The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
NOTES TO UNAUDITED 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, 2019, 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 three and nine months ended September 30, 2019
and 2018 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 Certificate European (“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 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”).
Our medical devices are designed for home use and to be patient friendly. Our devices are small, portable, battery-operated and
include an electrical pulse generator which is connected to the body via electrodes. 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, which 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, 2019 and
2018, the Company generated substantially all of its revenue (99.99%) in North America from sales of its devices and related supplies
to patients and health care providers.
Unaudited Consolidated Financial Statements
The unaudited 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, 2018. Amounts as of December 31, 2018, are derived from those audited consolidated
financial statements. These interim 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, 2018, which has previously been filed with the SEC.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the financial position of the Company as of September
30, 2019 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, 2019 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.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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, Zynex Billing and Consulting, LLC (“ZBC”).
Reclassifications
During 2019, the Company began reporting costs related to its
selling and marketing activities separate from its general and administrative costs. As a result, reclassifications between selling
and marketing costs and general and administrative costs have been made to the results of operations for the three and nine month
periods ending September 30, 2018 to conform to the consolidated 2019 financial statement presentation. These reclassifications
had no effect on net earnings, retained 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, 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 customers standard 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.
Revenue is generated primarily from sales in the United States
of our electrotherapy devices and associated supplies. Sales are primarily made with, and shipped, directly 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”
(ASC 606) and is recognized when the device, which has been prescribed by a doctor, is delivered to the patient which is when control
is deemed to have transferred to the customer.
Revenue related to devices out on lease is recognized in accordance
with ASC 842 (as defined below). These leases are 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 until the customer returns the unit.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Device sales between purchased, subject to ASC 606, and leased,
subject to ASC 842, are broken down as following (in thousands):
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
DEVICE REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
$
|
939
|
|
|
$
|
547
|
|
|
$
|
2,249
|
|
|
$
|
1,260
|
|
Leased
|
|
|
1,722
|
|
|
|
1,264
|
|
|
|
4,675
|
|
|
|
3,812
|
|
Total Device revenue
|
|
|
2,661
|
|
|
|
1,811
|
|
|
|
6,924
|
|
|
|
5,072
|
|
Supplies revenue is recognized once delivered to the patient,
which is when control is deemed to have transferred to the customer. Supplies needed for the device can be set up as a recurring
shipment, ordered through the customer support team or our online store as needed.
In
the healthcare industry there is often a third party involved that will pay on the patient’s behalf for purchased or leased
devices and supplies. The terms of the separate arrangement impact certain aspects of the contracts, with patients covered
by Third-party Payors (as defined below), 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 had deferred revenue of $0.9 million as of December 31, 2018 related to an insurance reimbursement
claim that was de-recognized during the nine months ended September 30, 2019. For additional detail, see description below in Note
7. There are no substantial costs incurred through support or warranty obligations.
Primarily all of the Company’s revenues are derived, and
the related receivables are due, from patients with private health insurance carriers and workers compensation claims (collectively
“Third-party Payors”), with a small portion related to private pay individuals , attorney and auto claims. The transaction
price is estimated with variable consideration using the most likely amount technique for Third-party Payors 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 Payor billing arrangements and the uncertainty of reimbursement amounts
for certain products from Third-party 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 Payor reimbursements,
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. Historically these differences have been immaterial and the Company has not had to go back and reassess the adjustments
in future periods for past billing adjustments.
The basis of estimates includes historical rates of collection,
the aging of the receivables, trends in the historical reimbursement rates by Third-party Payors, 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 Third-party Payor groups in our portfolios. If there is a change in our Third-party 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 Third-party Payors. 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.
Billing and reimbursement disputes are very common in the Company’s
industry. The Company frequently receives refund requests from Third-party Payors relating to specific patients and dates of service.
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 Third-party Payors.
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 Third-party Payors. 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.
