Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ¨
The aggregate market value of the registrant’s common
stock held by non-affiliates of the registrant as of June 30, 2019, the last business day of the Registrant’s last completed
second quarter, based upon the closing price of the common stock as reported by the Nasdaq Stock Market on such date was approximately $291.7 million.
As of February 27, 2020, 33,883,052 shares of common stock
are issued and 32,811,832 shares are outstanding.
This report includes statements of our expectations, intentions,
plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Nonetheless, it is important for
an investor to understand that these statements involve risks and uncertainties. These statements relate to the discussion of our
business strategies and our expectations concerning future operations, margins, profitability, liquidity and capital resources
and to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable.
We have used words such as “may,” “will,” “should,” “expect,” “intend,”
“plan,” “anticipate,” “believe,” “think,” “estimate,” “seek,”
“expect,” “predict,” “could,” “project,” “potential” and other similar
terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking
statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties, risks
and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond
our control, that could cause our actual results to differ materially from those matters expressed or implied by these forward-looking
statements.
Such risks and other factors also include those listed in Item 1A.
“Risk Factors and elsewhere in this report and our other filings with the Securities and Exchange Commission. When considering
these forward-looking statements, you should keep in mind the cautionary statements in this report and the documents incorporated
by reference. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us.
We assume no obligation to update any forward-looking statements after the date of this report as a result of new information,
future events or developments, except as required by applicable laws and regulations.
When used in this annual report, the terms the “Company,”
“Zynex”, “we,” “us,” “ours,” and similar terms refer to Zynex, Inc., a Nevada corporation,
and its subsidiaries, Zynex Medical, Inc., Zynex NeuroDiagnostics, Inc., Zynex Monitoring Solutions Inc., Zynex Europe ApS, Zynex
Billing and Consulting, LLC and Pharmazy, Inc. As of the date of this annual report, our only operating subsidiary is Zynex Medical,
Inc. (“ZMI”). Zynex Monitoring Solutions, Inc. (“ZMS”) has developed its blood volume monitoring
product as described below.
PART I
ITEM 1. BUSINESS
History
Zynex, Inc. was founded by Thomas Sandgaard in 1996, when
he founded two privately held companies that eventually were folded into Zynex, Inc. Zynex, Inc., a Nevada
corporation is the parent company of and conducts business within six subsidiaries: Zynex Medical, Inc. (“ZMI”),
a Colorado corporation, Zynex Neuro Diagnostics, Inc. (“ZND”), a Colorado corporation, Zynex Monitoring
Solutions, Inc. (“ZMS”), a Colorado corporation, Zynex Billing and Consulting, LLC (“ZBC”), a
Colorado limited liability company, Zynex Europe (Zynex Europe ApS) (“ZEU”), a Danish corporation, and Pharmazy,
Inc. (“Pharmazy”), which was incorporated under the laws of Colorado in June 2015 as a wholly-owned subsidiary of
ZMI (Zynex, Inc. collectively with the foregoing subsidiaries may be referred to as “Zynex” or the
“Company”).
As of December 31, 2019, the Company conducts most of its operations
through its primary subsidiary, ZMI. One other subsidiary, ZEU, generated minimal revenues during the years ended December 31,
2019 and 2018 from international sales and marketing. ZMS has developed a blood volume monitoring device which is in the process
of approval by the Food and Drug Administration (“FDA”) in the United States of America and CE Marking in Europe. As
a result, ZMS has achieved no revenues to date. Our inactive subsidiaries include ZND, ZBC, and Pharmazy. The Company’s compounding
pharmacy operated as a division of ZMI dba as Pharmazy through January 2016.
Over 99% of our consolidated revenue in 2019 and 2018 is attributable
to ZMI. Our headquarters are located in Englewood, Colorado.
Active Subsidiaries
Zynex Medical, Inc. (ZMI): ZMI designs, manufactures
and markets medical devices designed to treat chronic and acute pain, as well as activate and exercise muscles for rehabilitative
purposes with electrical stimulation. ZMI devices are intended for pain management to reduce reliance on medications and are designed
to 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 intended to be patient friendly and designed for home use.
The ZMI devices are small, portable, battery operated and include an electrical pulse generator which is connected to the body
via electrodes. The products are cost effective when compared to traditional physical therapy, and often result in better mobility,
less pain and increased potential for a patient to return to work earlier than with traditional therapies alone. All of our medical
devices are marketed in the U.S. and follow FDA regulations and approval. Our products require a physician’s prescription
before they can be dispensed in the U.S. We consider the physician’s prescription as an “order”, and it is on
this basis that we provide the product to the patient and either bill the patient directly or the patient’s private or government
insurer for payment. ZMI’s 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 basis, as needed.
ZMI designs, manufactures and markets the NeuroMove product.
The NeuroMove contains electromyography and electric stimulation technology that is primarily used for stroke, spinal cord and
traumatic brain injury rehabilitation (“SCI”), by reaching parts of the brain to re-connect with muscles, also known
as neuroplasticity. The NeuroMove product is primarily marketed to medical clinics. Zynex did not have material sales
of this product in 2019 or 2018.
ZMI also designs, manufactures and markets the InWave product,
an in-home electrical stimulation device used to treat female urinary incontinence. The device requires a prescription and is covered
by most insurance plans and Medicare.
ZMI distributes complimentary products such as lumbar support,
cervical traction and hot/cold therapy. These complement our pain management products and are critical for our physicians and therapists.
These products require a prescription and are covered by most insurance plans and Medicare.
Zynex Monitoring Solutions (ZMS):
ZMS was formed in 2011 to develop and market medical devices
for non-invasive cardiac monitoring. The blood volume monitor is a non-invasive medical device for monitoring central blood volume
that would be used in operating and recovery rooms to detect blood loss during surgery and internal bleeding during recovery.
This device has been subjected to multiple clinical studies, which are being utilized for collecting data to further validate the
algorithm used to determine changes in central blood volume, and there are plans to conduct future, additional clinical studies.
We have submitted a 510(k) application to the FDA and are responding to their questions. There is no guarantee when or if the product
will be cleared for marketing by the FDA.
Concurrent to our FDA application, we are pursuing European
Union (“EU”) Certificate European (“CE”) Marking. CE Marking is a certification that a product meets the
standards established by the 28 nations of the EU and qualifies for sale in the EU and 4-nation European Free Trade Association.
The blood volume monitor has been tested in several International
Review Board (“IRB”) approved studies and was used in several blood donation settings where hundreds of subjects have
donated half a liter of blood with strong correlation to the index on the device. We have built a number of commercial devices
in pilot-production and continue to refine the algorithms for the Blood Volume Index (BVI). In the fourth quarter of 2018 a U.S.
utility patent was obtained for this unique application, and we believe this product could serve a currently unmet need in
the market for safer surgeries and safer monitoring of patients during recovery. ZMS did not produce any revenue for the years
ending December, 31, 2019 and 2018.
Zynex International (Zynex Europe) (ZEU):
ZEU was formed in 2012 to further progress Zynex’s international
expansion. ZEU is currently conducting business and focused on sales and marketing our products within the international marketplace,
upon receipt of necessary regulatory approvals. ZEU did not produce significant revenue for the years ended December 31, 2019 and
2018.
Products
We currently market and sell Zynex-manufactured products as
well as distribute complimentary products and private labeled supplies for Zynex products, as indicated below:
Product Name
|
|
Description
|
Zynex Medical Products
|
|
|
|
|
|
NexWave
|
|
Dual Channel, multi-modality IFC, TENS, NMES Device
|
|
|
|
NeuroMove
|
|
Electromyography (EMG) triggered Electrical Stimulation Device
|
|
|
|
InWave
|
|
Electrical stimulation for treatment of female urinary incontinence
|
|
|
|
TENSWave
|
|
Dual Channel TENS Device
|
|
|
|
Private Labeled Supplies
|
|
|
|
|
|
Electrodes
|
|
Supplies, re-usable for delivery of electrical current to the body
|
|
|
|
Batteries
|
|
Supplies, for use in electrotherapy products
|
|
|
|
Distributed Complementary Products
|
|
|
|
|
|
Comfortrac/Saunders
|
|
Cervical traction
|
|
|
|
JetStream
|
|
Hot/Cold therapy
|
|
|
|
LSO Back Braces
|
|
Lumbar support
|
|
|
|
Zynex Monitoring Solutions Products
|
|
|
CM-1500
|
|
Blood Volume Monitor
|
Product Uses
Pain Management and Control
Standard electrotherapy is a clinically proven and medically
accepted alternative to manage acute and chronic pain. Electrical stimulation has been shown to reduce most types of local
pain, such as tennis elbow, neck or lower back pain, arthritis, and others. The devices used to accomplish this are commonly described
as the TENS family of devices. Electrotherapy is not known to have any negative side effects, a significant advantage over
most pain relief medications. The benefits of electrotherapy can include: pain relief, increased blood flow, reduced edema, prevention
of venous thrombosis, increased range-of-motion, prevention of muscle disuse atrophy, and reduced urinary incontinence.
Electrotherapy introduces an electrical current applied through
surface electrodes. The electrical current “distorts” a pain signal on its way to the central nervous system and the
brain, thus reducing the pain. Additionally, by applying higher levels of electricity, muscles contract and such contraction is
believed to assist in the benefits mentioned above.
Numerous clinical studies have been published over several decades
showing the effectiveness of IFC and TENS for pain relief. Our primary electrotherapy device, the NexWave has received FDA 510(k)
clearance. The NexWave is a digital IFC, TENS and NMES device that delivers pain-alleviating electrotherapy.
Stroke and Spinal Cord Injury Rehabilitation
Our proprietary NeuroMove product is a Class II medical device
that has been cleared by the FDA for stroke and SCI rehabilitation. Stroke and SCI usually affect a survivor’s mobility,
functionality, speech, and memory, and the NeuroMove is designed to help the survivor regain movement and functionality.
The NeuroMove product utilizes the relatively new science of
“neuroplasticity” the process by which healthy parts of the brain learn to compensate and assume functions previously
carried out by the damaged areas. To accomplish this task, the extraordinarily sensitive NeuroMove technology monitors muscle activity
and detects brain signals that indicate, even without any visible movement, the brain’s effort to move a specific muscle
or area of the body. Once the effort is detected, the NeuroMove induces actual movement through electrical stimulation, thus providing
effective feedback to initiate relearning in the healthy part of the brain.
