The accompanying notes are an integral part
of these condensed consolidated financial statements
The accompanying notes are an integral part
of these condensed consolidated financial statements
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 Englewood,
Colorado. We operate one primary business segment, medical devices which include Electrotherapy and Pain Management
Products. As of September 30, 2018, 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 material revenues during the nine months ended September 30, 2018 and 2017
from international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation)
has developed a blood volume monitoring device, but it is awaiting approval by the U.S. Food and Drug Administration (“FDA”)
as well as CE Marking in Europe, therefore, ZMS has achieved no revenues to date.
The term “the Company” refers to Zynex, Inc. and
its active and inactive subsidiaries.
Nature of Business
The Company designs, manufactures and markets medical devices
that treat chronic and acute pain, as well as activate and exercise muscles for rehabilitative purposes with electrical stimulation.
The Company’s devices are intended for pain management to reduce reliance on drugs and medications and provide rehabilitation
and increased mobility through the utilization of non-invasive muscle stimulation, electromyography technology, interferential
current (“IFC”), neuromuscular electrical stimulation (“NMES”) and transcutaneous electrical nerve stimulation
(“TENS”). All our medical devices are designed to be patient friendly and designed for home use. Our devices are small,
portable, battery operated and include an electrical pulse generator which is connected to the body via electrodes. All of our
medical devices are marketed in the U.S. and are subject to FDA regulation and approval. Our products require a physician’s
prescription before they can be dispensed in the U.S. Our primary product is the NexWave device. The NexWave is marketed
to physicians and therapists by our field sales representatives. The NexWave requires consumable supplies, such as
electrodes and batteries, which are shipped to patients on a recurring monthly basis, as needed.
During the three and nine months ended September 30, 2018 and
2017, the Company generated substantially all of its revenue (99.99%) in North America from sales and supplies of its devices 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, 2017. Amounts as of December 31, 2017, 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, 2017, 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, 2018 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, 2018, are not necessarily indicative of the results that may be achieved for
a full fiscal year and cannot be used to indicate financial performance for the entire year.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Zynex, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Non-controlling Interest
Non-controlling interest in the equity of a subsidiary is accounted
for and reported as stockholders’ 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 2017 financial
statements to conform to the consolidated 2018 financial statement presentation. These reclassifications had no effect on net earnings
or cash flows as previously reported.
We reclassified amounts between device and supplies revenue
for all of the quarters ended during 2017. The change was due to enhanced information which allowed us to perform a more detailed
analysis of revenue and the related classifications. The reclassification did not change total net revenue.
Use of Estimates
Preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The most significant management estimates used in the preparation
of the accompanying consolidated financial statements are associated with the allowance for billing adjustments and uncollectible
accounts receivable, the reserve for obsolete and damaged inventory, stock-based compensation, and valuation of long-lived assets
and realizability of deferred tax assets.
Revenue Recognition, Allowance for Billing Adjustments
and Collectability
On January 1, 2018 the company adopted the new accounting standard
on revenue recognition issued by the Financial Accounting Standards Board (“FASB”). Pursuant to the revenue from contracts
with customer’s standards the Company recognizes revenue when it transfers promised goods to customers in an amount that
reflects the consideration to which the company expects to be entitled, known as the transaction price. The company elected to
use the modified retrospective method which resulted in immaterial changes to previously issued financial statements and retained
earnings.
Revenue is generated primarily from sales in the United States
of our electrotherapy devices and associated supplies. Sales are primarily made with, and shipped, direct to the patient with a
small amount of revenue generated from sales to distributors. Device sales can be in the form of a purchase or a lease. Revenue
related to purchased devices are recognized in accordance with ASU No. 2014-09—“Revenue from Contracts with Customers”
(Topic 606) and is recognized when the device, which has been prescribed by a doctor, is delivered to the patient.
