shares of common stock were
excluded from the dilutive stock calculation due to the net loss for the period.
Prior to their issuance on August 28, 2017, the dilutive securities
calculation included 776,250 shares of common stock issuable related to the private placement which was completed on February 28,
2017. The common shares were issuable six months from the closing of the shareholder notes.
(4)
STOCK-BASED COMPENSATION PLANS
In June 2017, our stockholders approved the 2017 Stock Incentive
Plan (the “2017 Stock Plan”) with a maximum of 5,000,000 shares reserved for issuance. Awards permitted under
the 2017 Stock Plan include: Stock Options and Restricted Stock. Awards issued under the 2017 Stock Plan are at the
discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to the closing price
of our common stock on the date of grant and generally vest over four years. During the three and nine months ended September 30,
2017, 76,000 and 286,000 options have been granted under the 2017 Stock Plan.
During the three and nine months ended September 30, 2017, 0 and
10,000 shares of restricted stock were issued to management, respectively. During the three and nine months ended September
30, 2017 no shares of restricted stock vested. No shares of restricted stock were forfeited during the three and nine months ended
September 30, 2017. The fair market value of restricted shares for share-based compensation expensing is equal to the closing
price of our common stock on the date of grant. The restrictions on the stock awards are released annually over four years
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. Options granted in 2016 and through May 2017 prior to the approval of the
2017 Stock Incentive Plan were approved by and certified by the board of directors on September 6, 2017 under the existing 2005
stock option plan.
The following summarizes stock-based compensation expenses recorded
in the condensed consolidated statement of operations:
In the three and nine months ended September 30, 2017,
the Company recorded compensation expense related to stock options of $9,000 and $46,000, respectively, all of which was recorded
in selling, general and administrative expense on the accompanying condensed consolidated statement of operations.
In the three and nine months ended September 30, 2016,
the Company recorded compensation expense related to stock options of $12,000 and $171,000, respectively, all of which was recorded
in selling, general and administrative expense on the accompanying condensed consolidated statement of operations.
During the three and nine months ended September 30,
2017, the Company granted options to purchase up to 76,000 and 511,000 shares of common stock to employees at a weighted average
exercise price of $0.92 and $0.41 per share, respectively. The weighted-average grant date fair value of options granted during
the three and nine months ended September 30, 2017 were $0.90 and $0.39 respectively.
During the three and nine months ended September 30,
2016, the Company granted options to purchase up to 100,000 and 854,000 shares of common stock to employees at a weighted average
exercise price of $0.22 and $0.27 per share, respectively. The weighted-average grant date fair value of options granted during
the three and nine months ended September 30, 2016 were $0.19 and $0.33, respectively.
No options were exercised during the three or nine months
ended September 30, 2017. 1,000 shares were exercised during the three and nine months ended September 30, 2016.
The Company used the Black Scholes option pricing model to determine
the fair value of stock option grants, using the following assumptions:
|
|
For the Three Months Ended September
30,
|
|
|
For the Nine Months Ended September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Expected term (years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Risk-free interest rate
|
|
|
1.82
|
%
|
|
|
1.12
|
%
|
|
|
1.79
|
%
|
|
|
1.49
|
%
|
Expected volatility
|
|
|
123.85
|
%
|
|
|
122.80
|
%
|
|
|
124.38
|
%
|
|
|
122.63
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
A summary of stock option activity under all equity compensation
plans for the nine months ended September 30, 2017, is presented below:
|
|
Number
of Shares
(in thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding at December 31, 2016
|
|
|
2,233
|
|
|
$
|
0.40
|
|
|
|
6.76
|
|
|
$
|
130
|
|
Granted
|
|
|
511
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(787
|
)
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
1,957
|
|
|
$
|
0.43
|
|
|
|
6.40
|
|
|
$
|
2,769
|
|
Exercisable at September 30, 2017
|
|
|
1,415
|
|
|
$
|
0.44
|
|
|
|
5.41
|
|
|
$
|
1,975
|
|
As of September 30, 2017, the Company had approximately $0.2 million
of unrecognized compensation expense related to stock options that will be recognized over a weighted average period of approximately
3.40 years.
(5)
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 and nine months ended September 30, 2017, and resulted
in income tax expense of $44,000 and $89,000 respectively, due to alternative minimum taxes. There was no income tax expense during
the three or nine months ended September 30, 2016.
The Company has generated a net operating loss carryforward (NOL)
for federal income tax purposes of approximately $5.3 million as of September 30, 2017, which is available to offset taxable income
in the future at various dates through 2035. The Company also has available NOL carryforwards of approximately $14.7 million for
state purposes, which begin to expire at various dates ranging from five to seven years.
As of September 30, 2017 and December 31, 2016, the Company has
a valuation allowance on all deferred tax assets. The Company has generated taxable income in 2017 and projects income in future
periods. Based on these factors, the Company is currently evaluating the realization of its deferred tax assets and may have an
adjustment to its valuation allowance in the future.
The Company paid no income taxes during the three or nine months
ended September 30, 2017 or 2016.
(6)
LINE OF CREDIT
The Company had an asset-backed revolving credit facility under
a Loan and Security Agreement as amended, (the “Triumph Agreement”) with Triumph Healthcare Finance. This credit facility
was paid in full on June 30, 2017.