We believe the NeuroMove product is unique because its built-in
microprocessor can recognize low-level attempts by muscles to contract and then “reward” such detection with electrical
stimulation. We do not believe there are similar products in the stroke rehabilitation market. Some generic devices are being offered
in international markets; however, we do not believe these products provide similar results with respect to stroke rehabilitation.
When conscientiously using the NeuroMove product for three to twelve months, studies show that the majority of NeuroMove patients
can re-establish the connection between the brain and impaired muscle and thus regain movement and functionality.
When movement and functionality are restored, the patient may experience increased mobility, increased productivity, an improved
outlook, and a reduced risk of accidents, and may be able to engage in activities they were precluded from before using the NeuroMove.
Sales of NeuroMove have not generated material revenue for years ended December 31, 2019 and 2018.
Our Markets
Zynex Medical (ZMI):
To date, the majority of our revenue has been generated by our
ZMI electrotherapy products and private label supplies. Thus, we primarily compete in the home electrotherapy market for pain management,
with products based on IFC, TENS and NMES devices and consumable supplies. We estimate the annual domestic market for home electrotherapy
products at approximately $500 million. Due to our recently improved financial performance and related cash flows, we are currently
growing our sales force to address what we believe is an unaddressed market in the electrotherapy market. The current opioid epidemic
has been declared a health emergency, and we are uniquely positioned to help reduce the amount of opioids prescribed for treatment
of chronic and acute pain symptoms. We are committed to providing health care professionals with alternatives to traditional opioid
based treatment programs with our prescription-strength products which have no side-effects. This has never been more necessary
than it is today considering the staggering statistics.
|
·
|
Pain impacts the lives of more Americans than diabetes, heart disease
and cancer combined.
|
|
|
|
|
·
|
Pain is the leading cause of disability, and seeking treatment
for chronic or acute pain is the most common reason American’s seek health care. Approximately 50 million Americans suffer
from chronic pain.
|
|
|
|
|
·
|
Nearly 20 million Americans experienced high-impact
chronic pain, defined as "limiting life or work activities on most days or every day in the past 6 months.
|
|
|
|
|
·
|
If pharmaceuticals such as opioids continue to be used as the first
line of defense America will continue to see a rise in opioid misuse, addiction and drug-related deaths.
|
We also distribute complimentary products such as JetStream
Hot/Cold Therapy, Aspen LSO Back bracing and Comfortrac and Saunders cervical traction units, all products targeted at treating
acute as well as chronic pain with minimal side-effects.
Key characteristics of our electrotherapy market are:
|
·
|
Collection cycles of initial payment
from insurance carriers can range from 30 days to many months and considerably longer for many attorney, personal injury and worker’s
compensation cases. Such delayed payment impacts our cash flow and can slow our growth or strain our liquidity. Collections
are also impacted by whether effective billing submissions are made by our billing and collections department to the insurance
carriers and other payers.
|
|
·
|
Prior to payment, the third party payers
often make or take significant payment “adjustments or discounts.” This can also lead to denials and billing disputes
with third party payers.
|
|
·
|
The majority of our revenue is generated by the sale of medical devices
and from recurring patient supplies, specifically from our electrotherapy products sold through ZMI. We are reliant on insurance
and our payor reimbursement.
|
Zynex Monitoring Solutions (ZMS):
ZMS is focused on developing products within the non-invasive
multi-parameter patient-monitoring marketplace. ZMS is currently focusing on its blood volume monitor. We believe our product,
once released into the marketplace (of which there can be no guarantee), will compete against multiple competitors, ranging from
large manufacturers with multiple business lines to small manufacturers that offer a limited range of products. We have not yet
identified competitors for this product. ZMS has not generated any revenue as this product is still in the process of FDA approval
and CE Marking.
Sales and Growth Strategies
To date, ZMI accounts for substantially all of our revenue and
profit. We are focused on expanding our sales force to address what we believe is an untapped market for electrotherapy products
which has recently become more attractive due to large competitors exiting the market. As of December 31, 2019, we had 176 field
sales representatives of which 42 were independent, contract representatives and the rest were W-2 direct employees. We continue
to hire field sales representatives at a rapid rate with the goal of filling a total of 400 territories across the U.S.
In an effort to increase revenue and diversification to become
less sensitive to reimbursement changes, we are continually adding new products to our ZMI sales channel, such as our hot/cold
therapy, cervical traction and LSO back braces, which may offset any impact on revenue due to changes in insurance reimbursement
rates of electrotherapy devices. We are also pursuing other opportunities, including the CM-1500. We believe these events and actions
will serve to focus and increase our market share in the marketplace and, in the future, grow our core business by providing our
electrotherapy patients additional non-pharmacological pain relief and complementary products to our manufactured devices. An insignificant
amount of our revenue is derived from international sales; however, we continue to take steps to penetrate the global medical device
marketplace.
Manufacturing and Product Assembly
Our manufacturing and product assembly strategy consists of
the following elements:
|
·
|
Compliance with relevant legal and regulatory requirements.
|
|
·
|
Use of contract manufacturers as needed, thereby allowing us to quickly
respond to changes in volume and avoid large capital investments for assembly and manufacturing equipment of certain product components.
We believe there is a large pool of highly qualified contract manufacturers, domestically and internationally, for the type of
manufacturing assistance needed for our manufactured devices.
|
|
·
|
Utilization of in-house final assembly and test capabilities.
|
|
·
|
Development of proprietary software and hardware for all products
in house.
|
|
·
|
Testing all units in a real-life, in-house environment to help ensure
the highest possible quality and patient safety while reducing the cost of warranty repairs.
|
We utilize contract manufacturers (principally located in the
United States) to manufacture components for our NexWave and NeuroMove units and for some of our other products and manufacture
/ assemble in-house for our NexWave and NeuroMove units. We do not have long-term supply agreements with our contract manufacturers,
but we utilize purchase orders with agreed upon terms for our ongoing needs. We believe there are numerous suppliers that can manufacture
our products and provide our required raw materials. Generally, we have been able to obtain adequate supplies of our required raw
materials and components. We are always evaluating our suppliers for price, quality, delivery time and service. The reduction or
interruption in supply, and an inability to develop alternative sources for such supply, could adversely affect our operations.
Distribution and Revenue Streams:
Currently, most of our revenue is generated through our ZMI
subsidiary from our electrotherapy products.
We sell through a direct sales force in United States. Our field
sales representatives are engaged to sell in predefined geographic markets and are compensated based on fixed amounts depending
on the type of product sold and insurance carrier of the patient. Currently, the United States has been the market that we have
focused on; however, we have established international distributors in Canada, Australia, Russia, China, India, Singapore, Holland,
Germany, the United Arab Emirates (UAE), Malaysia, Saudi Arabia, Egypt and Vietnam. Typically, we sell and ship product directly
to our international distributors, who work directly with the ultimate patient or end-user. To date these international distributors
have not generated significant revenue.
A significant portion of our revenue is derived from patients
with insurance plans held by private health insurance carriers, typically known as HMO or PPO, who pay on behalf of their insureds,
government payers such as Medicare and Medicaid, and worker’s compensation claims. The remaining portion of revenue
is primarily received from attorneys representing injured patients, hospitals, clinics and private-pay individuals.
A large part of our revenue is recurring. Recurring revenue
results primarily from the sale of surface electrodes and batteries sent to existing patients with our units. Electrodes and batteries
are consumable items that are considered an integral part of our products.
Private Labeled Distributed Products
In addition to our own products, we distribute, through our
sales force, a number of private labeled supplies and complimentary products from other domestic manufacturers. These products
generally include patient consumables, such as electrodes and batteries plus cervical traction, lumbar support and hot/cold therapy.
Customarily, there are no formal contracts between vendors in the durable medical equipment industry. Replacement products and
components are easily found, either from our own products or other manufacturers, and purchases are made by purchase order.
Intellectual Property
We believe that our products contain certain proprietary software.
During 2018, we received a US utility patent for our Blood Volume
Monitor and in January 2020, we received a utility patent in Europe. In the future, we may seek patents for advances to our existing
products and for new products as they are developed.
Zynex is trademarked in the U.S.
We utilize non-disclosure and trade secret agreements with employees
and third parties to protect our proprietary information.
Regulatory Approval and Process
Federal Drug Association (FDA)
All our ZMI products are classified as Class II (Medium Risk)
devices by the FDA, and clinical studies with our products are considered to be NSR (Non-Significant Risk Studies). Our business
is regulated by the FDA, and all products typically require 510(k) market clearance before they can be put in commercial distribution.
Section 510(k) of the Federal Food, Drug and Cosmetics Act, is available in certain instances for Class II (Medium Risk) products.
It requires that before introducing most Class II devices into interstate commerce, the product must first submit information to
the FDA demonstrating that the device is substantially equivalent in terms of safety and effectiveness to a device legally marketed
prior to March 1976 or to devices that have been reclassified in accordance with the provisions of the Federal Food, Drug, and
Cosmetic Act that do not require approval of a premarket approval application. When the FDA determines that the device is substantially
equivalent, the agency issues a “clearance” letter that authorizes marketing of the product. We are also regulated
by the FDA’s “GMP” (Good Manufacturing Practice) and “QSR” (Quality Systems Regulation). We believe
that our products have obtained or are good candidates for the requisite FDA clearance or are exempt from the FDA clearance process. In
November 2001, Zynex received FDA 510(k) clearance to market NeuroMove. In September 2011, Zynex received FDA 510(k) clearance
to market the NexWave, our current generation IFC, TENS and NMES device. In August 2012, Zynex received FDA 510(k) clearance to
market the InWave, our next generation muscle stimulator for treatment of female incontinence. Failure to comply with FDA requirements
could adversely affect us.
International
Zynex has received CE Marking for several of its products. CE
marking is the medical device manufacturer's claim that a product meets the essential requirements of all relevant
European Medical Device Directives. The CE mark is a legal requirement to place a device on the market
in the EU. Zynex is currently in the process of renewing the CE marking on several devices and obtaining initial CE marking for
its CM-1500 Blood Volume Monitor.