As of September 30, 2019, the Company believes its accounts
receivable is reasonably stated at its net collectible value and has an adequate allowance for billing adjustments relating to
all known Third-party Payor disputes, adjustments and refund requests.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Stock-based Compensation
The Company accounts for stock-based compensation through recognition
of the cost of employee services received in exchange for an award of equity instruments, which is measured based on the grant
date fair value of the award that is ultimately expected to vest during the period. The stock-based compensation expenses are recognized
over the period during which an employee is required to provide service in exchange for the award (the requisite service period,
which in the Company’s case is the same as the vesting period). For awards subject to the achievement of performance
metrics, stock-based compensation expense is recognized when it becomes probable that the performance conditions will be achieved
over the respective performance period.
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 include 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 net realizable value.
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 based upon assumptions about future demand. If future demand is less favorable than currently projected by management,
additional inventory reserves or write-downs may be required.
Inventories, net of reserve, at September 30, 2019 were $2.1
million which was comprised of finished goods, work in progress, and parts and supplies as compared to December 31, 2018 of $0.8
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 bases 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.
We use a recognition threshold and a measurement attribute for
the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits
to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. 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.
Recently Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock
Compensation (Topic 718), Improvements to Nonemployee Share-based Payments. 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 determined
that adoption did not have a material impact on its consolidated financial statements.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
In February 2018, the FASB issued ASU 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. The Company determined that the adoption did not
have a material impact on its consolidated financial statements.
The Company adopted ASU 2016-02, Leases (Topic 842), as
of January 1, 2019, with an effective date of January 1, 2018, using the modified retrospective approach. The modified retrospective
approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of
a full retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance
within the new standards, which among other things, allowed us to carry forward the historical lease classification. We also elected
the hindsight practical expedient to determine the lease term for existing leases. Our election of the hindsight practical expedient
resulted in the lengthening of the lease term related to one of our financing leases.
Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities
of approximately $3.6 million and $3.9 million, respectively, as of January 1, 2018. The Company also recorded an adjustment to
the opening balance of retained earnings of $6,000 on January 1, 2018. The difference between the additional lease assets and lease
liabilities, net of our previously recorded deferred rent liability, was recorded as an adjustment to retained earnings. The standard
did not have a material impact on our consolidated statement of operations and had no impact on our statement of cash flows. See
Note 8, below, for further discussion regarding the Company’s operating and financing leases.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Effect of ASC 842 Adoption on the Company’s Consolidated
Balance Sheets (in thousands, except share amounts)
|
|
December 31,
|
|
|
Effect of the
Adoption of
|
|
|
December 31,
|
|
|
|
2018
|
|
|
ASC 842
|
|
|
2018
|
|
|
|
|
(as previously
reported)
|
|
|
|
|
|
|
|
(as adjusted)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
