UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended: September 30, 2011
OR
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission file number
33-26787-D
Zynex, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
NEVADA
|
|
90-0214497
|
|
|
|
(State or other jurisdiction of incorporation or organization)
|
|
(IRS Employer
Identification No.)
|
|
|
|
9990 PARK MEADOWS DRIVE
|
|
|
LONE TREE, COLORADO
|
|
80124
|
|
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(303) 703-4906
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
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 and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check One):
|
|
|
|
|
|
|
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
þ
|
|
|
|
|
(Do not check if a smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
|
|
|
Class
|
|
Shares Outstanding as of November 8, 2011
|
|
|
|
Common Stock, par value $0.001
|
|
30,816,631
|
ZYNEX, INC.
INDEX TO FORM 10-Q
2
|
|
|
ITEM 1.
|
|
FINANCIAL STATEMENTS
|
ZYNEX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(UNAUDITED)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
761
|
|
|
$
|
602
|
|
Accounts receivable, net
|
|
|
10,756
|
|
|
|
7,309
|
|
Inventory
|
|
|
4,320
|
|
|
|
3,641
|
|
Prepaid expenses
|
|
|
146
|
|
|
|
145
|
|
Deferred tax asset
|
|
|
1,072
|
|
|
|
794
|
|
Other current assets
|
|
|
52
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
17,107
|
|
|
|
12,532
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
3,490
|
|
|
|
2,906
|
|
Deposits
|
|
|
210
|
|
|
|
174
|
|
Deferred financing fees, net
|
|
|
78
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,885
|
|
|
$
|
15,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
3,380
|
|
|
$
|
1,270
|
|
Current portion of capital lease obligations
|
|
|
128
|
|
|
|
93
|
|
Accounts payable
|
|
|
2,161
|
|
|
|
1,313
|
|
Income taxes payable
|
|
|
1,245
|
|
|
|
1,103
|
|
Accrued payroll and payroll taxes
|
|
|
759
|
|
|
|
572
|
|
Deferred rent
|
|
|
277
|
|
|
|
221
|
|
Other accrued liabilities
|
|
|
1,699
|
|
|
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,649
|
|
|
|
5,552
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, less current portion
|
|
|
292
|
|
|
|
327
|
|
Deferred rent
|
|
|
1,230
|
|
|
|
1,452
|
|
Deferred tax liability
|
|
|
250
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
11,421
|
|
|
|
7,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock; $.001 par value, 10,000,000 shares authorized,
no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 100,000,000 shares authorized,
30,794,479 (September 30, 2011) and 30,604,167 (December 31,
2010) shares issued and outstanding
|
|
|
31
|
|
|
|
31
|
|
Paid-in capital
|
|
|
5,019
|
|
|
|
4,702
|
|
Retained earnings
|
|
|
4,414
|
|
|
|
3,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
9,464
|
|
|
|
8,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
20,885
|
|
|
$
|
15,701
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
ZYNEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$
|
2,482
|
|
|
$
|
2,032
|
|
|
$
|
7,377
|
|
|
$
|
6,639
|
|
Sales
|
|
|
6,945
|
|
|
|
4,625
|
|
|
|
17,078
|
|
|
|
10,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,427
|
|
|
|
6,657
|
|
|
|
24,455
|
|
|
|
17,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
|
465
|
|
|
|
169
|
|
|
|
1,191
|
|
|
|
702
|
|
Sales
|
|
|
1,470
|
|
|
|
1,257
|
|
|
|
3,915
|
|
|
|
2,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,935
|
|
|
|
1,426
|
|
|
|
5,106
|
|
|
|
3,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,492
|
|
|
|
5,231
|
|
|
|
19,349
|
|
|
|
13,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
6,389
|
|
|
|
4,606
|
|
|
|
17,486
|
|
|
|
12,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,103
|
|
|
|
625
|
|
|
|
1,863
|
|
|
|
788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
5
|
|
Interest expense and loss on extinguishment of debt
|
|
|
(87
|
)
|
|
|
(45
|
)
|
|
|
(225
|
)
|
|
|
(177
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87
|
)
|
|
|
(43
|
)
|
|
|
(222
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
1,016
|
|
|
|
582
|
|
|
|
1,641
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(425
|
)
|
|
|
(214
|
)
|
|
|
(676
|
)
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
591
|
|
|
$
|
368
|
|
|
$
|
965
|
|
|
$
|
330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,794,268
|
|
|
|
30,569,441
|
|
|
|
30,727,720
|
|
|
|
30,555,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
31,013,012
|
|
|
|
30,667,064
|
|
|
|
30,977,933
|
|
|
|
30,744,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
ZYNEX, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Common
|
|
|
Paid in
|
|
|
Retained
|
|
|
|
|
|
|
of Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of January 1, 2011
|
|
|
30,604,167
|
|
|
$
|
31
|
|
|
$
|
4,702
|
|
|
$
|
3,449
|
|
|
$
|
8,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for option exercise
|
|
|
112,500
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
49
|
|
for services
|
|
|
77,812
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
207
|
|
|
|
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the nine months
ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
965
|
|
|
|
965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of September 30, 2011
|
|
|
30,794,479
|
|
|
$
|
31
|
|
|
$
|
5,019
|
|
|
$
|
4,414
|
|
|
$
|
9,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
ZYNEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
965
|
|
|
$
|
330
|
|
Adjustments to reconcile net income to net cash
used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
594
|
|
|
|
591
|
|
Provision for losses on uncollectible accounts receivable
|
|
|
1,190
|
|
|
|
118
|
|
Amortization of financing fees
|
|
|
36
|
|
|
|
31
|
|
Issuance of common stock for services
|
|
|
61
|
|
|
|
61
|
|
Provision for obsolete inventory
|
|
|
134
|
|
|
|
(2
|
)
|
Deferred rent
|
|
|
(166
|
)
|
|
|
846
|
|
Net loss on disposal of equipment
|
|
|
|
|
|
|
18
|
|
Employee stock-based compensation expense
|
|
|
207
|
|
|
|
203
|
|
Deferred tax benefit
|
|
|
(216
|
)
|
|
|
(331
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,637
|
)
|
|
|
(1,707
|
)
|
Inventory
|
|
|
(791
|
)
|
|
|
(1,389
|
)
|
Prepaid expenses
|
|
|
(1
|
)
|
|
|
100
|
|
Deposits and other current assets
|
|
|
(47
|
)
|
|
|
(19
|
)
|
Accounts payable
|
|
|
848
|
|
|
|
358
|
|
Accrued liabilities
|
|
|
906
|
|
|
|
331
|
|
Income taxes payable
|
|
|
142
|
|
|
|
(364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(775
|
)
|
|
|
(825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds received in lease termination
|
|
|
|
|
|
|
108
|
|
Purchases of equipment and inventory used for rental
|
|
|
(1,123
|
)
|
|
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,123
|
)
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net borrowings from line of credit
|
|
|
2,110
|
|
|
|
972
|
|
Issuance of common stock
|
|
|
49
|
|
|
|
|
|
Deferred financing fees
|
|
|
(25
|
)
|
|
|
(90
|
)
|
Payments on capital lease obligations
|
|
|
(77
|
)
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,057
|
|
|
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
159
|
|
|
|
(270
|
)
|
Cash at beginning of period
|
|
|
602
|
|
|
|
863
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
761
|
|
|
|
593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
175
|
|
|
$
|
83
|
|
Income taxes paid
|
|
$
|
750
|
|
|
$
|
955
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing
and financing activities:
|
|
|
|
|
|
|
|
|
Equipment acquired through capital lease
|
|
$
|
77
|
|
|
$
|
334
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
6
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010
(1)
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Zynex, Inc. and its wholly-owned subsidiaries, Zynex Medical, Inc., Zynex NeuroDiagnostics Inc. and
Zynex Monitoring Solutions Inc. are collectively referred to as the Company. The unaudited
condensed consolidated financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission and accounting
principles generally accepted in the United States (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 Companys accounting policies and other financial information is included in
the audited consolidated financial statements as filed with the Securities and Exchange Commission
in the Companys Annual Report on Form 10-K for the year ended December 31, 2010. Amounts as of
December 31, 2010, are derived from those audited consolidated financial statements. These interim
condensed consolidated financial statements should be read in conjunction therewith.
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments necessary to present fairly the financial position of the
Company as of September 30, 2011, and the results of operations and cash flows for the periods
presented. All such adjustments are of a normal recurring nature. The results of operations for
the nine months ended September 30, 2011, 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.
(2)
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
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 allowances for provider discounts and
uncollectible accounts receivable, the reserve for obsolete and damaged inventory, stock-based
compensation and income taxes.