The Far East, Middle East, Eastern Europe and Latin American
markets have different regulatory requirements. We comply with applicable regulatory requirements within the markets in which we
currently sell. If and when we decide to enter additional geographic areas, we intend to comply with applicable regulatory
requirements within those markets.
Zynex has received ISO13485: 2016 certification for its compliance
with international standards in quality management systems for design, development, manufacturing and distribution of medical devices.
This certification is not only important as an assurance that we have the appropriate quality systems in place but is also crucial
to our international expansion efforts as many countries require this certification as part of their regulatory approval. The quality
management system is audited on an annual basis and the current recertification is pending final audit review.
Government Regulation
The delivery of health care services and products has become
one of the most highly regulated of professional and business endeavors in the United States. Both the federal government and individual
state governments are responsible for overseeing the activities of individuals and businesses engaged in the delivery of health
care services and products. Federal law and regulations are based primarily upon the Medicare and Medicaid programs. Each program
is financed, at least in part, with federal funds. State jurisdiction is based upon the state’s interest in regulating the
quality of health care in the state, regardless of the source of payment. Many state and local jurisdictions impose additional
legal and regulatory requirements on our business including various states and local licenses, taxes, limitations regarding insurance
claim submission and limitations on relationships with referral parties. Failure to comply with this myriad of regulations in a
particular jurisdiction may subject us to fines or other penalties, including the inability to sell our products in certain jurisdictions.
Federal health care laws apply to us when we submit a claim
to any other federally funded health care program, in addition to requirements to meet government standards. The principal federal
laws that we must abide by in these situations include:
|
·
|
Those that prohibit the filing of false or improper claims for federal
payment.
|
|
·
|
Those that prohibit unlawful inducements for the referral of business
reimbursable under federally funded health care programs
|
The federal government may impose criminal, civil and administrative
penalties on anyone who files a false claim for reimbursement from federally funded programs.
A federal law commonly known as the “anti-kickback law”
prohibits the knowing or willful solicitation, receipt, offer or payment of any remuneration made in return for:
|
·
|
The referral of patients covered under federally-funded health care
programs; or
|
|
·
|
The purchasing, leasing, ordering, or arranging for any goods, facility,
items or service reimbursable under those programs
|
Competition
Since we are in the market for medical electrotherapy products
we face a mixture of competitors ranging from large manufacturers with multiple business lines to small manufacturers that offer
a limited selection of products. Our principal competitors include International Rehabilitative Sciences, Inc. d/b/a RS Medical,
EMSI, and H-Wave. In addition, we face competition from providers of alternative medical therapies, such as pharmaceutical companies.
Research and Development
During 2019 and 2018, we incurred approximately $0.6 million
and $0.2 million, respectively, of research and development expenses. We expect our research and development expenditures will
be limited throughout 2020.
Employees
As of December 31, 2019, we employed 283 full time employees
of which 134 are employed as direct sales representatives in the field. Additionally, we also engage 42 independent commission-only
sales contractors.
ITEM 1A. RISK FACTORS
RISKS RELATED TO OUR BUSINESS
We have encountered significant volatility in our recent
operating results.
The Company’s results from operations have improved significantly
in recent years, but there has been significant volatility in our results over the past five years as reflected in the following
table (in millions):
Year
|
|
|
Revenues
|
|
|
Profit (Loss)
|
|
2015
|
|
|
$
|
11.6
|
|
|
$
|
(2.9
|
)
|
2016
|
|
|
$
|
13.3
|
|
|
$
|
0.07
|
|
2017
|
|
|
$
|
23.4
|
|
|
$
|
7.4
|
|
2018
|
|
|
$
|
31.9
|
|
|
$
|
9.6
|
|
2019
|
|
|
$
|
45.5
|
|
|
$
|
9.5
|
|
Our financial results could continue to be volatile, and there
is no assurance we will continue our current increase in revenue and profits.
In prior years, our auditors have issued a going concern
opinion because of low liquidity
During 2013 through 2015, the Company suffered operating losses
which caused a lack of liquidity and a substantial working capital deficit. This raised substantial doubt about the Company’s
ability to continue as a going concern.
During 2016, the Company generated net income during Q3 and
Q4 and combined with the profitability in 2017, 2018 and 2019, the Company has recorded 14 consecutive profitable quarters, paid
off its line of credit with Triumph Healthcare Finance, a division of TBK Bank, SSB, formerly known as Triumph Community Bank,
(“Triumph”) and generated cash reserves and positive working capital.
Our history of operating losses could make it difficult to raise
any new capital and may have an adverse impact on our relationship with third parties with whom we do business, including our customers,
vendors and employees.
We cannot be certain the Company will not be impacted by liquidity
challenges in the future due to swings in our operating results.
We are dependent on reimbursement from insurance companies;
changes in insurance reimbursement policies or application of them have resulted in decreased or delayed revenues.
A large percentage of our revenues come from insurance company
and government health care program reimbursement. Upon delivery of our products to our customers, we directly bill the customers’
private insurance companies or government payors for reimbursement. If the billed payers do not remit payment on a timely basis
or if they change their policies to exclude or reduce coverage for our products, we would experience a decline in our revenue as
well as cash flow. In addition, we may deliver products to customers based on past practices and billing experiences with
health insurance companies and have a health insurance company later deny coverage for such products.
In some cases our delivered product may not be covered pursuant
to a policy statement of a health insurance provider, despite a payment history of the insurance provider and benefits to the patients.
A health insurance provider may seek repayment of amounts previously paid for covered products. We maintain an allowance for provider
discounts for amounts intended to cover legitimate requests for repayment. Failure to adequately identify and provide for amounts
for resolution of repayment demands in our allowance for provider discounts could have a material adverse effect on our results
of operations and cash flows. For government health care programs, if we identify a deficiency in prior claims or practices, we
may be required to repay amounts previously reimbursed to us by government health care programs.
We frequently receive, and expect to continue to receive, refund
requests from insurance providers relating to specific patients and dates of service. Billing and reimbursement disputes are very
common in our industry. These requests are sometimes related to a few patients and other times include a significant number of
refund claims in a single request. We review and evaluate these requests and determine if any refund is appropriate. During the
adjudication process we review claims where we are rebilling or pursuing additional reimbursement from that insurance provider.
We frequently have significant offsets against such refund requests which may result in amounts that are due to us in excess of
the amounts of refunds requested by the insurance providers. Therefore, at the time of receipt of such refund requests we are generally
unable to determine if a refund request is valid. Although we cannot predict whether or when a request for repayment or our subsequent
request for reimbursement will be resolved, it is not unusual for such matters to be unresolved for a long period of time. No assurances
can be given with respect to our estimates for our allowance for provider discounts for reimbursements and offsets or the ultimate
outcome of the refund requests.
Future changes in coverage and reimbursement policies
for our products or reductions in reimbursement rates for our products by third party payers could adversely affect our business
and results of operations.
In the United States, our products are prescribed by physicians
for their patients. Based on the prescription, which we consider an order, we submit a claim for payment directly to third-party
payers such as private commercial insurance carriers, government payers and others as appropriate and the third-party payer reimburses
us directly. Federal and state statutes, rules or other regulatory measures that restrict coverage of our products or reimbursement
rates could have an adverse effect on our ability to sell or rent our products or cause physical therapists and physicians to dispense
and prescribe alternative, lower-cost products.
There are significant estimating risks associated with
the amount of revenue, related refund liabilities, accounts receivable and provider discounts that we recognize, and if we are
unable to accurately estimate these amounts, it could impact the timing of our revenue recognition, have a significant impact on
our operating results or lead to a restatement of our financial results.
There are significant estimating risks associated with the amount
of revenues, related refund liabilities, accounts receivable and provider discounts that we recognize in a reporting period. The
billing and collection process is complex due to ongoing insurance coverage changes, geographic coverage differences, differing
interpretations of coverage, differing provider discount rates and other third party payer issues. Determining applicable primary
and secondary coverage for our customers at any point in time, together with the changes in patient coverage that occur each month,
requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds
to payers. Revenues associated with government programs are also subject to estimating risk related to the amounts not paid by
the primary government payer that will ultimately be collectable from other government programs paying secondary coverage, the
patient’s commercial health plan secondary coverage or the patient. Collections, refunds and pay or retractions typically
continue to occur for up to three years and longer after our products are provided. While we typically look to our past experience
in collections with a payer in estimating ultimate amounts expected to be collected on current billings, nonetheless recent trends
and current changes in reimbursement practice, the overall healthcare environment, and other factors could ultimately impact the
amount of revenues recorded and the receivables ultimately collected. If our estimates of revenues, related refund liabilities,
accounts receivable or provider discounts are materially inaccurate, it could impact the timing of our revenue recognition and
have a significant impact on our operating results. It could also lead to a restatement of our financial results.
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.
Tax laws and regulations require compliance efforts that
can increase our cost of doing business and changes to these laws and regulations could impact financial results.
We are subject to a variety of tax laws and regulations in the
jurisdictions in which we do business. Maintaining compliance with these laws can increase our cost of doing business and failure
to comply could result in audits or the imposition of fines or penalties. Further, our future effective tax rates in any of these
jurisdictions could be affected, positively or negatively, by changing tax priorities, changes in statutory rates, or changes in
tax laws or the interpretation thereof. The most significant recent example of this is the impact of the U.S Tax Cuts and Jobs
Act of 2017 (the “Tax Act”) which was enacted on December 22, 2017. These changes significantly revised 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 has implemented the U.S. Tax Act and does not expect any significant changes related to the Tax Act at
this time.
The Patient Protection and Accountability act of 2010
has had an impact on our business which may be in part beneficial and in part detrimental.
In March 2010, broad federal health care reform legislation
was enacted in the United States. This legislation did not become effective immediately in total, and may be modified prior to
the effective date of some provisions. This legislation has had an impact on our business in a variety of ways including increased
number of Medicaid recipients, increased number of individuals with commercial insurance, additional audits conducted by public
health insurance plans such as Medicaid and Medicare, changes to the rules that govern employer group health insurance and other
factors that influence the acquisition and use of health insurance from private and public payors. This legislation has resulted
in a change in reimbursement for certain durable medical equipment. We believe the new healthcare legislation and these changes
to reimbursement have caused uncertainty with prescribers, which we believe contributed to our drop in orders and revenue during
2013 and 2014 and the lack of any significant increase in 2015. Orders and revenue increased in2016, 2017 and 2018; however, we
are currently unable to determine whether such trend will continue in future periods or whether the health care reform legislation
will have other adverse consequences to our business and results of operations. To the extent prescribers write fewer prescriptions
for our products or there is an adverse change to insurance reimbursement for our products, due to the new law or otherwise, our
revenue and profitability will be materially adversely affected.