10,128
|
|
|
$
|
-
|
|
|
$
|
10,128
|
|
Accounts receivable, net
|
|
|
2,791
|
|
|
|
-
|
|
|
|
2,791
|
|
Inventory, net
|
|
|
837
|
|
|
|
-
|
|
|
|
837
|
|
Prepaid expenses and other
|
|
|
570
|
|
|
|
(2
|
)(a)
|
|
|
568
|
|
Total current assets
|
|
|
14,326
|
|
|
|
(2
|
)
|
|
|
14,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
819
|
|
|
|
-
|
|
|
|
819
|
|
Operating lease asset
|
|
|
-
|
|
|
|
3,050
|
(b)
|
|
|
3,050
|
|
Financing lease asset
|
|
|
-
|
|
|
|
19
|
(c)
|
|
|
19
|
|
Deposits
|
|
|
314
|
|
|
|
-
|
|
|
|
314
|
|
Long term deferred income taxes
|
|
|
725
|
|
|
|
-
|
|
|
|
725
|
|
Total assets
|
|
$
|
16,184
|
|
|
$
|
3,067
|
|
|
$
|
19,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
1,552
|
|
|
|
-
|
|
|
|
1,552
|
|
Operating lease liability
|
|
|
-
|
|
|
|
671
|
(b)
|
|
|
671
|
|
Financing lease liability
|
|
|
-
|
|
|
|
14
|
(c)
|
|
|
14
|
|
Deferred rent
|
|
|
57
|
|
|
|
(57
|
)(b)
|
|
|
-
|
|
Income taxes payable
|
|
|
688
|
|
|
|
-
|
|
|
|
688
|
|
Dividends payable
|
|
|
2,270
|
|
|
|
-
|
|
|
|
2,270
|
|
Accrued payroll and related taxes
|
|
|
908
|
|
|
|
-
|
|
|
|
908
|
|
Deferred insurance reimbursement
|
|
|
880
|
|
|
|
-
|
|
|
|
880
|
|
Total current liabilities
|
|
|
6,355
|
|
|
|
628
|
|
|
|
6,983
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
531
|
|
|
|
(531
|
)(b)
|
|
|
-
|
|
Operating lease liability
|
|
|
-
|
|
|
|
2,967
|
(b)
|
|
|
2,967
|
|
Financing lease liability
|
|
|
-
|
|
|
|
10
|
(c)
|
|
|
10
|
|
Total liabilities
|
|
|
6,886
|
|
|
|
3,074
|
|
|
|
9,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2019 and December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par
value; 100,000,000 shares authorized; 33,312,411 issued and 32,241,191 outstanding as of March 31, 2019 and 33,290,587 issued
and 32,271,367 outstanding as of December 31, 2018
|
|
|
34
|
|
|
|
-
|
|
|
|
34
|
|
Additional paid-in capital
|
|
|
8,157
|
|
|
|
-
|
|
|
|
8,157
|
|
Treasury stock 1,071,220 and 1,019,220 shares, at March 31, 2019 and December 31, 2018, respectively, at cost
|
|
|
(3,675
|
)
|
|
|
-
|
|
|
|
(3,675
|
)
|
Accumulated earnings
|
|
|
4,871
|
|
|
|
(7
|
)(d)
|
|
|
4,864
|
|
Total Zynex, Inc. stockholders' equity
|
|
|
9,387
|
|
|
|
(7
|
)
|
|
|
9,380
|
|
Non-controlling interest
|
|
|
(89
|
)
|
|
|
-
|
|
|
|
(89
|
)
|
Total stockholders' equity
|
|
|
9,298
|
|
|
|
(7
|
)
|
|
|
9,291
|
|
Total liabilities and stockholders' equity
|
|
$
|
16,184
|
|
|
$
|
3,067
|
|
|
|
19,251
|
|
|
a)
|
Represents prepaid rent reclassified to financing lease assets
|
|
b)
|
Represents capitalization of operating lease assets, recognition of operating lease liabilities and reclassification of tenant
incentives and deferred rent balances
|
|
c)
|
Represents impact of changes in finance lease terms under the hindsight practical expedient
|
|
d)
|
Represents the impact of changes in financing lease terms for certain leases due to the application of the hindsight practical
expedient
|
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Recent Accounting Pronouncements
In August 2017, the FASB issued 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.
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.
(2) PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in
thousands):
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
1,139
|
|
|
$
|
1,172
|
|
Assembly equipment
|
|
|
128
|
|
|
|
128
|
|
Vehicles
|
|
|
181
|
|
|
|
184
|
|
Leasehold improvements
|
|
|
501
|
|
|
|
480
|
|
Leased devices
|
|
|
697
|
|
|
|
317
|
|
|
|
$
|
2,646
|
|
|
|
2,281
|
|
Less accumulated depreciation
|
|
|
(1,866
|
)
|
|
|
(1,462
|
)
|
|
|
$
|
780
|
|
|
$
|
819
|
|
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 both the three months
ended September 30, 2019 and 2018. Depreciation expense for the nine-month periods ended September 30, 2019 and 2018 was $0.2 million
and $0.1 million, respectively.
Total depreciation expense related to devices out on lease was
$0.1 million for both the three months ended September 30, 2019 and 2018. Depreciation expense related to devices out on lease
was $0.4 million and $0.1 million for the nine months ended September 30, 2019 and 2018, respectively. Depreciation on leased units
is reflected on the income statement as cost of revenue.