REVENUE RECOGNITION, AND ALLOWANCES FOR PROVIDER DISCOUNTS AND COLLECTIBILITY
The Company recognizes revenue when each of the following four conditions are met: 1) a contract or
sales arrangement exists; 2) products have been shipped and title has transferred, or rental
services have been rendered; 3) the price of the products or services is fixed or determinable; and
4) collectability is reasonably assured. Accordingly, the Company recognizes revenue, both rental
and sales, when products have been delivered to the patient and the patients insurance (if the
patient has insurance) has been verified (if any). For medical products that are sold from
inventories consigned at clinic locations, the Company recognizes revenue when it receives notice
that the product has been prescribed and delivered to the patient and the patients insurance
coverage has been verified or preauthorization has been obtained from the insurance company, when
required. Revenue from the rental of products is normally on a month-to-month basis and is
recognized ratably over the products rental period. Revenue from sales to distributors is
recognized when the Company ships its products, which fulfills its order and transfers title. All
revenue is recognized at amounts estimated to be received from customers or third-party providers
using the Companys established rates, net of estimated provider discounts.
7
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010
(2)
SIGNIFICANT ACCOUNTING POLICIES (continued)
A significant portion of the Companys revenue is derived, and the related receivables are due,
from insurance companies or other third-party payors. The nature of these receivables within this
industry has typically resulted in long and varying collection cycles. The process of determining
what products will be reimbursed by third-party providers and the amounts that they will reimburse
is complex and depends on conditions and procedures that vary among providers and may change from
time to time. The Company maintains an allowance for provider discounts and records additions to
the allowance to account for the risk of nonpayment. Provider discounts result from reimbursements
from insurance or other third party payors that are less than amounts claimed (billed), where the
amount claimed by the Company exceeds the insurance or other payors usual, customary and
reasonable reimbursement rate. The Company determines the amount of the allowance, and adjusts the
allowance at the end of each reporting period, based on a number of factors, including historical
rates of collection, the aging of the receivables, trends in the historical rates of collection and
current relationships and experience with insurance companies or other third party payors. If the
rate of collection of past-due receivables recorded for previous fiscal periods changes, or if
there is a trend in the rates of collection on those receivables, the Company may be required to
change the rate at which it provides for additions to the allowance. A change in the rates of the
Companys collections can result from a number of factors, including experience and training of
billing personnel, changes in the reimbursement policies or practices of payors, or changes in
industry rates of reimbursement. Accordingly, the provision for provider discounts recorded in the
income statement as a reduction of revenue has fluctuated and may continue to fluctuate
significantly from quarter to quarter.
Due to the nature of the industry and the reimbursement environment in which the Company operates,
estimates are required to record net revenues and accounts receivable at their net realizable
values. Inherent in these estimates is the risk that they will have to be revised or updated as
additional information becomes available. Specifically, the complexity of third-party billing
arrangements and the uncertainty of reimbursement amounts for certain products or services from
payors may result in adjustments to amounts originally recorded. Due to continuing changes in the
health care industry and third-party reimbursement, it is possible that managements estimates
could change in the near term, which could have an impact on results of operations and cash flows.
Any differences between estimated settlements and final determinations are reflected as an increase
or a reduction to revenue in the period when such final determinations are known.
The Company frequently receives refund requests from insurance providers relating to specific
patients and dates of service. Billing and reimbursement disputes are very common in the Companys
industry. For example, on April 26, 2010, the Company received a refund request from Anthem Blue
Cross Blue Shield (Anthem) covering the period from October 1, 2008 (the date of the last
retrospective audit by Anthem) through March 12, 2010. These requests are sometimes related to a
limited number of patients; at other times, they include a significant number of refund claims in a
single request. The Company reviews and evaluates these requests and determines if any refund
request is appropriate. The Company also reviews refund claims when it is rebilling or pursuing
reimbursement from that insurance provider. The Company frequently has significant offsets against
such refund requests, and sometimes amounts are due to the Company in excess of the amounts of
refunds requested by the insurance providers. Therefore, at the time of receipt of such refund
requests, the Company is generally unable to determine if a refund request is valid and should be
accrued.
On September 22, 2011, the Company and Anthem reached a settlement resolving all issues, claims and
disputes between the parties in the amount of $226 (the Settlement). The Settlement provided for
an initial payment of $60 by the Company, which was paid on October 3, 2011, with the remaining
amount payable over a twelve month, interest free period. The Company recorded an accrued liability
of $226 as of September 30, 2011.
As of September 30, 2011, the Company believes it has adequate reserves relating to all known
insurance disputes and refund requests. However, no assurances can be given with respect to such
estimates of reimbursements and offsets or the ultimate outcome of any refund requests.
8
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010
(2)
SIGNIFICANT ACCOUNTING POLICIES (continued)
In addition to the allowance for provider discounts, the Company records an allowance for
uncollectible accounts receivable. Uncollectible accounts receivable are primarily a result of the
following: non-payment from patients who have been direct billed for co-payments or deductibles,
lack of appropriate insurance coverage and disallowances of charges by third-party payors. If there
is a change to a material insurance provider contract or policy, application by a provider, a
decline in the economic condition of providers or a significant turnover of Company billing
personnel resulting in diminished collection effectiveness, the estimate of the allowance for
uncollectible accounts receivable may not be adequate and may result in an increase in the future.
At September 30, 2011 and December 31, 2010, the allowance for uncollectible accounts receivable is
$1,937 and $1,262, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK
The Companys financial instruments at September 30, 2011 include cash, accounts receivable,
accounts payable, capital lease obligations and the line of credit balance, for which current
carrying amounts approximate fair value due to their short-term nature. At September 30, 2011 and
December 31, 2010, the Company had no financial assets or liabilities subject to recurring fair
value measurement.
RECLASSIFICATIONS
Certain reclassifications to the 2010 cash flow statement and balance sheet have been made to
conform to the 2011 presentation, none of which had any effect on cash flows from operating,
investing and financing activities or total assets, total liabilities or stockholders equity.
INVENTORY
Inventories, which primarily represents finished goods, are valued at the lower of cost (average) or market. Finished goods include products
held at the Companys headquarters and at different clinics by health care providers or other third
parties for rental or sale to patients.
The Company monitors inventory for turnover and obsolescence, and records losses for excess and
obsolete inventory as appropriate. At September 30, 2011, the Company had a reserve for obsolete
and damaged inventory of approximately $661 and a reserve of approximately $549 at December 31,
2010. The Company had $2,614 of open purchase commitments at September 30, 2011.
PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 2011 and December 31, 2010, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Useful lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
1,391
|
|
|
$
|
1,194
|
|
|
3-7 years
|
|
Rental inventory
|
|
|
2,599
|
|
|
|
2,108
|
|
|
5 years
|
|
Vehicles
|
|
|
76
|
|
|
|
60
|
|
|
5 years
|
|
Leasehold improvements
|
|
|
404
|
|
|
|
370
|
|
|
2-6 years
|
|
Assembly equipment
|
|
|
39
|
|
|
|
11
|
|
|
7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,509
|
|
|
|
3,743
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(1,019
|
)
|
|
|
(837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,490
|
|
|
$
|
2,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010
(2)
SIGNIFICANT ACCOUNTING POLICIES (continued)
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2011, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No.
2011-07,
Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue,
Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities
,
which requires that certain health care entities change the presentation of their statement of
operations by reclassifying the provision for bad debts associated with patient service revenue
from an operating expense to a deduction from patient service revenue (net of contractual
allowances and discounts). In addition, the amendments also require enhanced disclosure about
policies for recognizing revenue and assessing bad debts and disclosures of qualitative and
quantitative information about changes in the allowance for doubtful accounts. This ASU is
effective for fiscal years and interim periods within those fiscal years beginning after December
15, 2011, with early adoption permitted. Management currently expects that this ASU will not have a
material impact on the Companys consolidated financial statements.
(3)
EARNINGS (LOSS) PER SHARE
Basic earnings per share is 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.
The calculation of basic and diluted earnings per share for the three and nine months ended
September 30, 2011 and 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
591
|
|
|
$
|
368
|
|
|
$
|
965
|
|
|
$
|
330
|
|
Weighted average shares outstanding basic
|
|
|
30,794,268
|
|
|
|
30,569,441
|
|
|
|
30,727,720
|
|
|
|
30,555,778
|
|
Net income per share basic
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
591
|
|
|
$
|
368
|
|
|
$
|
965
|
|
|
$
|
330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
30,794,268
|
|
|
|
30,569,441
|
|
|
|
30,727,720
|
|
|
|
30,555,778
|
|
Dilutive securities
|
|
|
218,744
|
|
|
|
97,623
|
|
|
|
250,213
|
|
|
|
188,986
|
|
Weighted average shares outstanding diluted
|
|
|
31,013,012
|
|
|
|
30,667,064
|
|
|
|
30,977,933
|
|
|
|
30,744,764
|
|
Net income per share diluted
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
The effects of potential common stock equivalents for the nine months ended September 30, 2011
and 2010 (1,116,000 and 1,229,000 shares, respectively) have not been included in the computation
of diluted loss per share as the impact of the potential common shares would be anti-dilutive.