Effective 2013, there was a 2.3% excise tax on the first sale
of medical devices, with certain exceptions. We believe that a majority of our ZMI products are not subject to this tax but currently
we can make no assurance. For our products that are or become subject to this excise tax, we are uncertain of our ability to pass
this tax on to third parties. Thus far this excise tax has not had a material impact on our financial results.
The uncertainty of continuing healthcare changes and regulations
may place our business model in doubt.
There is substantial doubt on the continuation of the Affordable
Care Act and the legislation that the current Congress will enact to replace it, if any. There is also substantial doubt whether,
even if the Affordable Care Act remains the law of the land, the President will support it or take regulatory action to negatively
impact its benefits. This significant amount of uncertainty creates a significant concern on our customer’s willingness to
buy products which may, or may not, be covered by future health care benefits even if they are covered currently.
Hospitals and clinicians may not buy, prescribe or use
our products in sufficient numbers, which could result in decreased revenues and profits.
Hospitals and clinicians may not accept any of our products
as effective, reliable, or cost-effective. Factors that could prevent such institutional customer acceptance include:
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If customers conclude that the costs of these products exceed the
cost savings associated with the use of these products;
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If customers are financially unable to purchase these products;
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If adverse patient events occur with the use of these products, generating
adverse publicity;
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If we lack adequate resources to provide sufficient education and
training to our customers;
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If frequent product malfunctions occur, leading clinicians to believe
that the products are unreliable;
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Uncertainty regarding or change in government or third-party payer
reimbursement policies for our products; and
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If physicians or other health care providers believe that our products
will not be reimbursed by insurers or decide to prescribe competing products.
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Because our sales are dependent on prescriptions from physicians,
if any of these or other factors results in fewer prescriptions for our products being written, we will have reduced revenues and
may not be able to fully fund operations. Although we experienced an increase in orders for our ZMI products during 2018 and
2019 compared to prior years, we can make no assurances that demand for our products will not decline in future periods.
Any new competitor could be larger than us and have greater
financial and other resources than we do, and those advantages could make it difficult for us to compete with them.
Many competitors to our products may have substantially greater
financial, technical, marketing, and other resources. Competition could result in our need to reduce prices, fewer orders, reduced
gross margins, and loss of market share. Our products are regulated by the FDA in the United States. Competitors may develop products
that are substantially equivalent to our FDA cleared products, thereby using our products as predicate devices to more quickly
obtain FDA approval for their own products. If overall demand for our products should decrease it could have a material adverse
effect on our operating results. Substantial competition is expected in the future in the area of stroke rehabilitation that
may directly compete with our NeuroMove product. These competitors may use standard or novel signal processing techniques
to detect muscular movement and generate stimulation to such muscles. Other companies may develop rehabilitation products
that perform better and/or are less expensive than our products, which could have a material adverse effect on our operating results.
Failure to keep pace with the latest technological changes
could result in decreased revenues.
The market for some of our products is characterized by rapid
change and technological improvements. Failure to respond in a timely and cost-effective way to these technological developments
could result in serious harm to our business and operating results. We have derived, and we expect to continue to derive, a substantial
portion of our revenues from the development and sale of products in the medical device industry. As a result, our success will
depend, in part, on our ability to develop and market product offerings that respond in a timely manner to the technological advances
of our competitors, evolving industry standards and changing patient preferences. There is no assurance that we will keep up with
technological improvements.
A third-party manufacturer’s inability to produce
our goods on time and to our specifications could result in lost revenue.
Third-party manufacturers assemble and manufacture components
of the NexWave and NeuroMove and some of our other products to our specifications. The inability of a manufacturer to ship orders
of our products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our
customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase
prices, any of which could have a material adverse effect on our revenues. Because of the timing and seriousness of our business,
and the medical device industry in particular, the dates on which customers need and require shipments of products from us are
critical. Further, because quality is a leading factor when customers, doctors, health insurance providers and distributors accept
or reject goods, any decline in quality by our third-party manufacturers could be detrimental not only to a particular order, but
also to our future relationship with that particular customer.
If we need to replace manufacturers, our expenses could
increase resulting in smaller profit margins.
We compete with other companies for the production capacity
of our manufacturers and import quota capacity. Some of these competitors have greater financial and other resources than we have,
and thus have an advantage in the competition for production and import quota capacity. If we experience a significant increase
in demand, or if we need to replace an existing manufacturer, we may have to expand our third-party manufacturing capacity. We
cannot assure that this additional capacity will be available when required on terms that are acceptable to us or similar to existing
terms, which we have with our manufacturers, either from a production standpoint or a financial standpoint. We enter into a number
of purchase order commitments specifying a time for delivery, method of payment, design and quality specifications and other standard
industry provisions, but do not have long-term contracts with any manufacturer. None of the manufacturers we use produce our products
exclusively. Should we be forced to replace one or more of our manufacturers, we may experience increased costs or an adverse
operational impact due to delays in distribution and delivery of our products to our customers, which could cause us to lose customers
or lose revenue because of late shipments.
Cyber-attacks and security vulnerabilities could lead
to reduced revenue, increased costs, liability claims, or harm to our competitive position.
Increased sophistication and activities of perpetrators of
cyber-attacks have resulted in an increase in information security risks in recent years. Hackers develop and deploy viruses,
worms, and other malicious software programs that attack products and services and gain access to networks and data centers.
If we were to experience difficulties maintaining existing systems or implementing new systems, we could incur significant
losses due to disruptions in our operations. Additionally, these systems contain valuable proprietary and confidential
information and may contain personal data of our customers. A security breach could result in disruptions of our internal
systems and business applications, harm to our competitive position from the compromise of confidential business information,
or subject us to liability under laws that protect personal data. As cyber threats continue to evolve, we may be required to
expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any
information security vulnerabilities. Any of these consequences would adversely affect our revenue and margins.
If we are unable to retain the services of Mr. Sandgaard
or if we are unable to successfully recruit qualified managerial and sales personnel, we may not be able to continue our operations.
Our success depends to a significant extent upon the continued
service of Mr. Thomas Sandgaard, our Chief Executive Officer and Founder and beneficial owner of approximately 50% of our
outstanding stock. Loss of the services of Mr. Sandgaard could have a material adverse effect on our growth, revenues, and
prospective business. There is currently no employment agreement with Mr. Sandgaard. We do not maintain key-man insurance on the
life of Mr. Sandgaard. In addition, in order to successfully implement and manage our business plan, we will be dependent
upon, among other things, successfully retaining and recruiting qualified managerial and sales personnel. Competition for qualified
individuals is intense. Various factors, such as marketability of our products, our reputation, our liquidity, and sales commission
structure can affect our ability to find, attract or retain sales personnel. There can be no assurance that we will be able to
find and attract qualified new employees and sales representatives and retain existing employees and sales representatives.
We need to maintain insurance coverage, which could become
very expensive or have limited availability.
Our marketing and sales of medical device products creates an
inherent risk of claims for product liability. As a result, we carry product liability insurance and will continue to maintain
insurance in amounts we consider adequate to protect us from claims. We cannot, however, be assured that we have resources sufficient
to satisfy liability claims in excess of policy limits if required to do so. Also, if we are subject to such liability claims,
there is no assurance that our insurance provider will continue to insure us at current levels or that our insurance rates will
not substantially rise in the future, resulting in increased costs to us or forcing us to either pay higher premiums or reduce
our coverage amounts, which would result in increased liability to claims.
We depend upon obtaining regulatory approval of any new
products and/or manufacturing operations we develop and maintain approvals of current products; failure to obtain or maintain such
regulatory approvals could result in increased costs, lost revenue, penalties and fines.
Before marketing any new products, we will need to complete
one or more clinical investigations of each product. There can be no assurance that the results of such clinical investigations
will be favorable to us. We may not know the results of any study, favorable or unfavorable to us, until after the study has been
completed. Such data must be submitted to the FDA as part of any regulatory filing seeking approval to market the product. Even
if the results are favorable, the FDA may dispute the claims of safety, efficacy, or clinical utility and not allow the product
to be marketed. The sale price of the product may not be enough to recoup the amount of our investment in conducting the investigative
studies and we may expend significant funds on research and development on products that are rejected by the FDA. Some of our products
are marketed based upon our interpretation of FDA regulation allowing for changes to an existing device. If our interpretations
are incorrect, we could suffer consequences that could have a material adverse effect on our results of operations and cash flows
and could result in fines and penalties. There can be no assurance that we will have the financial resources to complete development
of any new products or to complete the regulatory approval process or to maintain regulatory compliance of existing products.
We may not be able to obtain clearance of a 510 (k) notification
or approval of a de novo or pre-market approval application with respect to any products on a timely basis, if at all.
If timely FDA clearance or approval of new products is not obtained,
our business could be materially adversely affected. Clearance of a 510(k) notification or de novo application may also be required
before marketing certain previously marketed products, which have been modified after they have been cleared. Should the FDA so
require, the filing of a new 510(k) notification for the modification of the product may be required prior to marketing any modified
devices. To determine whether adequate compliance has been achieved, the FDA may inspect our facilities at any time. Such compliance
can be difficult and costly to achieve and maintain. Our compliance status may change due to future changes in, or interpretations
of, FDA regulations or other regulatory agencies. Such changes may result in the FDA withdrawing marketing clearance or requiring
product recall. In addition, any changes or modifications to a device or its intended use may require us to reassess compliance
with good manufacturing practices guidelines, potentially interrupting the marketing and sale of products. We may also fail to
comply with complex FDA regulations due to their complexity or otherwise. Failure to comply with regulations could result in enforceable
actions, including product seizures, product recalls, withdrawal of clearances or approvals, and civil and criminal penalties,
any of which could have a material adverse effect on our operating results and reputation.
We continue to incur expenses.
This area of medical device research is subject to rapid and
significant technological changes. Developments and advances in the medical industry by either competitors or other parties can
affect our business in either a positive or negative manner. Developments and changes in technology that are favorable to us may
significantly advance the potential of our research while developments and advances in research methods outside of the methods
we are using may severely hinder, or halt completely our development.