(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.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The calculation of basic and diluted earnings per share for
the three and nine months ended September 30, 2019 and 2018 are as follows (in thousands, except per share data):
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
2,033
|
|
|
$
|
2,591
|
|
|
$
|
6,545
|
|
|
$
|
6,930
|
|
Basic weighted-average shares outstanding
|
|
|
32,490
|
|
|
|
32,521
|
|
|
|
32,350
|
|
|
|
32,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
|
$
|
0.20
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
2,033
|
|
|
$
|
2,591
|
|
|
$
|
6,545
|
|
|
$
|
6,930
|
|
Weighted-average shares outstanding
|
|
|
32,490
|
|
|
|
32,521
|
|
|
|
32,350
|
|
|
|
32,580
|
|
Effect of dilutive securities - options and restricted stock
|
|
|
1,586
|
|
|
|
1,410
|
|
|
|
1,567
|
|
|
|
1,591
|
|
Diluted weighted-average shares outstanding
|
|
|
34,076
|
|
|
|
33,931
|
|
|
|
33,917
|
|
|
|
34,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
|
$
|
0.19
|
|
|
$
|
0.20
|
|
For both the three and nine months ended September 30, 2019,
options to purchase 0.4 million shares of common stock were excluded from the dilutive stock calculation because their effect would
have been anti-dilutive.
For both the three and nine months ended September 30, 2018,
options to purchase 0.3 million shares of common stock were excluded from the dilutive stock calculation because their effect would
have been anti-dilutive.
(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, 2019, 0.2
million and 0.6 million stock option awards were granted under the 2017 Stock Plan, respectively. 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, 2019, there
were 2.1 million stock option awards issued and 1.2 million stock option awards exercisable under all plans. As of September 30,
2019, 3.7 million stock options remain reserved for issuance under the 2017 Stock Plan.
During the three and nine months ended September 30, 2019, 35,000 and 45,000 shares of restricted stock
were granted to management under the 2017 Stock Plan, respectively. 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 of the Restricted Stock
Awards typically occur quarterly over three years for the Board of Directors and quarterly over four years for management.
The following summarizes stock-based compensation expenses recorded
in the consolidated statements of operations:
During the three and nine months ended September 30,
2019, the Company recorded compensation expense related to stock options and restricted stock of approximately $0.3 million and
$0.6 million, respectively. During the three and nine months ended September 30, 2018, the Company recorded compensation expense
of approximately $0.1 million and $0.2 million, respectively. The Company includes stock-based compensation expense in its in general
and administrative expense on the accompanying consolidated statements of operations.
The Company received proceeds of approximately $34,000
and $0.2 million related to option exercises during three and nine months ended September 30, 2019, 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.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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, 2019 and 2018.
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Expected term (years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Risk-free interest rate
|
|
|
1.83
|
%
|
|
|
2.78
|
%
|
|
|
2.34
|
%
|
|
|
2.78
|
%
|
Expected volatility
|
|
|
121.58
|
%
|
|
|
123.05
|
%
|
|
|
121.83
|
%
|
|
|
123.05
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
A summary of stock option activity under all equity compensation
plans for the nine months ended September 30, 2019, 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, 2018
|
|
|
1,885
|
|
|
$
|
0.80
|
|
|
|
6.3
|
|
|
$
|
4,085
|
|
Granted
|
|
|
616
|
|
|
$
|
5.62
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(7
|
)
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(115
|
)
|
|
$
|
2.47
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(253
|
)
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
2,126
|
|
|
$
|
2.12
|
|
|
|
6.6
|
|
|
$
|
15,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
1,171
|
|
|
$
|
0.43
|
|
|
|
4.7
|
|
|
$
|
10,626
|
|
A summary of restricted stock award activity under all equity
compensation plans for the nine months ended September 30, 2019, is presented below:
|
|
Number of
|
|
|
|
Shares
|
|
|
|
(in thousands)
|
|
Granted but not vested at December 31, 2018
|
|
|
76
|
|
Granted
|
|
|
45
|
|
Forfeited
|
|
|
-
|
|
Vested
|
|
|
(21
|
)
|
Granted but not vested at September 30, 2019
|
|
|
100
|
|
As of September 30, 2019, the Company had approximately $3.6
million of unrecognized compensation expense related to stock options and restricted stock awards that will be recognized over
a weighted average period of approximately 3.0 years.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
(5) STOCKHOLDERS’ EQUITY
Common Stock Dividend
Our Board of Directors declared a cash dividend of $0.07 per
share on November 6, 2018. The dividend of $2.3 million was paid on January 18, 2019 to stockholders of record as of January 2,
2019.
