The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
(1) BASIS OF PRESENTATION
Organization
Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood,
Colorado. We operate in one primary business segment, medical devices which include electrotherapy and pain management
products. As of March 31, 2020, the Company’s only active subsidiary is Zynex Medical, Inc. (“ZMI,” a wholly-owned
Colorado corporation) through which the Company conducts most of its operations. One other subsidiary, Zynex Europe, ApS (“ZEU,”
a wholly-owned Denmark corporation), did not generate material revenues during the three months ended March 31, 2020 and 2019 from
international sales and marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has
developed a blood volume monitoring device which was approved by the U.S. Food and Drug Administration (“FDA”) in February
2020 and is awaiting approval by the 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 doing
business 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 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, which is marketed to physicians and therapists
by our field sales representatives. The NexWave requires consumable supplies, such as electrodes and batteries, which
are shipped to patients on a recurring monthly basis, as needed.
During the three months ended March 31, 2020 and 2019, the Company
generated substantially all of its revenue in North America from sales of its devices and supplies to patients and health care
providers.
Unaudited Consolidated Financial Statements
The unaudited consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”)
and accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and
footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make
the information presented not misleading. A description of the Company’s accounting policies and other financial information
is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form
10-K for the year ended December 31, 2019. Amounts as of December 31, 2019, are derived from those audited consolidated
financial statements. These interim consolidated financial statements should be read in conjunction with the annual audited financial
statements, accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2019, which has previously been filed with the SEC.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31,
2020 and the results of its operations and its cash flows for the periods presented. The results of operations for the three
months ended March 31, 2020 are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot
be used to indicate financial performance for the entire year.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Zynex, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Use of Estimates
Preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The most significant management estimates used in the preparation
of the accompanying consolidated financial statements are associated with the allowance for billing adjustments and uncollectible
accounts receivable, the reserve for obsolete and damaged inventory, stock-based compensation, and valuation of long-lived assets
and realizability of deferred tax assets.
Leases
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 8- 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 and Accounts Receivable
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.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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 Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Purchased
|
|
$
|
1,280
|
|
|
$
|
590
|
|
Leased
|
|
|
2,164
|
|
|
|
1,385
|
|
|
|
|
3,444
|
|
|
|
1,975
|
|
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
over the respective performance period.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, accounts
receivable, accounts payable, and accrued liabilities, for which current carrying amounts approximate fair value due to their short-term
nature. Financial instruments also included our operating and finance lease obligations, the carrying value of which approximates
fair value because the interest rates on the outstanding borrowings are at rates that approximate market rates for borrowings with
similar terms and average maturities.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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 (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Raw Materials
|
|
$
|
1,381
|
|
|
$
|
953
|
|
Work-in-process
|
|
|
256
|
|
|
|
200
|
|
Finished Goods
|
|
|
1,944
|
|
|
|
1,640
|
|
|
|
$
|
3,581
|
|
|
|
2,793
|
|
Less: reserve
|
|
|
(152
|
)
|
|
|
(415
|
)
|
|
|
$
|
3,429
|
|
|
$
|
2,378
|
|
The Company monitors inventory for turnover and obsolescence
and records losses for excess and obsolete inventory, as appropriate. The Company provides reserves for estimated excess and obsolete
inventories based upon assumptions about future demand. If future demand is less favorable than currently projected by management,
additional inventory write-downs may be required.
Segment Information
We define operating segments as components of our enterprise
for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and
to make operating decisions. We have identified our Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer
as our chief operating decision-makers (“CODM”).
We currently operate our business as one operating segment which
includes two revenue types: Devices and Supplies.
Income Taxes
We record deferred tax assets and liabilities for the estimated
future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying
consolidated balance sheets, as well as operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities
using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected
to be recovered or settled. We reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more
likely than not that these benefits will not be realized.
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.
Recent 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 Company 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 Company is currently evaluating the impact of adopting
this guidance.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Management has evaluated other recently issued accounting pronouncements
and does not believe that any of these pronouncements will have a material impact on the Company’s consolidated financial
statements.