Revenue related to leased devices are recognized in accordance
with ASC 840, Leases. Using the guidance in ASC 840, we concluded our transactions should be accounted for as operating leases
based on the following criteria below:
|
·
|
The lease does not transfer ownership of the underlying asset to the lessee by the end of the lease term.
|
|
·
|
The lease does not grant the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
|
|
·
|
The lease term is month to month, which does not meet the major part of the remaining economic life of the underlying
asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion
shall not be used for purposes of classifying the lease.
|
|
·
|
There is no residual value guaranteed and the present value of the sum of the lease payments does not equal or exceed
substantially all of the fair value of the underlying asset
|
|
·
|
The underlying asset is expected to have alternative uses to the lessor at the end of the lease term.
|
Leased units still require a doctor’s prescription and
the lease inception is dependent upon delivery. The company retains title to the leased device and those devices are classified
as property and equipment on the balance sheet. Since our leases are month-to-month and can be returned by the patient at any time,
revenue is typically recognized monthly as use by the patient persists.
Devices sales between purchased and leased are broken down as
following (in thousands) :
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
DEVICE REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
$
|
547
|
|
|
$
|
304
|
|
|
$
|
1,260
|
|
|
$
|
1,189
|
|
Leased
|
|
|
1,264
|
|
|
|
841
|
|
|
|
3,812
|
|
|
|
2,571
|
|
Total Device revenue
|
|
|
1,811
|
|
|
|
1,145
|
|
|
|
5,072
|
|
|
|
3,760
|
|
Supplies revenue is recognized once delivered to the patient.
Supplies needed for the device can be set up as a recurring shipment or ordered thru the customer support team or online store
as needed.
In the healthcare industry there is often a third party involved
that will pay on the patients’ behalf. The terms of the separate arrangement impact certain aspects of the contracts, with
patients covered by third party payors, such as contract type, performance obligations and transaction price, but for purposes
of revenue recognition the contract with the customer refers to the arrangement between the Company and the patient. The Company
does not have any material deferred revenue in the normal course of business as each performance obligation is met upon delivery
of goods to the patient. The Company has $0.9 million at the end of September 30, 2018 in deferred revenue related to an insurance
reimbursement claim that is expected to be resolved in 2019. For additional detail see description below in Note 8. There are no
substantial costs incurred through support or warranty obligations.
A significant portion of the Company’s revenues are derived,
and the related receivables are due, from a commercial health insurance company or government agency (collectively “Third-party
Payors”). Transaction price is estimated with variable consideration using the most likely amount technique for Third-party
Payor reimbursement deductions, 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, refund requests, and for the timing and
values of amounts to be billed. Inherent in these estimates is the risk that they will have to be revised as additional information
becomes available and constraints are released. Specifically, the complexity of third-party billing arrangements and the uncertainty
of reimbursement amounts for certain products 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 our forecasting model to
estimate collections could change, which could have an impact on our results of operations and cash flows. Any differences between
estimated settlements and final determinations are reflected as an increase or a reduction to revenue in the period when such final
determinations are known.
The basis of estimates include historical rates of collection,
the aging of the receivables, trends in the historical reimbursement rates by insurance groups, determined using the portfolio
approach, and current relationships and experience with the Third-party Payors. A change in the way estimates are determined 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. The Company monitors the variability and uncertain
timing over payor groups in our portfolios. If there is a change in our payor mix over time, it could affect our net revenue and
related receivables. We believe we have a sufficient history of collection experience to estimate the net collectible amounts by
payor. However, changes to the allowance for billing adjustments, which are recorded as a reduction of transaction price, have
historically fluctuated and may continue to fluctuate significantly from quarter to quarter and year to year.
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 recorded when the
amount is fixed and determinable. However, management maintains an allowance for estimated future refunds which we believe is sufficient
to cover future claims in connection with its estimates of variable consideration recorded at the time sales are recorded.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, accounts
receivable, accounts payable, and accrued liabilities, for which current carrying amounts approximate fair value due to their short-term
nature. Financial instruments also included the notes payable related to our private placement 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 devices, parts and supplies, 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.
Total gross inventories at September 30, 2018 were $0.8 million
which was comprised of finished goods, work in progress, and parts and supplies as compared to December 31, 2017 of $0.4 million.
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: Devices and Supplies.
Income Taxes
We record deferred tax assets and liabilities for the estimated
future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying
consolidated balance sheets, as well as operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities
using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected
to be recovered or settled. We reduce deferred tax assets by a valuation allowance if, based on available evidence, it is
more likely than not that these benefits will not be realized.