We are a small company in terms of employees, technical and
research resources. We expect to incur research and development, sales and marketing, and general and administrative expenses.
These amounts may increase before any commensurate incremental revenue from these efforts may be obtained and may adversely affect
our potential profits and we may lack the liquidity to pay for such expenditures. These factors may also hinder our ability to
meet changes in the medical industry as rapidly or effectively as competitors with more resources.
We may be unable to protect our trademarks, trade secrets
and other intellectual property rights that are important to our business.
We consider our trademarks, trade secrets and other intellectual
property an integral component of our success. We rely on trademark law and trade secret protection and confidentiality agreements
with employees, customers, partners and others to protect our intellectual property. Effective trademark and trade secret protection
may not be available in every country in which our products are available. We obtained utility patents on the blood volume monitor
in 2018 in the U.S. and 2020 in Europe. We cannot be certain that we have taken adequate steps to protect our intellectual property,
especially in countries where the laws may not protect our rights as fully as in the United States. In addition, if our third-party
confidentiality agreements are breached there may not be an adequate remedy available to us. If our trade secrets become publicly
known, we may lose competitive advantages.
Substantial costs could be incurred defending against
claims of infringement.
Other companies, including competitors, may obtain patents or
other proprietary rights that would limit, interfere with, or otherwise circumscribe our ability to make, use, or sell products.
Should there be a successful claim of infringement against us and if we could not license the alleged infringed technology at a
reasonable cost, our business and operating results could be adversely affected. There has been substantial litigation regarding
patent and other intellectual property rights in the medical device industry. The validity and breadth of claims covered in medical
technology patents involve complex legal and factual questions for which important legal principles remain unresolved. Any litigation
claims against us, independent of their validity, may result in substantial costs and the diversion of resources with no assurance
of success. Intellectual property claims could cause us to:
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Cease selling, incorporating, or using products that incorporate the
challenged intellectual property;
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Obtain a license from the holder of the infringed intellectual property
right, which may not be available on reasonable terms, if at all; and
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Re-design our products excluding the infringed intellectual property,
which may not be possible.
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Our business could be adversely affected by reliance on
sole suppliers.
Notwithstanding our current multiple supplier approach, in the
future certain essential product components may be supplied by sole, or a limited group of, suppliers. Most of our products and
components are purchased through purchase orders rather than through long term supply agreements and large volumes of inventory
may not be maintained. There may be shortages and delays in obtaining certain product components. Disruption of the supply or inventory
of components could result in a significant increase in the costs of these components or could result in an inability to meet the
demand for our products. In addition, if a change in the manufacturer of a key component is required, qualification of a new supplier
may result in delays and additional expenses in meeting customer demand for products. These factors could adversely affect our
revenues and ability to retain our experienced sales force.
Our products are subject to recall even after receiving
FDA or foreign clearance or approval, which would harm our reputation and business.
We are subject to medical device reporting regulations that
require us to report to the FDA or respective governmental authorities in other countries if our products cause or contribute to
a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the
malfunction were to recur. The FDA and similar governmental authorities in other countries have the authority to require the recall
of our products in the event of material deficiencies or defects in design or manufacturing. A government mandated or voluntary
recall by us could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling.
Any recall would divert managerial and financial resources and
could harm our reputation with customers. We cannot assure you that we will not have product recalls in the future or that such
recalls would not have a material adverse effect on our business. We have not undertaken any voluntary or involuntary recalls to
date.
Our principal executive officer owns a controlling interest
in our voting stock, and investors will not have any voice in our management.
Our President, Chief Executive Officer, and Chairman, Thomas
Sandgaard, beneficially owns approximately 50% of our outstanding common stock as of February 27, 2020. As a result, Mr. Sandgaard
has the ability to control substantially all day to day operations of our company and all matters submitted to our stockholders
for approval, including:
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Election of our board of directors;
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Removal of any of our directors;
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Amendment of our articles of incorporation or bylaws;
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Approval of significant corporate transactions, such as a sale, merger
or liquidation of our Company; and
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Adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving us.
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We are a relatively small company with a limited number
of products and staff. Sales fluctuations and employee turnover may adversely affect our business.
We are a relatively small company. Consequently, compared to
larger companies, sales fluctuations could have a greater impact on our revenue and profitability on a quarter-to-quarter and year-to-year
basis and delays in patient orders could cause our operating results to vary significantly from quarter to quarter and year-to-year.
In addition, as a small company we have limited staff and are heavily reliant on certain key personnel to operate our business.
If a key employee were to leave the company it could have a material impact on our business and results of operations as we might
not have sufficient depth in our staffing to fill the role that was previously being performed. A delay in filling the vacated
position could put a strain on existing personnel or result in a failure to satisfy our contractual obligations or to effectively
implement our internal controls, and materially harm our business.
We may fail to protect the privacy, integrity and security
of customer information.
We possess and process sensitive customer information and Protected
Health Information protected by the Health Insurance Portability and Affordability Act (“HIPAA”). While we have taken
reasonable and appropriate steps to protect that information, if our security procedures and controls were compromised, it could
harm our business, reputation, results of operations and financial condition and may increase the costs we incur to protect against
such information security breaches, such as increased investment in technology, the costs of compliance with health care privacy
and consumer protection laws. A compromise of our privacy or security procedures could also subject us to liability under certain
health care privacy laws applicable to us.
Expansion of our operations and sales internationally
may subject us to additional risks, including risks associated with unexpected events.
A component of our growth strategy is to expand our operations
and sales internationally. There can be no assurance that we will be able to successfully market, sell and deliver our products
in foreign markets, or that we will be able to successfully expand our international operations. Global operations could cause
us to be subject to unexpected, uncontrollable and rapidly changing risks, events and circumstances.
The following factors, among others, could adversely affect
our business, financial condition and results of operations:
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difficulties in managing foreign operations and attracting and retaining
appropriate levels of senior management and staffing;
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longer cash collection cycles;
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proper compliance with local tax laws which can be complex and may
result in unintended adverse tax consequences;
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difficulties in enforcing agreements through foreign legal systems;
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failure to properly comply with U.S. and foreign laws and regulations
applicable to our foreign activities including, without limitation, product approval, healthcare and employment law requirements
and the Foreign Corrupt Practices Act;
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fluctuations in exchange rates that may affect product demand and
may adversely affect the profitability in U.S. dollars of the products we provide in foreign markets;
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the ability to efficiently repatriate cash to the United States and
transfer cash between foreign jurisdictions; and
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changes in general economic conditions
or political circumstances in countries where we operate.
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Changes in financial accounting standards or practices
may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.
We are required to prepare our financial statements in accordance
with generally accepted accounting principles in the United States of America (“GAAP”), which is periodically revised
and/or expanded. From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative
bodies, including the FASB and the SEC. It is possible that future accounting standards we are required to adopt may require additional
changes to the current accounting treatment that we apply to our financial statements and may require us to make significant changes
to our reporting systems. Such changes could result in a material adverse impact on our business, results of operations and financial
condition.
RISKS RELATING TO OUR COMMON STOCK
Sales of significant amounts of shares held by Mr. Sandgaard,
or the prospect of these sales, could adversely affect the market price of our common stock
Sales of significant amounts of shares held by Mr. Sandgaard,
or the prospect of these sales, could adversely affect the market price of our common stock. Mr. Sandgaard’s stock ownership
may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which
in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
Our status as a ‘controlled
company’ could make our common stock less attractive to some investors or otherwise harm our stock price.
On February 12, 2019, we began trading
on The Nasdaq Capital Market. We currently qualify as a "controlled company" under the corporate governance rules, therefore
we are not required to have a compensation committee or an independent nominating function. Accordingly, should the interests of
our controlling stockholder differ from those of other stockholders; the other stockholders may not have the same protections afforded
to stockholders of companies that are subject to all corporate governance rules. Our status as a controlled company could make
our common stock less attractive to some investors or otherwise harm our stock price.
Our existing shareholders may experience
dilution if we elect to raise equity capital
Due to our past liquidity issues, we have had to raise capital
in the form of debt and/or equity to meet our working capital needs. We may also choose to issue equity or debt securities
in the future to meet our liquidity or other needs which would result in additional dilution to our existing stockholders. Although
we will attempt to minimize the dilutive impact of any future capital-raising activities, we cannot offer any assurance that we
will be able to do so. We may have to issue additional shares of our common stock at prices at a discount from the then-current
market price of our common stock. If we raise additional working capital, existing shareholders may experience dilution.
We paid a dividend on our common stock, and cash used
to pay dividends will not be available for other corporate purposes
In 2018, our Board of Directors declared a special one-time
dividend of $0.07 per share which was paid in January 2019. The decision to pay dividends in the future will depend on general
business conditions, the impact of such payment on our financial condition and other factors our Board of Directors may consider.
If we elect to pay future dividends, this could reduce our cash reserves to levels that may be inadequate to fund expansions to
our business plan or unanticipated contingent liabilities.
Our stock price could become more volatile and your
investment could lose value.
All of the factors discussed in this section could affect our
stock price. A significant drop in our stock price could also expose us to the risk of securities class actions lawsuits, which
could result in substantial costs and divert management’s attention and resources, which could adversely affect our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
In October 2017, we signed a lease for a new corporate headquarters
in Englewood, Colorado beginning in January 2018. In March 2019, we signed an amendment to this lease which allowed the Company
to expand its corporate offices. An additional amendment was entered into on January 3, 2020 which will allow the Company to expand
its corporate offices to approximately 108,227 square feet once certain work is completed. The lease and subsequent amendments
continue through June 30, 2023 with an option for a two-year extension through June 2025. We believe these leased properties are
sufficient to support our current requirements and that we will be able to locate additional facilities as needed. See Note 9 to
the Consolidated Financial Statements for additional information on these leases.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2019 AND 2018
(1) ORGANIZATION, NATURE OF BUSINESS AND MANAGEMENT’S
PLANS
Organization
Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood,
Colorado. We operate in one primary business segment, medical devices which include electrotherapy and pain management
products. As of December 31, 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 years ended December 31, 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 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. Its inactive subsidiaries include Zynex NeuroDiagnostics,
Inc. (“ZND,” a wholly-owned Colorado corporation), Zynex Billing and Consulting, LLC (“ZBC,” an 80% owned
Colorado limited liability company) and Pharmazy, Inc. (“Pharmazy”), which was incorporated in June 2015 as a wholly-owned
Colorado corporation. The Company’s compound pharmacy operated as a division of ZMI dba as Pharmazy through January 2016.