(2) PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in
thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
1,431
|
|
|
$
|
1,178
|
|
Assembly equipment
|
|
|
128
|
|
|
|
128
|
|
Vehicles
|
|
|
181
|
|
|
|
181
|
|
Leasehold improvements
|
|
|
544
|
|
|
|
500
|
|
Leased devices
|
|
|
1,077
|
|
|
|
934
|
|
|
|
$
|
3,361
|
|
|
|
2,921
|
|
Less accumulated depreciation
|
|
|
(2,245
|
)
|
|
|
(2,063
|
)
|
|
|
$
|
1,116
|
|
|
$
|
858
|
|
The Company monitors devices out on lease for potential loss
and places an estimated reserve on the net book value based on historical loss rates.
Total depreciation expense related to our property and equipment
was $0.1 million for each of the three months ended March 31, 2020 and 2019.
Total depreciation expense related to devices out on lease was
$0.2 million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively. Depreciation on leased units is
reflected on the income statement as cost of revenue.
(3) EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income
by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing
net income by the weighted-average number of common shares outstanding and the number of dilutive potential common share equivalents
during the period, calculated using the treasury-stock method for outstanding stock options.
The calculation of basic and diluted earnings per share for
the three months ended March 31, 2020 and 2019 are as follows (in thousands, except per share data):
|
|
For the Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
2,937
|
|
|
$
|
2,350
|
|
Basic weighted-average shares outstanding
|
|
|
32,913
|
|
|
|
32,233
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
2,937
|
|
|
$
|
2,350
|
|
Weighted-average shares outstanding
|
|
|
32,913
|
|
|
|
32,233
|
|
Effect of dilutive securities - options and restricted stock
|
|
|
1,291
|
|
|
|
1,488
|
|
Diluted weighted-average shares outstanding
|
|
|
34,204
|
|
|
|
33,721
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.07
|
|
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
For the three months ended March 31, 2020 and 2019, 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.
(4) STOCK-BASED COMPENSATION PLANS
In June 2017, our stockholders approved the 2017 Stock
Incentive Plan (the “2017 Stock Plan”) with a maximum of 5,000,000 shares reserved for issuance. Awards permitted
under the 2017 Stock Plan include: Stock Options and Restricted Stock. Awards issued under the 2017 Stock Plan are at
the discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to the closing price
of our common stock on the date of grant and generally vest over four years. Restricted Stock Awards are issued to the recipient
upon vesting and are not included in outstanding shares until such vesting and issuance occurs.
During the three months ended March 31, 2020, 14,000 stock option
awards were granted under the 2017 Stock Plan. During the three months ended March 31, 2019, 0.3 million stock option awards were
granted under the 2017 Stock Plan. At March 31, 2020, the company had 1.3 million stock options outstanding and 0.7 million exercisable
under the following plans:
|
|
Outstanding Number of Options
(in thousands)
|
|
|
Exercisable Number of Options
(in thousands)
|
|
Plan Category
|
|
|
|
|
|
|
|
|
2005 Stock Option Plan
|
|
|
388
|
|
|
|
388
|
|
Equity Compensation Plans not approved by Shareholders
|
|
|
59
|
|
|
|
30
|
|
2017 Stock Option Plan
|
|
|
869
|
|
|
|
238
|
|
Total
|
|
|
1,316
|
|
|
$
|
656
|
|
During the three months ended March 31, 2020, 165,000 shares
of restricted stock were granted to the Board of Directors and management under the 2017 Stock Plan. During the three months
ended March 31, 2019, 5,000 shares of restricted stock were granted. The fair market value of restricted shares for share-based
compensation expensing is equal to the closing price of our common stock on the date of grant. The vesting on the Restricted Stock
is typically released quarterly over three years for the Board of Directors and annually or quarterly over four years for management.
The following summarizes stock-based compensation expenses recorded
in the consolidated statements of operations:
|
|
For the Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cost of Revenue
|
|
$
|
6
|
|
|
$
|
6
|
|
Sales and marketing expense
|
|
|
29
|
|
|
|
41
|
|
General, and administrative
|
|
|
462
|
|
|
|
93
|
|
Total stock based compensation expense
|
|
$
|
497
|
|
|
$
|
140
|
|
During the three months ended March 31, 2020, there
were 14,000 options granted at a weighted average exercise price of $10.15 per share. The weighted-average grant date fair value
of options granted during the three months ended March 31, 2020 was $8.88. The Company issued 165,000 shares of restricted stock
to management during the three months ended March 31, 2020.