On December 22, 2017, the U.S. government enacted comprehensive
tax legislation (the “Tax Act”), which significantly revises the ongoing U.S. corporate income tax law by lowering
the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing a one-time tax on foreign
unremitted earnings and setting limitations on deductibility of certain costs, among other things.
The Company is subject to the provisions of the Financial Accounting
Standards Board (“FASB”) ASC 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities
of a change in tax rates be recognized in the period the tax rate change was enacted. Due to the complexities involved in accounting
for the recently enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”)
118 requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings
to the extent such estimate has been determined.
Pursuant to the SAB118, the Company is allowed a measurement
period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The final
impact on the Company from the Tax Act’s transition tax legislation may differ from the aforementioned estimates due to the
complexity of calculating and supporting with primary evidence such U.S. tax attributes such as accumulated foreign earnings and
profits, foreign tax paid, and other tax components involved in foreign tax credit calculations for prior years back to 1998. Such
differences could be material, due to, among other things, changes in interpretations of the Tax Act, future legislative action
to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations
in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition tax's reasonable
estimate. The Company has not made any estimates regarding the U.S. Tax Act. The Company will continue to evaluate the impact of
the U.S. Tax Act and will record any resulting material tax adjustments during 2018.
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 2018, the FASB issued Accounting Standards Update
No. 2018-02,
Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”),
which allows companies to
reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act (the Tax Act), from accumulated other comprehensive
income to retained earnings. The new standard is effective for us beginning January 1, 2019, with early adoption permitted. We
are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and
the related disclosures.
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 June 2018, the FASB issued ASU 2018-07, Compensation-Stock
Compensation (Topic 718), Improvements to Nonemployee Share-based Payments (“ASU 2018-07”). This ASU expands the scope
of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The effective date
for the standard is for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. The new
guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. The
Company is currently evaluating the effect ASU 2018-07 will have on the 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 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. The Company adopted the new ASU as of January 1, 2018 using the modified retrospective method and resulted
in no material changes to previously stated financial statements. For further details see the revenue recognition policy described
previously in Note 1.
(2)
BALANCE SHEET COMPONENTS
The components of certain balance sheet line items are as follows
(in thousands):
|
|
|
September 30, 2018
|
|
|
|
December 31, 2017
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
1,149
|
|
|
$
|
998
|
|
Assembly equipment
|
|
|
128
|
|
|
|
128
|
|
Vehicles
|
|
|
181
|
|
|
|
76
|
|
Leasehold improvements
|
|
|
480
|
|
|
|
-
|
|
Leased devices
|
|
|
152
|
|
|
|
-
|
|
|
|
$
|
2,090
|
|
|
$
|
1,202
|
|
Less accumulated depreciation
|
|
|
(1,261
|
)
|
|
|
(1,014
|
)
|
|
|
$
|
829
|
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,2018
|
|
|
|
December 31,2017
|
|
Assets acquired under capital lease:
|
|
|
|
|
|
|
|
|
Original book value
|
|
$
|
461
|
|
|
$
|
461
|
|
Accumulated depreciation
|
|
|
(427
|
)
|
|
|
(379
|
)
|
Net book value
|
|
$
|
34
|
|
|
$
|
82
|
|
The Company monitors devices out on lease for potential loss
and places an estimated reserve on the net book value based on historical loss rates.
Total depreciation expense related to our property and equipment
was $0.1 million for the three months ended September 30, 2018 and 2017. Total depreciation expense was $0.1 million and $0.2 million
for the nine months ending September 30, 2018 and 2017, respectively
Total depreciation expense related to devices out on lease was $0.1 million for the three and nine months
ended September 30, 2018. Total depreciation expense was $0.2 million and $0.3 million for the three and nine months ending September
30, 2017, respectively. Depreciation on leased units is reflected on the income statement as cost of revenue.
Included in office furniture and equipment at September 30,
2018 and December 31, 2017 are assets under capital lease. Depreciation expense related to assets under capital leases was $16,000
and $48,000 for the three and nine months ended September 30, 2018.
(3)
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income
by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing
net income by the weighted-average number of common shares outstanding and the number of dilutive potential common share equivalents
during the period, calculated using the treasury-stock method for outstanding stock options.