10
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010
(4)
STOCK-BASED COMPENSATION PLANS
The Company has reserved 3,000,000 shares of common stock for issuance under its 2005 Stock Option
Plan (the Option Plan). Vesting provisions are determined by the Board of Directors. All stock
options under the Option Plan expire no later than ten years from the date of grant.
In the three months ended September 30, 2011 and 2010, the Company recorded compensation expense
related to stock options of $61 and $77, respectively. In the nine months ended September 30, 2011
and 2010, the Company recorded compensation expense related to stock options of $207 and $203,
respectively. The stock-based compensation expense was included in selling, general and
administrative expenses in the accompanying condensed consolidated statements of operations.
In the nine months ended September 30, 2011, the Company granted options to purchase up to 274,000
shares of common stock to employees at exercise prices that ranged from $0.62 to $0.90 per share.
In the nine months ended September 30, 2010, the Company granted options to purchase up to
374,500 shares of common stock at exercise prices that ranged from $0.41 to $1.06 per share.
The Company used the Black-Scholes option pricing model to determine the fair value of stock option
grants, using the following assumptions during the nine months ended September 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
Weighted average expected term
|
|
7 years
|
|
|
6 years
|
|
Weighted average volatility
|
|
|
121.3
|
%
|
|
|
111.5
|
%
|
Weighted average risk-free interest rate
|
|
|
2.33
|
%
|
|
|
2.73
|
%
|
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 Companys 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 Companys anticipated
cash dividend over the expected term of the stock options. Forfeitures of share-based payment
awards are estimated at the time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. The estimated average forfeiture rate for the nine
months ended September 30, 2011 and 2010 was 35%.
11
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010
(4)
STOCK-BASED COMPENSATION PLANS (continued)
A summary of stock option activity under the Option Plan for the nine months ended September 30,
2011, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Under
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Option
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2011
|
|
|
1,845,250
|
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
274,000
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(112,500
|
)
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(354,000
|
)
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2011
|
|
|
1,652,750
|
|
|
$
|
0.98
|
|
|
7.7 Years
|
|
$
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2011
|
|
|
752,003
|
|
|
$
|
1.12
|
|
|
6.8 Years
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of status of the Companys non-vested share awards as of and for the nine months ended
September 30, 2011, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Nonvested Shares
|
|
|
Weighted Average
|
|
|
|
Shares Under Option
|
|
|
Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Non-vested at January 1, 2011
|
|
|
1,195,750
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
274,000
|
|
|
$
|
0.66
|
|
Vested
|
|
|
(296,128
|
)
|
|
$
|
0.86
|
|
Forfeited
|
|
|
(272,875
|
)
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2011
|
|
|
900,747
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011, the Company had approximately $382 of unrecognized compensation expense
related to stock options that will be recognized over a weighted-average period of approximately
2.4 years.
(5)
INCOME TAXES
The provision for income taxes is recorded at the end of each interim period based on the Companys
best estimate of its effective income tax rate expected to be applicable for the full fiscal year.
The Company paid income taxes of $750 during the first nine months of 2011, which was included in
income taxes payable at December 31, 2010. For the nine months ended September 30, 2011, permanent
differences are added back to net income resulting in a higher taxable income for purposes of
calculating income tax expense or benefit. On July 13, 2011, the Company received a letter from the
Internal Revenue Service (IRS) denying the Companys request for abatement of penalties and
interest incurred and previously recorded in 2010. The Company is in the process of appealing the
denial and intends to mitigate partial or full payment of these penalties and interest.
12
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010
(6)
LINE OF CREDIT
In February 2011, the Company entered into an amendment to its revolving credit and security
agreement with CapitalSource Bank (the Credit Agreement) to add Zynex Monitoring Solutions Inc.
and Zynex NeuroDiagnostic Inc. to the Credit Agreement and to amend certain financial covenants.
The Company has an asset-based revolving line of credit (RLOC) under the Credit Agreement that
allows borrowing, repayment and re-borrowing, subject to the lesser of the facility cap of $3,500
or 85% of the borrowing base less certain reserved amounts. The borrowing base is generally the
net collectible dollar value of the Companys eligible accounts receivable, as defined. The Credit
Agreement bears interest at a floating rate based on the one-month London interbank offered rate
(LIBOR), divided by the sum of one minus a measure of the aggregate maximum reserve requirement for
Eurocurrency Liabilities for the previous month, as defined, plus 4.0%. Interest is payable
monthly. As of September 30, 2011, the effective interest rate under the Credit Agreement was 10%
(7% interest rate and 3% fees). As of September 30, 2011, $3,380 was outstanding on the Credit
Agreement (the remaining amount available for borrowing was $120).
As of September 30, 2011, the Company was in compliance with its financial covenants.
On October 7, 2011, the Company received a commitment letter from a new lender to provide a larger,
more favorable loan facility. Although no assurance can be given that the Company will close the
new loan facility, the Company is currently negotiating and documenting the terms. On October 10,
2011, the Company provided its existing lender notice to terminate the Credit Agreement. The
Company will continue to operate under its existing Credit Agreement until the new agreement is
finalized, which is expected to occur during the fourth quarter of 2011.
(7)
CONCENTRATIONS
The Company had a receivable from one private health insurance carrier at September 30, 2011 that
made up approximately 30% of the net accounts receivable balance. The same private health insurance
carrier made up approximately 27% of net accounts receivable at December 31, 2010.
(8)
LITIGATION
A lawsuit was filed against the Company, its President and Chief Executive Officer and its former
Chief Financial Officer on April 6, 2009, in the United States District Court for the District of
Colorado (
Marjorie and David Mishkin v. Zynex, Inc. et al
.). On April 9 and 10, 2009, two other
lawsuits were filed in the same court against the same defendants. These lawsuits alleged
substantially the same matters and have been consolidated. On April 19, 2010, the plaintiffs filed
a Consolidated Class Action Complaint (Civil Action No. 09-cv-00780-REB-KLM). The consolidated
lawsuit refers to the April 1, 2009 announcement by the Company that it would restate its unaudited
interim financial statements for the first three quarters of 2008. The lawsuit purports to be a
class action on behalf of purchasers of the Companys securities between May 21, 2008 and March 31,
2009. The lawsuit alleges, among other things, that the defendants violated Section 10 and Rule
10b-5 of the Securities Exchange Act of 1934 by making intentionally or recklessly untrue
statements of material fact and/or failing to disclose material facts regarding the financial
results and operating conditions for the first three quarters of 2008. The plaintiffs asked for a
determination of class action status, unspecified damages and costs of the legal action.
On May 17, 2010, the Company filed a Motion to Dismiss. The plaintiffs filed an Opposition to
Defendants Motion to Dismiss, and on July 5, 2010, the Company filed a Reply in Support of
Defendants Motion to Dismiss. On March 30, 2011, the United States District Court of Colorado
entered an Order denying the Companys motion to dismiss. On November 8, 2011, the parties entered into an agreement
to settle the lawsuit for a payment of $2.5 million to the plaintiff class in exchange for the dismissal with
prejudice of all claims against all defendants in the litigation. The settlement is expected to be fully funded
by insurance and is subject to final approval of the court. The Company cannot predict with certainty the outcome
of the litigation, and if the settlement is not finally approved by the Court, the Company believes that it has
meritorious defenses to the claims in the compliant.
13
ZYNEX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010
(8)
LITIGATION (continued)
On July 28, 2011, a stockholder derivative suit was filed purportedly on behalf of the Company in
the United States District Court for the District of Colorado against the Companys President and
Chief Executive Officer, its former Chief Financial Officer and certain of its directors (Stephen
Hatch, derivatively, on behalf of Zynex Inc. v. Thomas Sandgaard et. al., 11-CV-01964). The
lawsuit alleges breach of fiduciary duty by the Companys officers and directors in connection with
the restatement of the Companys unaudited interim financial statements for the first three
quarters of 2008. The plaintiff is seeking, on behalf of the Company, an undisclosed amount of
damages and equitable relief. On October 11, 2011, the Company and the individual defendants filed
a motion to dismiss, which is currently pending before the Court. On October 18, 2011, certain
individual defendants filed a motion requesting the plaintiff to post a security bond pursuant to
Nevada law.
The Company has notified its directors and officers liability insurer of this claim. At this
time, the Company is not able to determine the likely outcome of the legal matter,
nor can it estimate its potential financial exposure. Litigation is subject to inherent
uncertainties, and if an unfavorable resolution of this matter occurs, the Companys
business, results of operations, and financial condition could be adversely affected.