During the three months ended March 31, 2019, there
were 0.3 million options granted at a weighted average exercise price of $4.37 per share. The weighted-average grant date fair
value of options granted during the three months ended March 31, 2019 was $3.86. The Company issued 5,000 shares of restricted
stock to management during the three months ended March 31, 2019.
The Company received proceeds of $0.2 million and
$8,000 related to option exercises during the three months ended March 31, 2020 and 2019, respectively.
The Company used the Black-Scholes option pricing model to determine
the fair value of stock option grants, using the following assumptions for the three months ended March 31, 2020 and March 31,
2019.
|
|
For the Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected term (years)
|
|
|
6.79
|
|
|
|
6.25
|
|
Risk-free interest rate
|
|
|
1.59
|
%
|
|
|
2.62
|
%
|
Expected volatility
|
|
|
116.76
|
%
|
|
|
121.98
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
A summary of stock option activity under all equity compensation
plans for the three months ended March 31, 2020, is presented below:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
(in thousands)
|
|
|
Price
|
|
|
(Years)
|
|
|
(in thousands)
|
|
Outstanding at December 31, 2019
|
|
|
1,855
|
|
|
$
|
2.48
|
|
|
|
6.42
|
|
|
$
|
10,032
|
|
Granted
|
|
|
14
|
|
|
$
|
10.15
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(175
|
)
|
|
$
|
5.40
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(378
|
)
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
1,316
|
|
|
$
|
2.72
|
|
|
|
7.18
|
|
|
$
|
10,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2020
|
|
|
656
|
|
|
$
|
1.00
|
|
|
|
5.81
|
|
|
$
|
6,604
|
|
A summary of restricted stock award activity under all equity
compensation plans for the three months ended March 31, 2019, is presented below:
|
|
Number of
|
|
|
|
Shares
|
|
|
|
(in thousands)
|
|
Granted but not vested at December 31, 2019
|
|
|
102
|
|
Granted
|
|
|
165
|
|
Vested
|
|
|
(7
|
)
|
Granted but not vested at March 31, 2020
|
|
|
260
|
|
As of March 31, 2020, the Company had approximately $3.8 million
of unrecognized compensation expense related to stock options and restricted stock awards that will be recognized over a weighted
average period of approximately 2.5 years.
(5) STOCKHOLDERS’ EQUITY
Treasury Stock
On May 14, 2018, our Board of Directors approved a new program
to buy back an additional $2.0 million of our common stock at prevailing market prices either in the open market or through privately
negotiated transactions through May 13, 2019. For the three months ending March 31, 2019, the Company purchased 52,000 shares of
our common stock for $0.2 million for an average price of $3.29 per share, related to the new program. From May 14, 2018 through
March 31, 2019, the Company purchased 576,129 shares of our common stock for $1.8 million or an average price $3.20 per share.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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 three months ended
March 31, 2020 is 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, 2019
|
|
|
100
|
|
|
$
|
2.63
|
|
|
|
4.77
|
|
|
$
|
525
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable at March 31, 2020
|
|
|
100
|
|
|
$
|
2.63
|
|
|
|
4.52
|
|
|
$
|
845
|
|
(6) INCOME TAXES
The income tax provision for interim periods is determined using
an estimate of the annual effective tax rate, adjusted for discrete items, primarily related to excess tax benefits on stock option
exercises. For the three months ended March 31, 2020 discrete items adjusted were $1.1 million. At March 31, 2020 the Company
is currently estimating an annual effective tax rate of approximately 26%. Each quarter, the estimate of the annual effective tax
rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for
volatility of the effective tax rate due to various factors.