The term “the Company” refers to Zynex, Inc. and
its active and inactive subsidiaries.
Nature of Business
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 years ended December 31, 2019 and 2018, 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.
(2) SIGNIFICANT ACCOUNTING POLICIES
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 a decrease in shareholders’ equity. Non-controlling interest represents the 20% ownership in the Company’s
majority-owned inactive subsidiary, 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 year ended December
31, 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, inventory reserves, the life of its leased devices, stock-based compensation, and valuation of long-lived
assets and realizability of deferred tax assets.
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.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments include investments
with maturities greater than three months, but not exceeding 12 months, or highly liquid investments with maturities greater than
12 months that the Company intends to liquidate during the next 12 months for working capital needs.
Inventory
Inventories are stated at the lower of cost and net realizable
value. Cost is computed using standard costs, which approximates actual costs on an average cost basis. Following are the components
of inventory as of December 31, 2019 and 2018 (in thousands):
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Raw Materials
|
|
$
|
953
|
|
|
$
|
454
|
|
Work-in-process
|
|
|
200
|
|
|
|
55
|
|
Finished Goods
|
|
|
1,640
|
|
|
|
576
|
|
|
|
$
|
2,793
|
|
|
|
1,085
|
|
Less: reserve
|
|
|
(415
|
)
|
|
|
(248
|
)
|
|
|
$
|
2,378
|
|
|
$
|
837
|
|
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.
Property and Equipment
Property and equipment is recorded at cost. Repairs and maintenance
expenditures are charged to expense as incurred. We compute depreciation expense on a straight-line basis over the estimated useful
lives of the assets as follows:
Classification
|
|
Estimated Useful Life
|
Office furniture and equipment
|
|
5 to 7 years
|
Assembly equipment
|
|
7 years
|
Vehicles
|
|
5 years
|
Leasehold improvements
|
|
Term of lease
|
Leased devices
|
|
9 months
|
Leases
The Company determines if an arrangement is a lease at inception
or modification of a contract.
The Company recognizes finance and operating lease right-of-use
assets and liabilities at the lease commencement date based on the estimated present value of the lease payments over the lease
term. For our finance leases, the Company uses the implicit rate to determine the present value of future lease payments. For our
operating leases that do not provide an implicit rate, the Company uses incremental borrowing rates to determine the present value
of future lease payments. The Company includes options to extend or terminate a lease in the lease term when it is reasonably certain
to exercise such options. The Company recognizes leases with an initial term of 12 months or less as lease expense over the lease
term and those leases are not recorded on our Consolidated Balance Sheets. For additional information on our leases where the Company
is the lessee, see Note 9- Leases.
A significant portion of our device revenue is derived from
patients who obtain our devices under month-to-month lease arrangements. Revenue related to devices on lease is recognized in accordance
with ASC 842, Leases. Using the guidance in ASC 842, 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.
|
Lease commencement occurs upon delivery of the device to the
patient. 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 recognized monthly for the
duration of the period in which the patient retains the device.
Revenue Recognition, Accounts Receivable, Allowance for
Billing Adjustments and Collectability
Revenue is derived from sales and leases of our electrotherapy
devices and sales of related supplies and complimentary products. The Company recognizes revenue when control of the product has
been transferred to the patient, in the amount that reflects the consideration to which the Company expects to receive. In general,
revenue from sales of our devices and supplies is recognized once the product is delivered to the patient, which is when control
is deemed to have transferred to our patient.
Sales of our devices and supplies are primarily made with, and
shipped directly to the patient with a small amount of revenue generated from sales to distributors. In the healthcare industry
there is often a third party involved that will pay on the patients’ 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 payers, 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. There are no substantial
costs incurred through support or warranty obligations.
The following table provides a breakdown of net revenue related
to devices accounted for as purchases subject to ASC 606 and leases subject to ASC 842 (in thousands):
|
|
For the Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Device revenue
|
|
|
|
|
|
|
|
|
Purchased
|
|
$
|
4,035
|
|
|
$
|
1,950
|
|
Leased
|
|
|
6,678
|
|
|
|
4,872
|
|
Total Device revenue
|
|
|
10,713
|
|
|
|
6,822
|
|
Primarily all of the Company’s receivables are due from
patients with commercial or government health plans and workers compensation claims with a small portion related to private pay
individuals, attorney and auto claims. Revenues are estimated using the portfolio approach by third party payer type based upon
historical rates of collection, aging of receivables, trends in historical reimbursement rates by third-party payer types, and
current relationships and experience with the third-party payers, which includes estimated constraints for third-party payer refund
requests, deductions and adjustments. 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 payer billing arrangements and the
uncertainty of reimbursement amounts for certain products from third-party payers 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 payer reimbursement, 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 and actual collectability are reflected
in the period in which received. Historically these differences have been immaterial and the Company has not had to go back and
reassess the adjustments of future periods for past billing adjustments.
A change in the way estimates are determined can result from
a number of factors, including changes in the reimbursement policies or practices of third-party payers, or changes in industry
rates of reimbursement. The Company monitors the variability and uncertain timing over third-party payer types in our portfolios.
If there is a change in our third-party payer 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 payer type. However,
changes to constraints for billing adjustments have historically fluctuated and may continue to fluctuate significantly from quarter
to quarter and year to year.
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.
Earnings Per Share
We calculate basic earnings per share on the basis of the weighted-average
number of shares of common stock outstanding during the period. Diluted earnings per share is calculated using the weighted-average
number of shares of common stock outstanding for the period plus the effect of potential dilutive common shares during the period
using the treasury stock method. Potential shares of common stock outstanding include unvested restricted stock awards, vested
and unvested stock options and common stock purchase warrants.
Advertising
The Company expenses advertising costs as they are incurred.
Advertising expense for each of the years ended December 31, 2019 and 2018 was approximately $0.3 million and $0.1 million, respectively.
Research and Development
Research and development costs are expensed when incurred. Research
and development expense for the years ended December 31, 2019 and 2018 was approximately $0.6 million and $0.2 million, respectively.
Research and development which includes salaries related to research and development and raw materials are included in general
and administrative expenses on the consolidated statement of comprehensive income.
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.
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 allows 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 company has finalized its analysis of tax impacts as of December 31, 2018 and has recorded no material adjustments.
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.
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 finance 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
difference between the additional lease assets and liabilities was primarily due to lease incentives with the remaining difference
of $7,000 recorded as an adjustment to the opening balance of 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 9, below, for further discussion
regarding the Company’s operating and finance leases.
Recently Issued Accounting Pronouncements
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, 2022, and interim periods therein for smaller reporting companies. Early adoption is permitted for annual periods
beginning after December 15, 2018, and interim periods therein. The Corporation is currently evaluating the impact that the adoption
of ASU 2016-13 will have on our financial condition, results of operations and cash flows.
In December 2019, FASB issued ASU 2019-12, “Income Taxes
(Topic 740): Simplifying the Accounting for Income Taxes.” The amendments simplify the accounting for income taxes by removing
certain exceptions to the general principals of Topic 740, “Income Taxes” and also improve consistent application by
clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on a retrospective, modified
retrospective or prospective basis, depending on the specific amendment. The Corporation is currently evaluating the impact of
adoption this guidance.
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.
(3) PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in
thousands):
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
1,178
|
|
|
$
|
1,172
|
|
Assembly equipment
|
|
|
128
|
|
|
|
128
|
|
Vehicles
|
|
|
181
|
|
|
|
184
|
|
Leasehold improvements
|
|
|
500
|
|
|
|
480
|
|
Leased devices
|
|
|
934
|
|
|
|
317
|
|
|
|
$
|
2,921
|
|
|
|
2,281
|
|
Less accumulated depreciation
|
|
|
(2,063
|
)
|
|
|
(1,462
|
)
|
|
|
$
|
858
|
|
|
$
|
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 purchased property
and equipment was $0.3 million and $0.2 million for the years ended December 31, 2019 and 2018, respectively.
Total depreciation expense related to devices out on lease was
$0.5 million and $0.3 million for the years ended December 31, 2019 and 2018, respectively. Depreciation on leased units is reflected
on the income statement as cost of revenue.
(4) EARNINGS PER SHARE
The calculation of basic and diluted earnings per share for
the years ended December 31, 2019 and 2018 are as follows (in thousands, except per share amounts):
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Basic earnings per share
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
9,492
|
|
|
$
|
9,552
|
|
Basic weighted-average shares outstanding
|
|
|
32,439
|
|
|
|
32,503
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
9,492
|
|
|
$
|
9,552
|
|
Weighted-average shares outstanding
|
|
|
32,439
|
|
|
|
32,503
|
|
Effect of dilutive securities - options and restricted stock
|
|
|
1,524
|
|
|
|
1,540
|
|
Diluted weighted-average shares outstanding
|
|
|
33,963
|
|
|
|
34,043
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.28
|
|
|
$
|
0.28
|
|
For the years ended December 31, 2019 and 2018, 0.3 million
and 0.4 million shares of common stock were excluded from the dilutive stock calculation because their effect would have been anti-dilutive.
(5) STOCK-BASED COMPENSATION PLANS
The Company’s 2017 Stock Incentive Plan (the “2017
Stock Plan”) is the Company’s equity compensation plan and provides for grants of stock-based awards to employees,
directors and other individuals providing services to the Company. The 2017 Stock Plan authorizes the Company to award stock options
and restricted stock. Awards issued under the 2017 Stock Plan are at the discretion of the Board of Directors.
The 2017 Stock Plan mandates a maximum award term of 10 years and stipulates that stock options be granted with prices not less
than fair market value on the date of grant. Stock option awards generally vest over four years. Restricted stock awards
typically vest quarterly over three years for grants issued to members of our Board of Directors and quarterly or annually over
four years for grants issued to employees. All awards granted under the 2017 Stock Plan are stock-settled with common stock issued
upon the exercise of stock options or the vesting of restricted stock awards. At December 31, 2019, there were 1.2 million stock
options and 0.1 million unvested restricted stock awards outstanding, and 3.7 million shares available for future grants under
the 2017 Stock Plan.