The Company is not a party to any other material pending or threatened legal proceedings.
14
|
|
|
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Special Cautionary Notice Regarding Forward-Looking Statements
This quarterly report contains statements that are forward-looking, such as statements relating to
plans for future expansion and other business development activities, as well as the impact of
reimbursement trends, other capital spending and financing sources. Such forward-looking
information involves important risks and uncertainties that could significantly affect anticipated
results in the future and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks include the need for
additional capital in order to grow our business, our ability to engage additional sales
representatives, the need to obtain Federal Drug and Administration (FDA) clearance and
Certificate European (CE) marking of new products, the acceptance of new products as well as
existing products by doctors and hospitals, our dependence on the reimbursement from insurance
companies for products sold or rented to our customers, acceptance of our products by health
insurance providers for reimbursement, larger competitors with greater financial resources, the
need to keep pace with technological changes, our dependence on third-party manufacturers to
produce our goods on time and to our specifications, implementation of our sales strategy including
a strong direct sales force, the uncertain outcome of pending material litigation and other risks
described in our Annual Report on Form 10-K for the year ended December 31, 2010.
These interim financial statements should be read in conjunction with the annual audited financial
statements, accounting policies and financial notes thereto, included in the Companys 2010 Annual
Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission.
The Company currently has three wholly-owned subsidiaries; Zynex Medical, Inc., Zynex
NeuroDiagnistics Inc. and Zynex Monitoring Solutions Inc. As of September 30, 2011, Zynex
NeuroDiagnostics Inc., formed in April 2010 to develop and market neurological diagnosis products
for hospitals and clinics, and Zynex Monitoring Solutions Inc., formed in April 2010 to develop and
market cardiovascular monitoring for hospitals and clinics, did not have any significant revenues.
RESULTS OF OPERATIONS (Amounts in thousands):
Revenue
Our products may be rented on a monthly basis or purchased. Renters and purchasers are primarily
patients and healthcare insurance providers on behalf of patients. Our products may also be
purchased by dealers. If a patient is covered by health insurance, the third party payor typically
determines whether the patient will rent or purchase a unit depending on the anticipated time
period for its use. If contractually arranged, a rental continues until an amount equal to the
purchase price is paid when we transfer ownership of the product to the patient and cease rental
charges. We also sell consumable supplies, consisting primarily of surface electrodes and
batteries that are used in conjunction with our electrotherapy products.
Revenue is reported net, after adjustments for uncollectable and estimated insurance company
reimbursement deductions. The deductions are known throughout the health care industry as
contractual adjustments whereby the healthcare insurers unilaterally reduce the amount they
reimburse for our products as compared to the rental rates and sales prices charged by us. The
deductions from gross revenue also take into account the estimated denials of claims for our
products placed with patients and other factors which may affect collectability. See Note 2 to the
Unaudited Condensed Consolidated Financial Statements in this Quarterly Report for a more complete
explanation of revenue recognition.
15
Total Net Revenue (Rental and Sale).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
Total net revenue by type (in thousands):
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Rental Revenue
|
|
$
|
2,482
|
|
|
$
|
2,032
|
|
|
$
|
7,377
|
|
|
$
|
6,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of electrotherapy and other
privately-labeled distributed products
|
|
|
3,501
|
|
|
|
2,319
|
|
|
|
7,871
|
|
|
|
4,089
|
|
Sales of recurring consumable supplies
|
|
|
3,444
|
|
|
|
2,306
|
|
|
|
9,207
|
|
|
|
6,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales Revenue
|
|
|
6,945
|
|
|
|
4,625
|
|
|
|
17,078
|
|
|
|
10,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenue
|
|
$
|
9,427
|
|
|
$
|
6,657
|
|
|
$
|
24,455
|
|
|
$
|
17,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue increased $2,770 or 42% to $9,427 for the three months ended September 30, 2011,
from $6,657 for the three months ended September 30, 2010. Total net revenue increased $7,181 or
42% to $24,455 for the nine months ended September 30, 2011, from $17,274 for the nine months ended
September 30, 2010.
The increase in total net revenue for the three and nine months ended September 30, 2011, compared
to the three and nine months ended September 30, 2010, was due primarily to a 41% and 37% increase
in prescriptions (orders) for our electrotherapy products, for the respective three and nine month
periods in 2011 as compared to the same periods in 2010, and a 49% and 41% increase in sales of our
recurring consumable supplies (surface electrodes and batteries) for the three and nine months
ended September 30, 2011, respectively, as compared to the same periods in 2010. The increased
orders are directly related to our continued addition of industry-experienced sales
representatives, which benefit us by serving markets that we had not yet penetrated and providing
greater awareness of our products to end users and physicians. As of September 30, 2011, we had
243 field sales employees versus 113 as of September 30, 2010. The increased sales of consumable
supplies are directly related to the increased number of active products currently in the market.
We believe the incremental addition of industry-experienced sales representatives allowed us to
increase our market presence and increase orders during the first nine months of 2011. Orders for
our products lead to (1) rental income, which we anticipate receiving on a recurring basis over the
time patients use our products, (2) direct sales of our products, and (3) corresponding recurring
sales of electrodes and other supplies for our products, all of which are subject to our ability to
collect payment due to contractual adjustments by insurers. Our products are subject to
reimbursement policies of third-party payors, which we may not be able to determine with any
certainty. These third-party payor policies typically dictate whether our products will be
purchased or rented. Therefore, our revenue mix of net rental and net sales revenue may fluctuate
from time to time and may not be an indicator of the overall demand for our products. We are
unable to determine if the reimbursement policy trend towards purchasing or renting our products
will continue or change in the future, as it is based on many market and third party payor factors.
However, we believe that based on the current demand for our products and the recent FDA 510(k)
clearance we received for our next generation electrotherapy device (NexWave), a change in
reimbursement policy will not have a significant impact on our total revenue, as we believe it will
only shift our revenue mix. Shifts in our revenue mix may also have a material impact on our
overall gross margin, as product sales result in a lower gross profit because their cost of sales
is higher than that from rentals (cost of sales associated with rentals is primarily depreciation).
Net Rental Revenue
Net Rental Revenue increased $450 or 22% to $2,482 for the three months ended September 30, 2011,
from $2,032 for the three months ended September 30, 2010. Net Rental Revenue increased $738 or
11% to $7,377 for the nine months ended September 30, 2011, from $6,639 for the nine months ended
September 30, 2010.
Net Rental Revenue for the three and nine months ended September 30, 2011 represented 26% and 30%,
respectively, of total net revenue compared to 31% and 38%, respectively, for the three and nine
months ended September 30, 2010. The increase in net rental revenue for the three and nine months
ended September 30, 2011 is primarily due to the overall increase in orders in 2011, subject to the
varying reimbursement policies of third-party payors for our products.
16
Net Sales Revenue
Net Sales Revenue increased $2,320 or 50% to $6,945 for the three months ended September 30, 2011,
from $4,625 for the three months ended September 30, 2010. Net Sales Revenue increased $6,443 or
61% to $17,078 for the nine months ended September 30, 2011, from $10,635 for the nine months ended
September 30, 2010.
Net Sales Revenue for the three and nine months ended September 30, 2011 represented 74% and 70%,
respectively, of total net revenue compared to 69% and 62%, respectively, for the three and nine
months ended September 30, 2010. Net Sales Revenue is comprised of two primary components: sales of
electrotherapy devices and private labeled distributed products, representing 37% and 32%,
respectively, of total net revenue for the three and nine months ended September 30, 2011, and
sales of recurring device consumables (batteries and electrodes), representing 37% and 38%,
respectively, of total net revenue for the three and nine months ended September 30, 2011. This
compares to the sale of electrotherapy devices and private labeled distributed products
representing 35% and 24%, respectively, of total net revenue for the three and nine months ended
September 30, 2010 and sale of device consumables representing 34% and 38%, respectively, of total
net revenue for the three and nine months ended September 30, 2010. The increase in Net Sales
Revenue for the three and nine months ended September 30, 2011 was primarily due to the respective
41% and 37% increase in orders over the same periods in 2010, the current change in third-party
payor reimbursement trend, in favor of purchasing products rather than renting them, and the
increased number of units in the market (previously sold or actively being rented). These
additional units in the market resulted in a 49% and 41%, respective increase of sales of our
recurring consumable supplies over the comparable three and nine month periods for 2010.
Gross Profit
Total gross profit for the three and nine months ended September 30, 2011 was $7,492 (or 79% of
total net revenue) and $19,349 (or 79% of total net revenue), respectively, compared to $5,231 (or
79% of total net revenue) and $13,630 (or 79% of total net revenue), respectively, in the three and
nine months ended September 30, 2010.