The provision for income taxes is recorded at the end of each
interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full
fiscal year. The Company’s effective income tax rate was (19)% for the three months ended March 31, 2020. Discrete items
recognized during the three months ended March 31, 2020 and 2019, resulted in a tax benefit of approximately $1.1 million and $18,000,
respectively. The Company recorded an income tax benefit of $483,000 and income tax expense of $786,000 for the three months ended
March 31, 2020 and 2019, respectively.
On March 27, 2020, President Trump signed into U.S. federal
law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected
by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating
to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative
minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation
methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, net
operating loss carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in 2018, 2019, and 2020 taxable
years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019
and 2020, the base for interest deductibility is increased from 30% to 50% of EBITDA. We are analyzing the different aspects of
the CARES Act to determine whether any specific provisions may impact us.
No taxes were paid during the three months ended March 31, 2020
and 2019.
(7) DEFERRED INSURANCE REIMBURSEMENT
During the first quarter of 2016, the Company collected $880,000
from a single insurance company for accounts receivable. The accounts receivable had been previously reduced to zero by the allowance
for billing adjustments. Subsequent to March 31, 2016, the insurance company verbally communicated to the Company that this payment
was made in error and requested it be refunded to the insurance company. The Company recorded this $880,000 insurance reimbursement
as a deferred insurance liability.
ZYNEX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
During the first quarter of 2019, the Company recognized $880,000
as other income and reversed the liability. The Company has included this amount in other income in order to ensure comparability
of the Company’s operating income results for the three months ended March 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.
(8) 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.
|
|
·
|
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 began on March
9, 2020 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. Upon lease commencement, the Company recorded an operating lease liability
and a corresponding right-of-use asset for $1.4 million each.
|
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 4.5% 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 3.3 years for the Company’s
operating leases and 4.6 years for its finance leases.
|
|
Operating lease liability
|
|
|
Financing lease liability
|
|
April 1, 2020 through December 31, 2020
|
|
|
1,246
|
|
|
|
42
|
|
2021
|
|
|
1,878
|
|
|
|
45
|
|
2022
|
|
|
1,964
|
|
|
|
45
|
|
2023
|
|
|
1,017
|
|
|
|
45
|
|
2024
|
|
|
-
|
|
|
|
34
|
|
Total undiscounted future minimum lease payments
|
|
|
6,105
|
|
|
|
211
|
|
Less: Difference between undiscounted lease payments and discounted lease liabilities:
|
|
|
(473
|
)
|
|
|
(32
|
)
|
Total lease liabilities
|
|
$
|
5,632
|
|
|
$
|
179
|
|
Operating lease costs were $0.4 million and $0.2 million for
the three months ended March 31, 2020 and 2019, respectively, which were included in general and administrative expenses on the
consolidated statement of operations.
(9) CONCENTRATIONS
For the three months ended March 31, 2020, the Company sourced
approximately 40% of the components for its electrotherapy products from two significant vendors (defined as supplying at least
10%). For the three months ended March 31, 2019 the company sourced approximately 57% of components from two significant vendors.
Management believes that its relationships with suppliers are
good; however, if the relationships were to be replaced, there may be a short-term disruption to operations, a period of time in
which products may not be available and additional expenses may be incurred.
The Company had receivables from two third-party payers at March
31, 2020 and December 31, 2019, that made up approximately 39% of the net accounts receivable balance.
(10) LITIGATION
From time to time, the Company may become party to litigation
and other claims in the ordinary course of business. To the extent that such claims and litigation arise, management would accrue
the estimated exposure for such events when losses are determined to be both probable and estimable.
The Company is currently not a party to any material pending
legal proceedings.
(11) SUBSEQUENT EVENT
In December 2019, a novel Coronavirus disease (“COVID-19”)
was reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. While the Company did not
incur significant disruptions to its operations during the first quarter of 2020 from COVID-19, it is unable at this time to predict
the impact that COVID-19 will have on its business, financial position and operating results in future periods due to numerous
uncertainties. The Company has been and continues to closely monitor the impact of the pandemic on all aspects of its business.
See also the risk factor relating to COVID-19 disclosed in Item 1A of Part II, below.
The Company evaluated subsequent events up to April 28, 2020
and concluded that there were no additional subsequent events.