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.
From May 14, 2018 through May 13, 2019, we had the ability through
our stock purchase program to re-purchase our common stock at prevailing market rates either in the open market or through privately
negotiated transactions up to $2.0 million. For the nine months ending September 30, 2019, the Company purchased 52,000 shares
of our common stock for $0.2 million for an average price of $3.29 per share, related to the new program. From May 14, 2018 through
May 13, 2019, the Company purchased 576,129 shares of our common stock for $1.8 million or an average price $3.20 per share.
Warrants
During the nine months ended September 30, 2019, 50,000 warrants
were exercised. These warrants were issued during October 2017 as payment for professional services. The exercise was done pursuant
to a net exercise provision and, as a result, 9,634 shares of common stock were withheld to facilitate the payment of the exercise
price which resulted in the issuance of 40,366 shares of common stock.
A summary of stock warrant activity for the nine months ended
September 30, 2019 is presented below (in thousands):
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
(in thousands)
|
|
|
Price
|
|
|
(Years)
|
|
|
(in thousands)
|
|
Outstanding at December 31, 2018
|
|
|
150
|
|
|
$
|
2.42
|
|
|
|
5.8
|
|
|
$
|
79
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(40
|
)
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(10
|
)
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
100
|
|
|
$
|
2.63
|
|
|
|
5.0
|
|
|
$
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
100
|
|
|
$
|
2.63
|
|
|
|
5.0
|
|
|
$
|
689
|
|
(6) INCOME TAXES
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, 2019 discrete items adjusted were
$0.2 million and $0.6 million, respectively. At September 30, 2019 the Company is currently estimating an annual effective tax rate of approximately 27%.
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.
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 27% for the nine months ended September 30, 2019.
Discrete items recognized during the three months ended September 30, 2019 and 2018, resulted in a tax benefit of
approximately $0.2 million and $16,000, respectively. Discrete items recognized during the nine months ended September 30,
2019 and 2018, resulted in a tax benefit of approximately $0.6 million and $0.3 million, respectively. The Company recorded
income tax expense of $0.5 million and $1.7 million for the three and nine months ended September 30, 2019, respectively, and
income tax expense of $0.2 million and $0.4 million for the three and nine months ended September 30, 2018.
Taxes of $2.2 million and $0.2 million were paid during the
nine months ended September 30 2019 and 2018, respectively.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
(7) 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.
During the first quarter of 2019, the Company recognized $880,000
as other income and reversed the liability as management’s assessment was that any repayment obligation was deemed remote.
The Company has included this amount in other income in order to ensure comparability of the Company’s operating income results
for the nine months ended September 30, 2019 and 2018. Management’s legal determination that any refund obligation is remote
was based on the facts and circumstances related to the dispute, which included reviewing the legal statutes within the jurisdictions
the Company operates.
(8) LEASES
The Company’s primary leases are as follows:
|
·
|
The Company entered into a sublease agreement on October 20, 2017 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 has not yet determined whether it is reasonably certain to exercise its renewal option and has therefore
only considered the initial term when determining the lease liability and lease asset. 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 as a reduction of the operating lease asset and subsequently treated as a reduction of rent
expense over the term of the lease.
|
|
·
|
The Company entered into an amendment to its sublease agreement on March 11, 2019 with CSG Systems, Inc. for an additional
21,420 square feet of office space at its current headquarters location at Two Maroon Circle, located at 9555 Maroon Circle, Englewood,
CO 80112. The term of sublease for the additional space began on June 1, 2019 and runs through June 30, 2023, with an option to
extend the term for an additional two years through June 30, 2025. During the first seven months of the Amendment to the Sublease,
the rent per square foot is $10.00, increasing to $20.75 from January 1, 2020 through October 31, 2020. For annual periods beginning
November 1, 2020, the price per square foot increases by an additional $1 per square foot. The expansion work was completed, and
the lease commenced, on June 1, 2019. Upon lease commencement, the Company recorded an operating lease liability and a corresponding
right of use asset for $1.6 million each.