Total gross profit percentage for the three and nine months ended September 30, 2011 remained
consistent with the total gross profit percentage for the three and nine months ended September 30,
2010. Our total gross profit percentage was impacted by two primary items for the three and nine
months ended September 30, 2011, the increase in total net revenue and revenue mix. During each
of the three and nine month periods ended September 30, 2011 we experienced a 42% increase in total
net revenue over the comparable periods in 2010. The total net revenue increase for the periods
positively impacted our gross profit percentage, as we had incremental net revenue that exceeded
fixed costs in manufacturing. The positive effect on gross profit percentage from our increase in
total net revenue was offset by the change in revenue mix from more products being sold than
rented. Product sales incur higher costs than those from rentals, as the major cost associated
with rentals is depreciation. Net product rentals for the three and nine months ended September
30, 2011 represented 26% and 30%, respectively, of total net revenue as compared to 31% and 38% for
the respective periods in 2010.
Selling, General and Administrative (SG&A)
Total selling, general and administrative expenses increased $1,783 or 39% to $6,389 for the three
months ended September 30, 2011 from $4,606 for the three months ended September 30, 2010. Total
selling, general and administrative expenses increased $4,644 or 36% to $17,486 for the nine months
ended September 30, 2011 from $12,842 for the nine months ended September 30, 2010.
17
A summary of selling, general and administrative expenses by department for the three and nine
months ended September 30, 2011 and 2010 is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
% of Net
|
|
|
September 30,
|
|
|
% of Net
|
|
|
September 30,
|
|
|
% of Net
|
|
|
September 30,
|
|
|
% of Net
|
|
SG&A expense by department
|
|
2011
|
|
|
Revenue
|
|
|
2010
|
|
|
Revenue
|
|
|
2011
|
|
|
Revenue
|
|
|
2010
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales & Marketing
|
|
$
|
2,812
|
|
|
|
30
|
%
|
|
$
|
1,590
|
|
|
|
24
|
%
|
|
$
|
6,778
|
|
|
|
28
|
%
|
|
$
|
4,542
|
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursement & Billing
|
|
|
2,078
|
|
|
|
22
|
%
|
|
|
1,815
|
|
|
|
27
|
%
|
|
|
6,520
|
|
|
|
27
|
%
|
|
|
4,925
|
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & Administrative
|
|
|
1,068
|
|
|
|
11
|
%
|
|
|
778
|
|
|
|
12
|
%
|
|
|
2,971
|
|
|
|
12
|
%
|
|
|
2,168
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering & Operations
(including Research and
Development)
|
|
|
431
|
|
|
|
5
|
%
|
|
|
423
|
|
|
|
6
|
%
|
|
|
1,217
|
|
|
|
5
|
%
|
|
|
1,207
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A expenses
|
|
$
|
6,389
|
|
|
|
|
|
|
$
|
4,606
|
|
|
|
|
|
|
$
|
17,486
|
|
|
|
|
|
|
$
|
12,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our sales and marketing expenses increased by $1,222 and $2,236, for the three and nine months
ended September 30, 2011 over the same periods in 2010, respectively, due to incremental
commissions incurred in the current periods (total orders increased 41% and 37%, respectively, for
the three and nine month periods in 2011 over the same periods in 2010) and the addition of field
sales employees. We incurred additional expenses in our reimbursement and billing department of
$263 and $1,595, respectively, for the three and nine month periods ended September 30, 2011 over
the same periods in 2010, primarily because of additional personnel added to support the increase
in total net revenue for 2011 and to further increase our cash collections from third party payors.
Our reimbursement and billing department relies on personnel, processes and systems to negotiate
and collect from third-party payors. Therefore, we continue to evaluate and invest in this
department, as it is our primary function for cash collections. Improvements in our reimbursement
and billing function may lead to higher revenues, as better negotiations and collection efforts
with third-party payors could result in an increase to our aggregate accounts receivable collection
percentage. We also incurred additional expense in our reimbursement and billing department for
severance related to the retirement of the Companys Vice President of Reimbursement and Billing in
February 2011, reflected in the nine months ended September 30, 2011 expenses (for additional
information refer to Note 13 of the financial statements in our 2010 Annual Report on Form 10-K).
Our general and administrative expenses increased by $290 and $803, respectively, for the three and
nine months ended September 30, 2011 over the same periods in 2010, which was primarily the result
of administrative infrastructure, including the addition of regulatory personnel, required to
support the increase in 2011 total net revenue. Engineering and operations increased by $8 for the
three months ended September 30, 2011 over the same period in 2010 and increased by $10 for the
nine months ended September 30, 2011 over the same period in 2010.
Other Income (Expense)
Other income (expense) is comprised of interest income, interest expense and other expense.
Interest income for the three and nine months ended September 30, 2011 was less than $1 and $1,
respectively, compared to $1 and $5 for the same periods in 2010.
Interest expense for the three and nine months ended September 30, 2011 was $87 and $225,
respectively, compared to $45 and $177 for the same periods in 2010. We increased the use of our
revolving line of credit during the first nine months of 2011 based on working capital needs, which
resulted in a revolving line of credit balance of $3,380 as of September 30, 2011, versus a balance
of $972 as of September 30, 2010. During the first quarter of 2010, we incurred an early
termination fee of $70 related to our prior line of credit, which resulted in higher interest
expense for the period.
Other income (expense) for the three and nine months ended September 30, 2011 was zero and $2,
respectively, as compared to zero and ($16) for the same periods in 2010. The other expense of
($16) reported in the nine months ended September 30, 2010 was primarily the result of a loss on a
net lease termination.
18
Income Tax Expense
Income tax expense for the three and nine months ended September 30, 2011 was $425 and $676,
respectively, compared to $214 and $270 for the same periods in 2010. The increase in income tax
expense for the 2011 periods is primarily due to the $1,016 and $1,641 income before tax recorded
for the three and nine months ended September 30, 2011 versus $582 and $600 for the same periods in
2010. We also have permanent differences (expenses which are not deductible for income tax
reporting) which create taxable income greater than the income before taxes in our statement of
operations. The taxes on this taxable income cause the income tax expense to be at a higher
effective tax rate than the statutory tax rate. On July 13, 2011, we received a letter from the
Internal Revenue Service (IRS) denying our request to abate penalties and interest incurred and
previously recorded in 2010. We are in the process of appealing the denial and intend to mitigate
payment of these penalties and interest, although no assurances can be given.
LIQUIDITY AND CAPITAL RESOURCES:
Line of Credit
In February 2011, we entered into an amendment to our revolving credit and security agreement with
CapitalSource Bank (Credit Agreement). We have an asset-based revolving line of credit (RLOC)
under the Credit Agreement that allows us to borrow, repay and re-borrow, subject to the lesser of
the facility cap of $3,500 or 85% of the borrowing base less certain reserved amounts. The
borrowing base is generally the net collectible dollar value of the Companys eligible accounts
receivable, as defined. The Credit Agreement bears interest at a floating rate based on the
one-month London interbank offered rate (LIBOR), divided by the sum of one minus a measure of the
aggregate maximum reserve requirement for Eurocurrency Liabilities for the previous month, as
defined, plus 4.0%. Interest is payable monthly. As of September 30, 2011, the effective interest
rate under the Credit Agreement was 10% (7% interest rate and 3% fees). As of September 30, 2011,
$3,380 was outstanding under the Credit Agreement.
As of September 30, 2011, we were in compliance with our financial covenants.
On October 7, 2011, we received a commitment letter from a new lender to provide a larger, more
favorable loan facility. Although no assurance can be given that we will close the new loan
facility we are currently negotiating and documenting the terms. On October 10, 2011, we provided
our existing lender notice to terminate our Credit Agreement. We will continue to operate under
our existing Credit Agreement until the new loan agreement is finalized, which is expected to occur
during the fourth quarter of 2011
Limited Liquidity
Cash at September 30, 2011 was $761, compared to cash at December 31, 2010 of $602.
Cash used in operating activities was $775 for the nine months ended September 30, 2011 compared to
$825 of cash used in operating activities for the nine months ended September 30, 2010. The primary
uses of cash from operations for the nine months ended September 30, 2011 was the result of
decreases in collections on accounts receivable and increases in inventory required to support our
growing revenue, offset by net income and non-cash items. The primary uses of cash from operations
for the nine months ended September 30, 2010, was the result of decreases in collections on
accounts receivable and increases to inventory, offset by net income and non-cash items.
Cash used in investing activities for the nine months ended September 30, 2011 was $1,123 compared
to cash used in investing activities of $163 for the nine months ended September 30, 2010. Cash
used in investing activities for the nine months ended September 30, 2011 primarily represents the
purchase and in-house production of rental products as well as purchases of capital equipment.
Cash used in investing activities for the nine months ended September 30, 2010 primarily represents
the purchase and in-house production of rental products and purchases of capital equipment, offset
by proceeds received in a lease termination.