The calculation of basic and diluted earnings per share for
the three and nine months ended September 30, 2018 and 2017 are as follows:
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
2,591
|
|
|
$
|
2,200
|
|
|
$
|
6,930
|
|
|
$
|
4,058
|
|
Basic weighted average shares outstanding
|
|
|
32,521
|
|
|
|
32,327
|
|
|
|
32,580
|
|
|
|
31,931
|
|
Basic income per share:
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
$
|
0.21
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
2,591
|
|
|
$
|
2,200
|
|
|
$
|
6,930
|
|
|
$
|
4,058
|
|
Weighted average shares outstanding
|
|
|
32,521
|
|
|
|
32,327
|
|
|
|
32,580
|
|
|
|
31,931
|
|
Effect of dilutive securities - options and restricted stock
|
|
|
1,410
|
|
|
|
1,218
|
|
|
|
1,591
|
|
|
|
859
|
|
Diluted weighted average shares outstanding
|
|
|
33,931
|
|
|
|
33,545
|
|
|
|
34,171
|
|
|
|
32,790
|
|
Diluted income per share:
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
$
|
0.20
|
|
|
$
|
0.12
|
|
For the three and nine months ended September 30, 2018, 0.3
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 three and nine months ended September 30, 2017, 1.0
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.
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. Restricted Stock Awards are issued to the recipient
upon vesting and are not included in outstanding shares until such vesting and issuance occurs.
During the three and nine months ended September 30, 2018, 0.1
million stock option awards were granted under the 2017 Stock Plan. At September 30, 2018, 0.7 million Stock Option Awards remain
issued and outstanding.
During the three and nine months ended September 30, 2018, 5,000
and 75,000 shares of restricted stock were granted to the Board of Directors and management under the 2017 Stock Plan. The
fair market value of restricted shares for share-based compensation expensing is equal to the closing price of our common stock
on the date of grant. The vesting on the Restricted Stock Awards are typically released quarterly over three years for the Board
of Directors and annually over four years for management.
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 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. At September 30, 2018, 1.1 million options remain issued and outstanding under the 2005 Stock Option Plan.
The following summarizes stock-based compensation expenses recorded
in the condensed consolidated statements of operations:
During the three months ended September 30, 2018 and
2017, the Company recorded compensation expense related to stock options of approximately $76,000 and $9,000, respectively, all
of which was recorded in selling, general and administrative expense on the accompanying condensed consolidated statements of operations.
During the nine months ended September 30, 2018 and
2017, the Company recorded share based compensation expense related to stock options of approximately $0.2 million and $46,000,
respectively, all of which was recorded in selling, general and administrative expense on the accompanying condensed consolidated
statements of operations.
During the three and nine months ended September 30,
2018, there were 0.1 million options granted, plus the aforementioned restricted stock grants. The options were granted at a weighted
average exercise price of $2.64 per share. The weighted-average grant date fair value of options granted during the three and nine
months ended September 30, 2018 was $2.34.
During the three and nine months ended September 30, 2017, the Company granted options to purchase up
to 0.1 million and 0.5 million 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. The company issued 0 and 10,000 shares of restricted stock to management during the
three and nine months ended September 30, 2017, respectively.
The Company received proceeds of approximately $21,000
and $0.2 million related to option exercises during the three and nine months ended September 30, 2018, respectively. No options
were exercised during the three or nine months ended September 30, 2017.
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 and nine months ended September 30, 2018 and
2017.