The Company previously reserved 3,000,000 shares of common stock
for issuance under its 2005 Stock Option Plan (the “2005 Stock Plan”). The 2005 Stock Plan expired as of December 31,
2014. Vesting provisions of the expired plan were to be determined by the Board of Directors. All stock options under the 2005
Stock Plan expire no later than ten years from the date of grant. Options granted in 2015, 2016 and through May 2017 prior to the
approval of the 2017 Stock Incentive Plan were approved and certified by the board of directors on September 6, 2017 under the
existing 2005 stock option plan. At December 31, 2019, 0.7 million options remain outstanding under the 2005 stock option plan.
The Company estimates the grant-date fair value of stock option
awards using the Black-Scholes option pricing model and restricted stock awards at intrinsic value on the date of grant. The following
assumptions were used in estimating the grant date fair value of stock options granted during the years ended December 31, 2019
and 2018:
|
|
2019
|
|
|
2018
|
|
Weighted average expected term
|
|
|
6.25 years
|
|
|
|
6.25 years
|
|
Weighted average volatility
|
|
|
122
|
%
|
|
|
123
|
%
|
Weighted average risk-free interest rate
|
|
|
2.30
|
%
|
|
|
3.00
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The weighted average expected term of stock options represents
the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The weighted
average expected volatility is based on the historical price volatility of the Company’s common stock. The weighted average
risk-free interest rate represents the U.S. Treasury bill rate for the expected term of the related stock options. The dividend
yield represents the Company’s anticipated cash dividend over the expected term of the stock options. Forfeitures are accounted
for as they occur.
The following table summarizes stock-based compensation expenses
recorded in the condensed consolidated statements of operations (in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Costs of revenue - devices and supplies
|
|
$
|
21
|
|
|
$
|
33
|
|
Sales and marketing
|
|
|
205
|
|
|
|
127
|
|
General, and administrative
|
|
|
594
|
|
|
|
210
|
|
Total stock based compensation expense
|
|
$
|
820
|
|
|
$
|
370
|
|
The excess tax benefit associated with our stock-based compensation
plans for the years ended December 31, 2019 and 2018, was approximately $0.8 million and $0.3 million, respectively.
A combined summary of stock option activity for the 2017 Stock
Plan and the 2005 Stock Plan for the years ended December 31, 2019 and 2018 is presented below:
|
|
Number of Shares
(in thousands)
|
|
|
Weighted
Average
Strike
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding at December 31, 2017
|
|
|
2,142
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
215
|
|
|
$
|
2.99
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(357
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(115
|
)
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,885
|
|
|
$
|
0.80
|
|
|
|
6.32
|
|
|
$
|
4,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,885
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
653
|
|
|
$
|
5.81
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(503
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(6
|
)
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(174
|
)
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
1,855
|
|
|
$
|
2.48
|
|
|
|
6.42
|
|
|
$
|
10,032
|
|
Exercisable at December 31, 2019
|
|
|
965
|
|
|
$
|
0.60
|
|
|
|
4.15
|
|
|
$
|
7,022
|
|
Range
|
|
Outstanding
Number of
Options (in
thousands)
|
|
|
Weighted
average
Remaining
Contractual
Life (years)
|
|
|
Weighted Average
Strike Price
|
|
|
Exercisable Number of
Options (in thousands)
|
|
|
Remaining Exercisable
Contractual Life (years)
|
|
|
Weighted
Average
Exercisable
Strike Price
|
|
$0 to $2.00
|
|
|
1,040
|
|
|
|
4.33
|
|
|
$
|
0.42
|
|
|
|
889
|
|
|
|
3.80
|
|
|
$
|
0.41
|
|
$2.01 to $4.00
|
|
|
367
|
|
|
|
8.68
|
|
|
$
|
3.11
|
|
|
|
76
|
|
|
|
8.26
|
|
|
$
|
2.78
|
|
$4.01 to $6.00
|
|
|
210
|
|
|
|
9.18
|
|
|
$
|
5.35
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
$6.01 to $8.00
|
|
|
200
|
|
|
|
9.56
|
|
|
$
|
7.87
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
$8.01 to $10.00
|
|
|
38
|
|
|
|
9.86
|
|
|
$
|
8.96
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
1,855
|
|
|
|
6.42
|
|
|
$
|
2.48
|
|
|
|
965
|
|
|
|
4.15
|
|
|
$
|
0.60
|
|
A summary of our unvested stock options as of December 31, 2019
and 2018 and related activity is presented below:
|
|
Non-vested
Shares
Under
Option (in
thousands)
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested at December 31, 2017
|
|
|
658
|
|
|
$
|
0.81
|
|
Granted
|
|
|
215
|
|
|
$
|
2.65
|
|
Vested
|
|
|
(256
|
)
|
|
$
|
0.72
|
|
Forfeited
|
|
|
(48
|
)
|
|
$
|
1.98
|
|
Non-vested at December 31, 2018
|
|
|
569
|
|
|
$
|
1.44
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2018
|
|
|
569
|
|
|
$
|
1.44
|
|
Granted
|
|
|
653
|
|
|
$
|
5.12
|
|
Vested
|
|
|
(169
|
)
|
|
$
|
1.24
|
|
Forfeited
|
|
|
(163
|
)
|
|
$
|
2.44
|
|
Non-vested at December 31, 2019
|
|
|
890
|
|
|
$
|
4.03
|
|
A summary of restricted stock award activity under the 2017
Stock Plan for the years ended December 2019 and 2018 are presented below:
|
|
Number of Shares
(in thousands)
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Outstanding at December 31, 2017
|
|
|
15
|
|
|
$
|
1.10
|
|
Granted
|
|
|
80
|
|
|
$
|
3.56
|
|
Vested
|
|
|
(19
|
)
|
|
$
|
3.09
|
|
Outstanding at December 31, 2018
|
|
|
76
|
|
|
$
|
3.19
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
76
|
|
|
$
|
3.19
|
|
Granted
|
|
|
55
|
|
|
$
|
8.10
|
|
Vested
|
|
|
(29
|
)
|
|
$
|
3.24
|
|
Outstanding at December 31, 2019
|
|
|
102
|
|
|
$
|
5.81
|
|
As of December 31, 2019, there was approximately $3.5 million
of total unrecognized compensation costs related to unvested stock options and restricted stock. These costs are expected to be
recognized over a weighted average period of 2.9 years.
The total intrinsic value of stock option exercises for the
years ended December 31, 2019 and 2018 was $4.4 million and $1.1 million, respectively. The total fair value of restricted stock
awards vested during the years ended December 31, 2019, and 2018 was $0.1 million and $0.2 million, respectively.
(6) 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.
Any determination to declare a future quarterly dividend, as
well as the amount of any cash dividend which may be declared, will be based on our financial position, earnings, earnings outlook
and other relevant factors at that time.
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 repurchase 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. From the inception of the plan through May 13, 2019, the Company purchased 576,129
shares of our common stock for $1.8 million or an average price of $3.20 per share. As of December 31, 2019 the Company had no
outstanding stock repurchase programs.
Warrants
In October 2017, 150,000 common stock warrants were issued in
exchange for professional services.
In connection with the agreement entered into on March 28, 2016,
with Triumph Bank, we issued a common stock warrant to purchase 50,000 shares of the Company’s common stock.
A summary of stock warrant activity for the years ended December
31, 2019 and 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
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(50
|
)
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable at December 31, 2018
|
|
|
150
|
|
|
$
|
2.42
|
|
|
|
5.77
|
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
150
|
|
|
$
|
2.42
|
|
|
|
5.77
|
|
|
$
|
79
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(40
|
)
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
Forfeited(1)
|
|
|
(10
|
)
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable at December 31, 2019
|
|
|
100
|
|
|
$
|
2.63
|
|
|
|
4.77
|
|
|
$
|
525
|
|
(1) Warrants were exercised under a net exercise provision in
the warrant agreement. As a result, approximately 10,000 warrants were forfeited in lieu of cash payment for shares.
(7) INCOME TAXES
The pre-tax income from continuing operations on which the provision
for income taxes was computed is as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
11,964
|
|
|
$
|
10,237
|
|
Foreign
|
|
|
(23
|
)
|
|
|
(21
|
)
|
Total
|
|
|
11,941
|
|
|
|
10,216
|
|
Income tax expense consists of the following for the years ended
December 31, 2019 and 2018 (in thousands):
|
|
2019
|
|
|
2018
|
|
Current tax expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,865
|
|
|
$
|
1,080
|
|
State
|
|
|
372
|
|
|
|
309
|
|
Total tax expense:
|
|
|
2,237
|
|
|
|
1,389
|
|
Deferred tax expense/(benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
120
|
|
|
|
(462
|
)
|
State
|
|
|
92
|
|
|
|
(263
|
)
|
Total deferred tax expense/(benefit):
|
|
$
|
212
|
|
|
$
|
(725
|
)
|
Total
|
|
$
|
2,449
|
|
|
$
|
664
|
|
A reconciliation of income tax computed at the U.S. statutory
rate of 21% to the effective income tax rate is as follows:
|
|
2019
|
|
|
2018
|
|
Statutory rate
|
|
|
21
|
%
|
|
|
21
|
%
|
State taxes
|
|
|
3
|
|
|
|
4
|
|
Permanent differences and other
|
|
|
-
|
|
|
|
1
|
|
Change in valuation allowance
|
|
|
(1
|
)
|
|
|
(16
|
)
|
Stock based compensation
|
|
|
(4
|
)
|
|
|
(3
|
)
|
Other (true – up)
|
|
|
1
|
|
|
|
-
|
|
Effective rate
|
|
|
20
|
%
|
|
|
7
|
%
|
The tax effects of temporary differences that give rise to deferred
tax assets (liabilities) at December 31, 2019 and 2018 are as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
34
|
|
|
$
|
37
|
|
Lease liability
|
|
|
1,109
|
|
|
|
217
|
|
Accounts receivable
|
|
|
19
|
|
|
|
18
|
|
Inventory
|
|
|
232
|
|
|
|
117
|
|
Stock-based compensation
|
|
|
145
|
|
|
|
138
|
|
Tax Credits and NOL Carryforward
|
|
|
110
|
|
|
|
354
|
|
Other
|
|
|
1
|
|
|
|
150
|
|
Property and equipment
|
|
|
-
|
|
|
|
-
|
|
Amortization
|
|
|
50
|
|
|
|
57
|
|
|
|
|
1,700
|
|
|
|
1,088
|
|
Less: Valuation allowance
|
|
|
-
|
|
|
|
(172
|
)
|
Deferred tax assets
|
|
$
|
1,700
|
|
|
$
|
916
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
(192
|
)
|
|
$
|
(176
|
)
|
Finance lease
|
|
|
(45
|
)
|
|
|
-
|
|
Right-of-use asset
|
|
|
(946
|
)
|
|
|
-
|
|
Prepaid expenses
|
|
|
(4
|
)
|
|
|
(15
|
)
|
Deferred tax liabilities
|
|
$
|
(1,187
|
)
|
|
$
|
(191
|
)
|
Net deferred tax assets
|
|
$
|
513
|
|
|
$
|
725
|
|
For federal tax purposes, the Company completely utilized its remaining $2.7 million in NOL carryforwards as of December 31, 2018. As of December 31, 2019, the Company has NOL carryforwards
in various states, which expire at various dates ranging from five to seven years.