|
|
·
|
The Company entered into an equipment lease on September 20, 2019 with Konica Minolta Premier Finance for a copier/printer
and related software located at its corporate offices. The term of the equipment lease agreement is 5 years with the option to
purchase the equipment at the end of the lease. The Company does not expect to exercise the option to purchase the equipment and,
accordingly, has not considered the effect of the purchase in the evaluation of the lease asset and liability. Rent is to be paid
monthly at a fixed rate for the term of the equipment lease agreement. Upon lease commencement, the Company recorded a financing
lease liability and a corresponding right of use asset for $0.2 million each.
|
The Company’s operating leases do not provide an implicit
rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring the lease liability. The
incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow
an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company’s incremental borrowing
rate was determined to be 4.8% for its operating lease liabilities. The Company’s equipment lease agreement has an implicit
rate of 8.3%, which was used to measure its financing lease liability. The remaining lease term was 4.0 years for the Company’s
operating leases and 5.0 years for its financing leases.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The table below reconciles the undiscounted future minimum lease
payments under the Company’s operating and capital leases to the total operating and capital lease liabilities recognized
on the consolidated balance sheets as of September 30, 2019 (in thousands):
|
|
Operating
lease liabilities
|
|
|
Financing
lease liabilities
|
|
October 1, 2019 through December 31, 2019
|
|
$
|
272
|
|
|
$
|
25
|
|
2020
|
|
|
1,344
|
|
|
|
45
|
|
2021
|
|
|
1,408
|
|
|
|
45
|
|
2022
|
|
|
1,473
|
|
|
|
45
|
|
2023
|
|
|
763
|
|
|
|
45
|
|
2024
|
|
|
-
|
|
|
|
34
|
|
Total undiscounted future minimum lease payments
|
|
|
5,260
|
|
|
|
241
|
|
Less: Difference between undiscounted lease payments and discounted lease liabilities:
|
|
|
(556
|
)
|
|
|
(42
|
)
|
Total lease liabilities
|
|
$
|
4,704
|
|
|
$
|
199
|
|
Operating and financing lease costs were $0.4 and $0.8 million
for the three and nine months ended September 30, 2019, respectively and $0.2 million and $0.7 million for the same periods in
2018, which were included in general and administrative expenses on the consolidated statement of operations.
(9) CONCENTRATIONS
For the three months ended September 30, 2019, the Company sourced
approximately 49% of the supplies for its electrotherapy products from two significant vendors (defined as supplying at least 10%).
For the same period in 2018, the Company sourced approximately 51% of the supplies from three significant vendors.
For the nine months ended September 30, 2019, the Company sourced
approximately 49% of supplies for its electrotherapy products from one significant vendor. For the same period in 2018 the company
sourced approximately 44% of supplies from one significant vendor.
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 two health insurance carriers
at September 30, 2019 that made up approximately 38% of the net accounts receivable balance. The Company had receivables from one
health insurance carrier at December 31, 2018, that made up approximately 23%, respectively, of the net accounts receivable balance.
(10) 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.
(11) RELATED PARTY TRANSACTIONS
As of September 30, 2019, the Company employs Mr. Martin Sandgaard,
son of Thomas Sandgaard. Total compensation for Martin Sandgaard was $24,000 and $71,000 for the three and nine months ended September
30, 2019, respectively. Mr. Sandgaard’s compensation for the three and nine months ended September 30, 2018 was $19,000 and
$65,000, 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 a three-year employment arrangement
totaling $100,000 per year with Mr. Joachim Sandgaard. During the three and nine months ended September 30, 2018, total compensation
paid to Joachim Sandgaard was $21,000 and $75,000. Joachim Sandgaard’s employment with the Company ceased during December
2018.