Cash provided by financing activities was $2,057 for the nine months ended September 30, 2011
compared with cash provided by financing activities of $718 for the nine months ended September 30,
2010. The primary financing sources of cash for the nine months ended September 30, 2011 were net
borrowings under the Credit Agreement and cash received from the exercise of stock options,
partially offset by payments on capital lease obligations and deferred financing fees. The primary
financing sources of cash for the nine months ended September 30, 2010 were net borrowings under
the Credit Agreement, partially offset by payments on capital lease obligations and deferred
financing fees.
19
We have limited liquidity. Our limited liquidity is primarily a result of (a) the high level of
outstanding accounts receivable because of deferred payment practices of third-party health payors,
(b) the required high levels of inventory kept with sales representatives that are standard in the
electrotherapy industry, (c) the payment of commissions to salespersons based on sales or rental
orders prior to payments for the corresponding product by insurers and whether or not there is a
denial of any payment by an insurer (d) the need for expenditures to continue to enhance the
Companys internal billing processes, (e) the delayed cost recovery inherent in rental transactions
and (f) increased commitments resulting from the premises lease signed in November 2009. As our
business and sales grow, some of these liquidity strains will increase. Limited liquidity may
restrict our ability to carry out our current business plans and curtail our revenue growth.
Our long-term business plan contemplates organic growth in revenues. Therefore, in order to
support a growth in revenue, we require, among other things, funds for the purchases of equipment,
primarily for rental inventory, the payment of commissions to an increasing number of sales
representatives, and the increase in office lease payments (for our new, larger building) to
support the higher level of operations.
We believe that our cash flows from operating activities, borrowing availability under our current
RLOC and proposed new credit facility currently being negotiated with a new lender, will fund our
cash requirements through September 30, 2012.
The availability of the RLOC depends upon our ongoing compliance with covenants, representations
and warranties in the agreement for the RLOC and borrowing base limitations. Although the maximum
amount of the line of credit is $3,500, the amount available for borrowing under the line of credit
is subject to a ceiling based upon eligible receivables and other limitations and may be less than
the maximum amount. As of September 30, 2011, $3,380 was outstanding on the Credit Agreement (the
remaining amount available for borrowing was $120). As of
November 4, 2011, the amount outstanding
on the Credit Agreement was $2,933. As noted above, on October 7, 2011, we provided notice to
terminate our Credit Agreement and intend to enter into a larger, more favorable credit agreement
with a different bank.
There is no assurance that our operations and available borrowings will provide enough cash for
operating requirements or for increases in our inventory of products, as needed, for growth. We
may need to seek external financing through the sale of debt or equity securities, and we are not
certain whether any such financing would be available to us on acceptable terms or at all. Any
additional debt would currently require the approval of CapitalSource Bank.
Our dependence on operating cash flow means that risks involved in our business can significantly
affect our liquidity. Contingencies such as unanticipated shortfalls in revenues or increases in
expenses could affect our projected revenue, cash flows from operations and liquidity which may
force us to curtail our operating plan or impede our growth.
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. For example, as previously disclosed, on April 26, 2010, we received a
refund request from Anthem Blue Cross Blue Shield (Anthem) covering the period from October 1,
2008 (the date of the last retrospective audit by Anthem) through March 12, 2010. 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. We also 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 and should be accrued as a liability.
On September 22, 2011, we reached a settlement with Anthem resolving all issues, claims and
disputes between us in the amount of $226 (the Settlement). The Settlement provided for an
initial payment of $60, which was paid on October 3, 2011, with the remaining amount payable over a
twelve month, interest free period. We recorded an accrued liability of $226 as of September 30,
2011.
20
As of September 30, 2011, we believe we have an adequate allowance for provider discounts relating
to known insurance disputes and refund requests. However, no assurances can be given with respect
to such estimates of reimbursements and offsets or the ultimate outcome of any refund requests.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
There are several accounting policies that involve managements judgments and estimates and are
critical to understanding our historical and future performance, as these policies and estimates
affect the reported amounts of revenue and other significant areas in our reported financial
statements.
Please refer to the Managements Discussion and Analysis of Financial Condition and Results of
Operation located within our Annual Report on Form 10-K filed on March 28, 2011 for the year ended
December 31, 2010, and Note 2 to the Unaudited Condensed Consolidated Financial Statements in this
Quarterly Report for further discussion of our Critical Accounting Policies.
|
|
|
ITEM 4.
|
|
CONTROLS AND PROCEDURES
|
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer, performed an
evaluation of the effectiveness of the Companys disclosure controls and procedures as of September
30, 2011. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures were effective as of September 30,
2011.
Changes in Internal Control Over Financial Reporting
There was no change in the Companys internal control over financial reporting during the
quarter ended September 30, 2011 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
21
PART II. OTHER INFORMATION
|
|
|
ITEM 1.
|
|
LEGAL PROCEEDINGS
|
A lawsuit was filed against the Company, its President and Chief Executive Officer and its former
Chief Financial Officer on April 6, 2009, in the United States District Court for the District of
Colorado (
Marjorie and David Mishkin v. Zynex, Inc. et al
.). On April 9 and 10, 2009, two other
lawsuits were filed in the same court against the same defendants. These lawsuits alleged
substantially the same matters and have been consolidated. On April 19, 2010, plaintiffs filed a
Consolidated Class Action Complaint (Civil Action No. 09-cv-00780-REB-KLM). The consolidated
lawsuit refers to the April 1, 2009 announcement by the Company that it would restate its unaudited
interim financial statements for the first three quarters of 2008. The lawsuit purports to be a
class action on behalf of purchasers of the Companys securities between May 21, 2008 and March 31,
2009. The lawsuit alleges, among other things, that the defendants violated Section 10 and Rule
10b-5 of the Securities Exchange Act of 1934 by making intentionally or recklessly untrue
statements of material fact and/or failing to disclose material facts regarding the financial
results and operating conditions for the first three quarters of 2008 and other misleading
statements. The plaintiffs ask for a determination of class action status, unspecified damages and
costs of the legal action.
On May 17, 2010, the Company filed a Motion to Dismiss. The plaintiffs filed an Opposition to
Defendants Motion to Dismiss, and on July 5, 2010, the Company filed a Reply in Support of
Defendants Motion to Dismiss. On March 30, 2011, the United States District Court of Colorado
entered an Order denying the Companys motion to dismiss. On November 8, 2011, the parties entered into an agreement
to settle the lawsuit for a payment of $2.5 million to the plaintiff class in exchange for the dismissal with
prejudice of all claims against all defendants in the litigation. The settlement is expected to be fully funded
by insurance and is subject to final approval of the court. The Company cannot predict with certainty the outcome
of the litigation, and if the settlement is not finally approved by the Court, the Company believes that it has
meritorious defenses to the claims in the compliant.
On July 28, 2011, a stockholder derivative suit was filed purportedly on behalf of the Company in
the United States District Court for the District of Colorado against the Companys President and
Chief Executive Officer, its former Chief Financial Officer and certain of its directors (Stephen
Hatch, derivatively, on behalf of Zynex Inc. v. Thomas Sandgaard et. al., 11-CV-01964). The
lawsuit alleges breach of fiduciary duty by the Companys officers and directors in connection with
the restatement of the Companys unaudited interim financial statements for the first three
quarters of 2008. The plaintiff is seeking, on behalf of the Company, an undisclosed amount of
damages and equitable relief. On October 11, 2011, the Company and the individual defendants filed
a motion to dismiss, which is currently pending before the Court. On October 18, 2011, certain
individual defendants filed a motion requesting the plaintiff to post a security bond pursuant to
Nevada law.
The Company has notified its directors and officers liability insurer of this claim. At this
time, the Company is not able to determine the likely outcome of the legal matter,
nor can it estimate its potential financial exposure. Litigation is subject to inherent
uncertainties, and if an unfavorable resolution of this matter occurs, the Companys
business, results of operations, and financial condition could be adversely affected.
The Company is not a party to any other material pending or threatened legal proceedings.
22
(4) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
3.1
|
|
|
Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 10.1 of the Current Report on Form 8-K
filed on October 7, 2008).
|
|
|
|
|
|
|
3.2
|
|
|
Amended and Restated Bylaws (incorporated by reference to
Exhibit 10.2 of the Companys Current Report on Form 8-K filed
on October 7, 2008).
|
|
|
|
|
|
|
4.1
|
|
|
Form of Warrant (incorporated by reference to Exhibit 10.4 of
the Companys Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2006).
|
|
|
|
|
|
|
10.1
|
|
|
Employment Agreement between the Company and Thomas
Sandgaard dated August 11 2011.
|
|
|
|
|
|
|
31.1
|
*
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
31.2
|
*
|
|
Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
32.1
|
*
|
|
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
101
|
*
|
|
The following financial statements, formatted in XBRL: (i)
Condensed Consolidated Balance Sheets as of September 30, 2011
and December 31, 2010, (ii) Condensed Consolidated Statements
of Operations for the three and nine months ended September 30,
2011, (iii) Condensed Consolidated Statements of Stockholders
Equity as of September 30, 2011, (iv) Condensed Consolidated
Statements of Cash Flows for the nine months ended September
30, 2010 and September 30, 2011 and (v) Notes to Condensed
Consolidated Financial Statements, tagged as blocks of text.