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Expected term (years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Risk-free interest rate
|
|
|
2.78
|
%
|
|
|
1.82
|
%
|
|
|
2.78
|
%
|
|
|
1.79
|
%
|
Expected volatility
|
|
|
123.05
|
%
|
|
|
123.85
|
%
|
|
|
123.05
|
%
|
|
|
124.38
|
%
|
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, 2018, is presented below:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
(in thousands)
|
|
|
Price
|
|
|
(Years)
|
|
|
(in thousands)
|
|
Outstanding at December 31, 2017
|
|
|
2,126
|
|
|
$
|
0.56
|
|
|
|
6.6
|
|
|
$
|
5,579
|
|
Granted
|
|
|
120
|
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(86
|
)
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(353
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
1,807
|
|
|
$
|
0.67
|
|
|
|
6.4
|
|
|
$
|
4,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2018
|
|
|
1,235
|
|
|
$
|
0.38
|
|
|
|
5.3
|
|
|
$
|
3,215
|
|
A summary of restricted stock award activity under all equity
compensation plans for the nine months ended September 30, 2018, is presented below:
|
|
Number of
|
|
|
|
Shares
|
|
|
|
(in thousands)
|
|
Granted but not vested at December 31, 2017
|
|
|
15
|
|
Granted
|
|
|
75
|
|
Forfeited
|
|
|
-
|
|
Vested
|
|
|
(13
|
)
|
Granted but not vested at September 30, 2018
|
|
|
77
|
|
As of September 30, 2018, the Company had approximately $0.8
million of unrecognized compensation expense related to stock options and restricted stock awards that will be recognized over
a weighted average period of approximately 2.8 years.
(5)
STOCKHOLDERS’ EQUITY
Treasury Stock
From December 6, 2017 through March 6, 2018, we had the
ability through our stock purchase program to re-purchase our common stock at prevailing market prices either in the open market
or through privately negotiated transactions up to $2.0 million. On March 6, 2018, we reached the limit of $2.0 million and
share re-purchases were ceased. From the inception of the plan through March 6, 2018, we purchased 495,091 shares of our common
stock for $2.0 million or an average price of $4.04 per share.
On May 14, 2018, our Board of Directors approved a new program to buy back an additional $2.0 million
of our common stock at prevailing market prices either in the open market or through privately negotiated transactions through
May 13, 2019. For the three months ending September 30, 2018, the Company purchased 334,414 shares of our common stock for $1.1
million for an average price of $3.22 per share, related to the new program. For the nine months ending September 30, 2018 the
Company purchased 400,927 shares of our common stock for $1.3 million or an average price $3.21 per share.
Warrants
In October 2017, 150,000 common stock warrants were issued in
exchange for professional services.
The Company previously had a revolving line of credit with Triumph Healthcare Finance. This credit facility
was paid in full on June 30, 2017. In connection with the forbearance agreement with Triumph entered into on March 28, 2016, the
lender suspended monthly payment requirements for February, March and April of 2016 in exchange for the issuance of a common stock
warrant of 50,000.
A summary of stock warrant activity for the nine months ended
September 30, 2018 are presented below:
|
|
Number of
Warrants
(in thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands
)
|
|
Outstanding at December 31, 2017
|
|
|
200
|
|
|
$
|
1.86
|
|
|
|
5.87
|
|
|
$
|
264
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(50
|
)
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
150
|
|
|
$
|
2.42
|
|
|
|
6.02
|
|
|
$
|
85
|
|
There were no warrants granted during the three or nine months
ended September 30, 2018 or 2017.
(6)
INCOME TAXES
The Company recorded an income tax expense of $0.2 million and
$44,000 for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and
2017, the Company recorded an income tax provision of $0.4 million and $0.1 million respectively. The income tax provision
for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, primarily related
to excess tax benefits on stock option exercises. For the three and nine months ended September 30, 2018 discrete items adjusted
were $16,000 and $0.3 million respectively. At September 30, 2018 the Company is currently estimating an annual effective tax rate
of approximately 9%. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax
rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to various
factors.
ASC 740, Income Taxes, provides for the recognition of
deferred tax assets if realization of such assets is more likely than not. As of December 31, 2017, our deferred tax assets were
fully offset by a valuation allowance. Based upon the weight of available evidence, which includes recent operating performance,
and forecasting our future results, we released a portion of the valuation allowance against our deferred tax assets during
the period ending September 30, 2018. Since the deferred tax assets are expected to be utilized in the current year and in connection
with interim reporting requirements, we have adjusted our annual effective tax rate to recognize the benefit ratably over all quarters
of 2018. We will continue to reassess valuation allowance considerations on a quarterly basis.
Taxes of approximately $0.2 million were paid during the
nine months ended September 30, 2018. No taxes were paid in the nine months ended September 30, 2017.