As of December 31, 2019 the Company had no recorded valuation
allowance. As of December 31, 2018 the Company had a valuation allowance of $0.2 million. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers past history, the scheduled reversal of deferred tax liabilities, available taxes in carryback
periods, projected future taxable income projections and tax planning strategies in making this assessment. During 2019,
Management determined that no valuation is necessary and released the remaining valuation allowance.
The accounting standard related to income taxes applies to all
tax positions and defines the confidence level that a tax position must meet in order to be recognized in the financial statements.
The accounting standard requires that the tax effects of a position be recognized only if it is "more-likely-than-not"
to be sustained by the taxing authority as of the reporting date. If a tax position is not considered "more-likely-than-not"
to be sustained, then no benefits of the position are to be recognized. Differences between financial and tax reporting which do
not meet this threshold are required to be recorded as unrecognized tax benefits. This standard also provides guidance
on the presentation of tax matters and the recognition of potential IRS interest and penalties. As of December 31, 2019 and 2018,
the Company does not have an unrecognized tax liability.
The Company does not classify penalty and interest expense related
to income tax liabilities as an income tax expense. Penalties and interest are included within general and administrative expenses
on the consolidated statements of operations.
The Company files income tax returns in the U.S. and various
state jurisdictions, and there are open statutes of limitations for taxing authorities to audit our tax returns from 2014 through
the current period.
(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.
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 years ended December 31, 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.
(9) LEASES
The Company has three operating leases pertaining to its corporate
headquarters located in Englewood, CO. Details of each lease are as follows:
|
·
|
The Company entered into a sublease agreement on October 20, 2017 with CSG Systems Inc. for approximately 41,715 square feet.
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. Upon lease commencement,
the Company recorded an operating lease liability of $3.9 million and a corresponding right-of-use asset for $3.6 million.
|
|
·
|
The Company entered into an amendment to its sublease agreement, above, on March 11, 2019 for an additional 21,420 square feet
of office space. The term of the 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.
|
|
·
|
Subsequent to December 31, 2019, the Company entered into an amendment to its sublease agreement, above, on January 3, 2020
for an additional 22,546 square feet of office space. The term of the sublease will begin once certain expansion work is completed
and will run through June 30, 2025. From the commencement date through October 31, 2020, the rent per square foot is $13.00, increasing
to $21.75 per square foot from November 1, 2020 through October 31, 2021. The price per square foot increases by an additional
$1 annually beginning November 1, 2021. The Company estimates that it will record a right-of-use asset and liability of $1.4 million
each upon lease commencement.
|
The Company has one finance lease for office equipment as follows:
|
·
|
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 finance
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 finance lease liability. The remaining lease term was 3.5 years for the Company’s
operating leases and 4.8 years for its finance leases.
The table below reconciles the undiscounted future minimum lease
payments under the Company’s operating and finance leases to the total operating and capital lease liabilities recognized
on the consolidated balance sheets as of December 31, 2019 (in thousands):
|
|
Operating lease liabilities
|
|
|
Finance lease liabilities
|
|
2020
|
|
$
|
1,344
|
|
|
$
|
57
|
|
2021
|
|
|
1,408
|
|
|
|
45
|
|
2022
|
|
|
1,473
|
|
|
|
45
|
|
2023
|
|
|
763
|
|
|
|
45
|
|
2024
|
|
|
-
|
|
|
|
34
|
|
Total undiscounted future minimum lease payments
|
|
|
4,988
|
|
|
|
226
|
|
Less: Difference between undiscounted lease payments
and discounted lease liabilities:
|
|
|
(495
|
)
|
|
|
(36
|
)
|
Total lease liabilities
|
|
$
|
4,493
|
|
|
$
|
190
|
|
Operating and finance lease costs were $1.2 million and $0.9
million for years ended December 31, 2019 and 2018, which were included in the consolidated statement of operations under the following
headings (in thousands):
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Operating Lease expense
|
|
|
|
|
|
|
|
|
Costs of revenue -
devices and supplies
|
|
$
|
121
|
|
|
$
|
142
|
|
Sales and marketing expense
|
|
|
170
|
|
|
|
114
|
|
General and administrative
|
|
|
859
|
|
|
|
670
|
|
Total operating lease expense
|
|
$
|
1,150
|
|
|
$
|
926
|
|
|
|
|
|
|
|
|
|
|
Finance Lease expense
|
|
|
|
|
|
|
|
|
Amortization of right-of-use asset:
|
|
|
|
|
|
|
|
|
Costs of revenue -
devices and supplies
|
|
$
|
2
|
|
|
$
|
-
|
|
Sales and marketing expense
|
|
|
4
|
|
|
|
-
|
|
General and administrative
|
|
|
13
|
|
|
|
10
|
|
Total amortization of right-of-use asset
|
|
|
19
|
|
|
|
10
|
|
Interest expense and other
|
|
|
5
|
|
|
|
2
|
|
Total finance lease expense
|
|
$
|
24
|
|
|
$
|
12
|
|
(10) COMMITMENTS AND CONTINGENCIES
See Note 9 for details regarding commitments under the Company’s
long-term leases.
From time to time, the Company may become party to litigation
and other claims in the ordinary course of business. To the extent that such claims and litigation arise, management would provide
for them if losses are determined to be both probable and estimable.
The Company is currently not a party to any material pending
legal proceedings.
(11) CONCENTRATIONS
The Company is exposed to concentration of credit risk related
primarily to its cash balances. The Company maintains its cash at major financial institutions. The Company has not experienced
any realized losses in such accounts and believes it is not exposed to any significant credit risk related to its cash.
The Company had one major vendor from which is sourced approximately
49% of supplies for its electrotherapy products for the years ended December 31, 2019 and 2018. Management believes that
its relationships with its suppliers are good. If the relationships were to be replaced, there may be a short-term disruption for
a period of time in which products may not be available and additional expenses may be incurred as the Company locates additional
or replacement suppliers.
The Company had receivables from two third-party payers at December
31, 2019, which made up approximately 39% of the accounts receivable balance. The Company had receivables from a third-party payer
at December 31, 2018, which made up approximately 23% of the accounts receivable balance.
(12) RETIREMENT PLAN
In 2012, the Company established a defined contribution
retirement plan for its employees under section 401(k) of the Internal Revenue Code (the “401(k) Plan”) that
is available to all employees 18 years of age or older with three months of service. All employee contributions are fully vested
immediately and employer contributions vest over a period of four years. The Company has a discretionary employee match
program and currently matches 35% of first 6% of an employee’s contributions.
During each of 2019 and 2018, The Company recorded an expense
of $0.1 million under the aforementioned plan, related to the Company match.
(13) RELATED PARTY TRANSACTIONS
In 2015, the Company entered into a three-year employment agreement
totaling $0.1 million with Mr. Joachim Sandgaard, Mr. Sandgaard’s son. This arrangement concluded at the end of 2018.
No further payments were made in 2019.
(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information is as follows (in thousands,
except per share data):
|
|
2018
|
|
|
|
|
First
Quarter
|
|
|
|
Second
Quarter
|
|
|
|
Third
Quarter
|
|
|
|
Fourth
Quarter
|
|
Total Revenue
|
|
$
|
6,876
|
|
|
$
|
7,573
|
|
|
$
|
8,131
|
|
|
$
|
9,337
|
|
Less: cost of revenue and operating expenses
|
|
|
4,921
|
|
|
|
4,858
|
|
|
|
5,312
|
|
|
|
6,457
|
|
Income from operations
|
|
|
1,955
|
|
|
|
2,715
|
|
|
|
2,819
|
|
|
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,840
|
|
|
|
2,678
|
|
|
|
2,818
|
|
|
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,921
|
|
|
$
|
2,418
|
|
|
$
|
2,591
|
|
|
$
|
2,622
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share - net income
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
Diluted income per share - net income
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
$
|
0.08
|
|
|
|
2019
|
|
|
|
|
First
Quarter
|
|
|
|
Second
Quarter
|
|
|
|
Third
Quarter
|
|
|
|
Fourth
Quarter
|
|
Total Revenue
|
|
$
|
9,196
|
|
|
$
|
10,297
|
|
|
$
|
11,817
|
|
|
$
|
14,162
|
|
Less: cost of revenue and operating expenses
|
|
|
6,940
|
|
|
|
7,713
|
|
|
|
9,322
|
|
|
|
10,431
|
|
Income from operations
|
|
|
2,256
|
|
|
|
2,584
|
|
|
|
2,495
|
|
|
|
3,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,136
|
|
|
|
2,584
|
|
|
|
2,496
|
|
|
|
3,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,350
|
|
|
$
|
2,162
|
|
|
$
|
2,033
|
|
|
$
|
2,947
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share - net income
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
Diluted income per share - net income
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
(15) SUBSEQUENT EVENTS
See Note 9 – Leases above for a discussion regarding
the lease agreement entered into in January 2020.
On February 25, 2020 the Company announced the FDA granted 510(k)
clearance for sale in the U.S. for the CM-1500 Blood Volume Monitor.