The information in Exhibit 101 is furnished and not filed,
as provided in Rule 402 of Regulation S-T.
|
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
ZYNEX, INC.
|
|
Dated: November 10, 2011
|
/s/ Thomas Sandgaard
|
|
|
Thomas Sandgaard
|
|
|
President, Chief Executive Officer and Treasurer
|
|
|
|
|
Dated: November 10, 2011
|
/s/ Anthony A. Scalese
|
|
|
Anthony A. Scalese
|
|
|
Chief Financial Officer
|
|
24
Exhibit 10.1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the
Agreement
), is dated as of the
11th day of August, 2011, between Zynex, Inc., 9990 Park Meadows Drive, Lone Tree, CO 80124 (the
Employer
) and Thomas Sandgaard, 1175 Castle Pointe Drive, Castle Rock, CO 80104 (the
Executive
).
RECITALS
A. The Employer is a provider of non-invasive pain relief through the creation, distribution, and
marketing of pain relief products; EMG, EEG, sleep pattern, auditory and nerve conductivity
neurological diagnosis devices; and non-invasive cardiac monitoring devices (the
Business
).
B. The Executive has been employed by the Employer pursuant to an Employment Agreement dated
February 1, 2004, as amended (the
Original Employment Agreement
). The Executive and the
Employer by this Agreement hereby amend and restate the Original Employment Agreement and herein
agree that the Original Employment Agreement is now terminated and replaced by this Agreement.
C. The Employer desires to employ the Executive under the terms and conditions below set forth.
The Executive desires to be so employed upon the terms and conditions below set forth.
D. The Executive acknowledges that his receipt of benefits under this Agreement, depends on, among
other things, the Executives willingness to agree to and abide by the Confidentiality and
Covenants Not to Compete or Solicit provisions in Sections 8 and 9 below.
AGREEMENT
NOW, THEREFORE, in consideration of the terms and the mutual undertakings contained herein, it
is agreed as follows:
1.
Term
.
(a) Subject to the terms of this Agreement, this Agreement shall commence on August 11, 2011
and shall terminate on the earlier of December 31, 2014, the Executives death or
legally-determined disability, or the termination of this Agreement in accord with the provisions
contained in Section 6 below (the
Termination Date
).
(b) Subject to the terms of this Agreement, this Agreement may be extended for additional
one-year terms after the Termination Date on the same terms and conditions as herein set forth (the
Extended Period
), if one party provides at least thirty (30) days written notice to the
other party prior to the Termination Date or end of the then-current Extended Period (the
Extension Notification Date
) and the other party, within ten (10) days of receipt of
such notice, responds with a written acceptance agreeing to the Extended Period. Except when the
contrary is indicated, the phrase
the Term of this Agreement
shall henceforth be deemed
to include any Extended Period agreed to by the parties in accord with the terms of this Section
1(b).
2.
Title
. The Employer agrees to employ the Executive as Zynex, Inc.s Chief
Executive Officer and President and the Executive accepts such employment.
3.
Duties
.
(a) The Executive shall render all services of the nature of the services that a Chief
Executive Officer would render to a company in the medical device area.
(b) During the Term of this Agreement, the Executive shall devote his full time, energy, skill
and best efforts to promote the Employers Business and affairs and to perform his duties
hereunder.
(c) The Executive shall report directly to the Board of Directors (
Board
) of the
Employer.
4.
Compensation
.
(a) Commencing on August 11, 2011, and continuing during the Term of this Agreement, the
Employer shall pay to the Executive for the loyal and consistent services provided to it hereunder
a salary of $385,000 per year. The Executives compensation shall be reviewed by the Board at
least annually for any appropriate adjustments at the end of each calendar year; however, the
Executives salary may not be reduced during the Term without the Executives written permission.
(b) The Executive shall also receive, after the end of each quarter during the Term of this
Agreement, bonus compensation, if any, based on the Employers performance or other criteria
established by the Board at least annually.
(c) The Employer will reimburse the Executive for all reasonable and necessary out-of-pocket
business, travel, and entertainment expenses incurred by the Executive in the performance of the
Executives duties and responsibilities to the Employer during the Executives employment under
this Agreement. Such reimbursement shall be subject to the Employers normal policies and
procedures for expense verification, documentation, and reimbursement.
5.
Insurance and Benefits
. During the Term of this Agreement, the Executive shall be
entitled to participate in all employee benefit plans and insurance programs which shall be
provided from time to time by the Employer to its employees (collectively,
Employee Benefit
Plans
) in accordance with the terms and conditions of such Employee Benefit Plans. During the
Term of this Agreement, the Executive will be provided with a company car with all costs and
reasonable expenses related to such company car to be paid by the Employer.
-2-
6.
Termination
.
(a) This Agreement may be terminated by either party upon ninety (30) days advance written
notice of termination from one party to the other. This Agreement may also be terminated by the
Employer for Cause immediately upon written notice to the Executive. The term
Cause
, as
used herein, shall mean the loss of any license necessary for the Executive to
perform his duties hereunder, or any willful misconduct, malfeasance, gross negligence or
other like conduct adversely affecting the best interests of the Employer, including, without
limitation, (i) the failure or neglect by the Executive to perform his duties hereunder, (ii) the
violation or attempted violation of any provision hereof, (iii) the commission of any felony or
dishonest act, including, without limitation, any fraud against the Employer, any of the
affiliates, clients or customers of the Employer.
(b) If the Executives employment with the Employer is terminated by the Employer without
Cause and the Termination Date is prior to the expiration of the Term, then the Employer will,
subject to the conditions in
Section 6(e)
, pay to Executive as severance pay an amount
equal to his then current monthly base salary for a period of one (1) year commencing in accordance
with
Section 6(c).
In addition, the Executive will be paid a pro rata share of any
quarterly bonus (
Section 4(b)
) he would have earned for the quarter in which he is
terminated. Notwithstanding anything herein to the contrary, in no event will the severance pay
available to the Executive under this
Section 6(a)
exceed the amount payable under Treas.
Reg. Section 1.409A-1(b)(9)(iii).
(c) Severance pay pursuant to
Section 6(b)
will be paid to the Executive in equal
installments in accordance with the Employers regular payroll schedule, less all legally required
and authorized deductions and withholdings, commencing on the first normal payroll date of the
Employer following the expiration of the applicable rescission periods provided by law applicable
to the release specified in
Section 6(e)
below and continuing for the applicable period
thereafter;
provided
,
however
, that if the Termination Date occurs before December 31 of any year,
any severance amounts that remain payable under
Section 6(b)
after the last normal payroll
date before March 15 of the following year shall be payable in a lump sum on March 15 of that
following year, less all legally required and authorized deductions and withholdings, and that if
such rescission periods have not then expired, the severance pay pursuant to Section 6(b) will be
forfeited and not paid to the Executive. Notwithstanding the foregoing, the Employers obligations
to make severance payments pursuant to this
Section 6
shall cease effective upon the date
that the Executive accepts employment with another employer. The Executive shall notify the
Employer promptly upon his acceptance of such employment.
(d) If the Executives employment with the Employer is terminated for any reason after the
Term, then the Employer will pay to Executive, his beneficiary or his estate, as the case may be,
only Executives then-owed base salary through the Termination Date; payment for any accrued but
unused vacation time; reimbursement of reasonable, approved business expenses; and any vested
rights the Executive may have under any equity plans or agreements (including stock option and
restricted stock agreements equity plans) to the extent provided for in accordance with the terms
thereof.
(e) Notwithstanding the foregoing provisions of this
Section 6
, the Employer will not
be obligated to make any payments under
Section 6(a)
hereof unless (i) the Executive, if
reasonably requested by the Board and for no additional consideration, completes such transitional
duties as the Board may assign; (ii) the Executive signs a release of claims in favor of the
Employer and its affiliates (substantially in a form to be prescribed by the Board) on or before
expiration of the applicable consideration period specified therein, if any, and of the deadline
specified in
Section 6(c),
and all applicable consideration and rescission periods
provided by law have expired; and (iii) the Executive is in strict compliance with the terms of
this Agreement and any other agreements with the Employer that survive the termination of the
Executives employment.
-3-
7.