(7)
PRIVATE PLACEMENT
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 was conducted through a FINRA registered broker, Newbridge
Securities Corporation (“Newbridge”). On February 28, 2017, the Company issued promissory notes totaling $1,035,000,
with a maturity date of June 28, 2018. The Company was obligated to make monthly repayments commencing on July 1, 2017, until the
senior lender had been paid in full with a limitation on 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; (ii) a 3% non-accountable expense allowance
(iii) expense reimbursement of $155,000 (iv) 776,250 shares of our common stock and (v) fees totaling $255,000. In connection with
the sale of the notes, 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 to the
note holders on August 28, 2017. In connection with the Offering, we also paid Triumph Bank, our senior secured 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 months ended September 30, 2018 and 2017, the Company recognized
$0 and $143,000, respectively in debt issuance costs and debt discount amortization expense included in interest expense, respectively. During
the nine months ended September 30, 2018 and 2017, the Company recognized $153,000 and $292,000, respectively 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 to be 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.
The table below summarizes the cash and
non-cash components of the private placement memorandum (in thousands):
|
|
September 30, 2018
|
|
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
|
|
|
(1,035
|
)
|
|
|
|
|
|
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
|
|
|
665
|
|
Unsecured subordinated promissory notes, net of issuance and debt discount
|
|
|
-
|
|
|
|
|
|
|
Current 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 review of
the reimbursement to determine that the original sales arrangement was properly executed, the products had been delivered, the
price of the products and the reimbursement rate is 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 review is complete and any
refund obligation is deemed remote.
(9)
CAPITAL LEASES AND OTHER OBLIGATIONS
On October 20, 2017 the Company entered into a sublease agreement with CSG Systems Inc. for approximately
41,715 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 accounts for the total
rent expense over the lease term on a straight line basis and the additional payable as deferred rent. As of the nine months ended
September 30, 2018, the Company had $0.6 million in deferred rent. The Company is also obligated to pay its proportionate share
of building operating expenses. The sub-landlord agreed to contribute approximately $0.2 million toward tenant improvements which
is accounted for in deferred rent and subsequently treated as a reduction of expense over the term of the lease.
Our prior headquarters lease in Lone Tree, Colorado contained
a termination clause which allowed the Company to terminate the lease at any time with three months written notice. We provided
notice to the landlord at the end of October 2017.
We entered into a month-to-month lease at our Lone Tree, Colorado
location for warehouse and production space to cover the periods January – April 2018. In April we transitioned all warehouse
and production facilities to our new Englewood, Colorado location. The lease was for 12,494 rentable square feet at $26.50 per
square foot and could be terminated at any time with thirty days’ notice. Termination notice was given on April 3, 2018.
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, 2018, the total recorded cost of assets under capital leases was approximately $0.5 million. Accumulated depreciation related
to these assets totals approximately $0.4 million.
(10)
CONCENTRATIONS
For the three months ended September 30, 2018, the Company sourced
approximately 51% of the components for its electrotherapy products from three significant vendors (defined as supplying at least
10%). For the nine months ended September 30, 2018 the company sourced approximately 44% of components from one significant supplier.
For the three months ended September 30, 2017, the Company sourced
approximately 52% from three significant vendors. For the nine months ended September 30, 2017, the Company sourced 47% of its
components from two significant vendors.
Management believes that its relationships with suppliers are
good; however, if the relationships were to be replaced, there may be a short-term disruption to operations, a period of time in
which products may not be available and additional expenses may be incurred.
The Company had receivables from a private health insurance
carrier at September 30, 2018 and December 31, 2017, that made up approximately 22% and 24%, 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 accrue
the estimated exposure for such events when losses are determined to be both probable and estimable.
The Company is currently not a party to any material pending
legal proceedings.
(
12)
RELATED PARTY TRANSACTIONS
The Company employs Mr. Martin Sandgaard and Mr. Joachim Sandgaard,
both sons of Thomas Sandgaard. Total compensation for both was $40,000 and $43,000 for the three months ended September 30, 2018
and 2017, respectively. Compensation for both was $0.1 million for the nine months ended September 30, 2018 and 2017. 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.
(1
3)
SUBSEQUENT EVENTS
On November 6, 2018 our board of Directors declared a special
one-time cash dividend of $0.07 per share payable January 18, 2019 to stockholders of record on January 2, 2019.