The Triumph Agreement contained certain customary restrictive and
financial covenants for asset-backed credit facilities. The Company had 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.
As of September 30, 2017, $0 was outstanding under the Triumph Agreement
as compared to $2.8 million at December 31, 2016. Subsequent to the default and prior to the pay off, 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 required monthly interest payments in arrears on the first day of each month. The Triumph Agreement originally
matured on December 19, 2014. Triumph had 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. 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 $250,000, 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 $15,000.
(7) 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 July 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 $155,000 (ii) 776,250 shares of our Common Stock were issued to the placement agent as
additional commission and fees totaling $255,000, and (iii) the Company had an obligation to issue 776,250 shares of the common
stock, six months after issuance of the notes to the noteholders which had initially been recorded as a liability totaling $255,000.
The shares were issued on August 28, 2017. In connection with the Offering, we also paid our Lender $342,000 as repayment of principal
and interest on the outstanding obligations. The common stock issued to the note holders represents additional interest expense
and was initially recorded as a liability and was adjusted each reporting period based upon the fair value of the underlying stock
until issued on August 28, 2017. During the three and nine months ended September 30, 2017, the Company recognized $143,000 and
$292,000 in debt issuance costs and debt discount amortization expense included in interest expense, respectively. Also, included
in interest expense is the increase in value of the common shares issued to the private placement noteholders from the date of
issue of approximately $529,000 and $740,000 for the three and nine month periods ended September 30, 2017, respectively.
The table below summarizes the cash and non-cash
components of the private placement memorandum (in thousands):
|
|
September 30, 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
|
)
|
Principal payments on promissory notes
|
|
|
(269
|
)
|
|
|
|
|
|
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
|
|
|
292
|
|
Unsecured subordinated promissory notes, net of issuance and debt discount
|
|
|
393
|
|
|
|
|
|
|
Current portion of unsecured subordinated promissory notes
|
|
|
(393
|
)
|
Long-term portion of unsecured subordinated promissory notes
|
|
$
|
-
|
|
(8) DEFERRED INSURANCE REIMBURSEMENT
During the first quarter of 2016, the Company collected $880,000
from a single insurance company for accounts receivable. The accounts receivable had been previously reduced to zero by the allowance
for billing adjustments. Subsequent to March 31, 2016, the insurance company verbally communicated to the Company that this payment
was made in error and requested it be refunded to the insurance company. The Company recorded this $880,000 insurance reimbursement
as a deferred insurance liability. 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 any refund obligation is deemed remote.
(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 $49,000 to $38,000 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.
|
Also see Note 13 below regarding the Company’s office lease
commitments.
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 2% to 10%. At September
30, 2017, the total recorded cost of assets under capital leases was approximately $461,000. Accumulated depreciation related
to these assets totals approximately $356,000.
(10)
CONCENTRATIONS
For the three months ended September 30, 2017, the Company sourced
approximately 52% of the components for its electrotherapy products from three significant vendors (defined as supplying at least
10%). For the nine months ended September 30, 2017, the Company sourced approximately 47% of components from two vendors.
For the three months ended September 30, 2016, three significant
vendors sourced 79% of our electrotherapy products. For the nine months ended September 30, 2016 two vendors sourced 52% of our
components. Management believes that its relationships with suppliers are good; however, if the relationships were to be replaced,
there may be a short-term disruption to operations, a period of time in which products may not be available and additional expenses
may be incurred.
The Company had receivables from a private health insurance carrier
at September 30, 2017 and December 31, 2016, that made up approximately19% and 10%, 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.
(
12) RELATED PARTY TRANSACTIONS
The Company employs Mr. Martin Sandgaard and Mr. Joachim Sandgaard,
both sons of Thomas Sandgaard. Compensation was $43,000 and $40,000 for the three months ended September 30, 2017 and 2016, respectively
and $129,000 and $101,000 for the nine months ended September 30, 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 September 30, 2017 and December 31, 2016
include a net payable to Thomas Sandgaard of $0 and $75,000 respectively, and a net payable to an employee of $0 and $112,000 respectively.
During the three months ended September 30, 2017 the company made repayments to Thomas Sandgaard and an employee of $0 and $93,000
respectively. During the nine months ended September 30, 2017 the Company made a repayment to Thomas Sandgaard and an employee
of $75,000 and $112,000 respectively.
(
13) SUBSEQUENT EVENT
On October 20, 2017 the Company entered into a sublease agreement
with CSG Systems Inc. for approximately 42,480 square feet at 9555 Maroon Circle, Englewood CO 80112. The Term of the Sublease
runs through June 30, 2023, with an option to extend for an additional two years through June 30, 2025. During the first year of
the Sublease, the rent per square foot is $7.50, increasing to $19.75 during the second year of the Sublease and each year thereafter
for the Initial Term increasing by an additional $1 per square foot. The Company is also obligated to pay its proportionate share
of building operating expenses. The Sublandlord agreed to contribute approximately $219,000 toward tenant improvements.
The Company expects to relocate its headquarters to the subleased
offices in January, 2018.
The Company issued a press release and filed a Form 8-K with
the SEC announcing the transaction on October 26, 2017.