Return of Documents
. On termination of this Agreement, or at any time upon the
request of the Board, the Executive shall return to the Employer all documents, including all
copies thereof, and all other property relating to the business or affairs of the Employer,
including, without limitation, customer lists, agents or representatives lists, commission
schedules and information manuals, letters, materials, reports, lists and records (all such
documents and other property being hereinafter referred to collectively as the
Materials
), in his possession or control, no matter from whom or in what manner he may
have acquired such property. The Executive acknowledges and agrees that all of the Materials are
property of the Employer and releases all claims of right of ownership thereto.
8.
Confidentiality
. Except as authorized in writing by the Board or as necessary in
carrying out Executives responsibilities for the Employer, Executive will not at any time divulge,
furnish, or make accessible to anyone or use in any way, any confidential, proprietary, or secret
knowledge or information of the Employer that Executive has acquired or will acquire about the
Employer, whether developed by himself or by others, concerning (i) any trade secrets, (ii) any
confidential, proprietary, or secret designs, inventions, discoveries, programs, processes,
formulae, plans, devices, or material (whether or not patented or patentable) directly or
indirectly useful in any aspect of the business of the Employer, (iii) any customer or supplier
lists, (iv) any confidential, proprietary, or secret development or research work, (v) any
strategic or other business, marketing, or sales plans, systems or techniques, (vi) any financial
data or plans, or (vii) any other confidential or proprietary information or secret aspects of the
business of the Employer. Executive acknowledges that the above-described knowledge and
information constitute a unique and valuable asset of the Employer and represent a substantial
investment of time and expense by the Employer, and that any disclosure or other use of such
knowledge or information other than for the sole benefit of the Employer would be wrongful and
would cause irreparable harm to the Employer. Executive will refrain from intentionally committing
any acts that would materially reduce, and shall take reasonable steps to protect, the value of
such knowledge or information to the Company. The foregoing obligations of confidentiality shall
not apply to any knowledge or information that (i) is now or subsequently becomes generally
publicly known, other than as a direct or indirect result of the breach by Executive of this
Agreement, (ii) is independently made available to Executive in good faith by a third party who has
not violated a confidential relationship with the Employer, or (iii) is required to be disclosed by
law or legal process. Executive understands and agrees that Executives obligations under this
Agreement to maintain the confidentiality of the Employers confidential information are in
addition to any obligations of Executive under applicable statutory or common law and any prior
agreements regarding this subject matter between Executive and the Company.
9.
Covenants Not to Compete or Solicit
.
(a) The Executive agrees that during the Term of this Agreement and for one (1) year
thereafter, he will not, directly or indirectly (whether as sole proprietor, partner, stockholder,
director, officer, employee or in any other capacity as principal or agent) compete with, or
participate in any business that competes with, the Employers Business, as then
conducted, anywhere in the world; provided that the Executive may invest in (i) the securities
of any business or enterprise (but without otherwise participating in the activities of such
business or enterprise) which are listed on a national or regional securities exchange or traded in
the over-the-counter market, and (ii) equity interests of the Employer.
-4-
(b) The Executive undertakes that during the Term of this Agreement and for one (1) year
thereafter he will not, directly or indirectly (whether as a sole proprietor, partner, stockholder,
director, officer, employee or in any other capacity as principal or agent), do any of the
following: (i) hire, or attempt to hire for employment, any person who is an employee of the
Employer on the date of such termination of employment, or attempt to influence any such person to
terminate his or her employment by the Employer; or (ii) in any other manner interfere with,
disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Employer and
any of its employees, or disparage the business or reputation of the Employer to any such person.
(c) The Executive undertakes that during the Term of this Agreement and for one (1) year
thereafter he will not, directly or indirectly (whether as a sole proprietor, partner, stockholder,
director, officer, employee or in any other capacity as principal or agent), do any of the
following: (i) solicit, service or accept any actual or prospective accounts, clients or customers
of the Employer during the period of the Executives employment by the Employer; (ii) influence or
attempt to influence any of the accounts, customers or clients referred to in Subsection 9(c)(i) to
transfer their business or patronage from the Employer to any other person or company engaged in a
similar business; (iii) directly assist any person or company soliciting, servicing or accepting
any of the accounts, customers or clients referred to in Subsection 9(c)(i); or (iv) in any other
manner directly interfere with, disrupt or attempt to disrupt the relationship, contractual or
otherwise, between the Employer and any of its accounts, customers or clients referred to in
Subsection 9(d)(i), or any other person, or disparage the business or reputation of the Employer to
any such person.
(d) Executive will not make any statement or remark to any person or entity that defames or
disparages the reputation, character, image, products, or services of Employer, or the reputation
or character of Employers employees, officers or directors. Employer, its employees, officers and
directors will not make any statement or remark to any person or entity that defames or disparages
the reputation, character, image, products, or services of Executive.
10.
Enforcement of Covenants
.
The parties acknowledge and agree that the covenants contained in Sections 8 and 9 are
essential elements of this Agreement that are required for the protection of the Employers
confidential, proprietary and trade secret information, its relationships with its clients and
customers and its goodwill, and that, but for the agreements of the Executive to comply with such
covenants, the Employer would not have entered into this Agreement. The parties further acknowledge
and agree that a breach by the Executive of the covenants contained in Sections 8 and 9 may result
in irreparable injury to the Employer for which there is no adequate remedy at law and that the
Employer shall be entitled to seek enforcement of the same by means of a temporary restraining
order and/or a preliminary or permanent injunction issued by any court having jurisdiction thereof.
In the event that the Executive breaches any of the covenants
-5-
contained in Sections 8 and 9, the Employer shall be entitled to an accounting and repayment
of all profits, commissions and benefits the Executive receives in connection with such breach.
The Executive agrees to indemnify and hold harmless the Employer against all of its costs and
expenses (including, without limitation, reasonable attorneys fees and expenses) incurred in
connection with the enforcement of the covenants contained in Sections 8 and 9, except, with
respect to the enforcement of any such covenant by the Employer, to the extent that the Employer is
the prevailing party in any action or proceeding commenced by the Employer in connection therewith.
The covenants contained in Sections 8 and 9 shall survive the termination of this Agreement. The
remedies provided in this Section 10 shall be in addition to, and not in lieu of, any other
remedies and relief including damages to which the Employer may be entitled.
11.
Employers Inventions
. The Executive hereby sells, transfers and assigns to the
Employer or to any person, or entity designated by the Employer, all of the entire right, title and
interest of the Executive in and to all inventions, ideas, disclosures and improvements, whether
patented or unpatented, and copyrightable material, made or conceived by the Executive, solely or
jointly, or in whole or in part, during or before the term hereof which (i) relate to methods,
apparatus, designs, products, processes or devices sold, leased, used or under construction or
development by the Employer or any subsidiary or (ii) otherwise relate to or pertain to the
business, functions or operations of the Employer or any subsidiary. The Executive shall
communicate promptly and disclose to the Employer, in such form as the Employer requests, all
information, details and data pertaining to the aforementioned inventions, ideas, disclosures and
improvements; and, whether during the term hereof or thereafter, the Executive shall execute and
deliver to the Employer such formal transfers and assignments and such other papers and documents
as may be required of the Executive to permit the Employer or any person or entity designated by
the Employer to file and prosecute the patent applications and, as to copyrightable material, to
obtain copyright thereon. Any invention by the Executive within one (1) year following the
termination of this Agreement shall be deemed to fall within the provisions of this
Section
11
unless proved by the Executive to have been first conceived and made following such
termination.
12.
Blue-Pencil
. If a court of competent jurisdiction shall at any time deem the
terms of any of the covenants and undertakings of the Executive under Sections 8 and 9 herein too
broad, the court shall modify the offending provisions to make such provisions enforceable to the
maximum extent permitted by law and the other provisions of those Sections 8 and 9 shall
nevertheless stand. The court in each case shall reduce the period of restriction to a permissible
duration and shall modify any other provision deemed overly broad so that it is enforceable to the
maximum extent permitted by law.
13.
Notices
. Unless otherwise specifically provided herein, all notices, requests,
demands and other communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or mailed, certified or registered mail, return receipt requested,
with postage prepaid at the following addresses, and/or to such other addresses and/or persons
which either party may designate by like notice:
|
(a)
|
|
If to the Executive, to:
|
|
|
|
|
Thomas Sandgaard
1175 Castle Pointe Drive
Castle Rock, CO 80104
|
-6-
|
(b)
|
|
If to the Employer, to:
|
|
|
|
|
Attn: Board of Directors
Zynex, Inc.
9990 Park Meadows Drive
Lone Tree, CO 80124
|
|
|
|
|
With a copy to:
|
|
|
|
|
Jason Day, Esq.
Perkins Coie, LLP
1900 16th Street, Suite 1400
Denver, CO 80202
|
14.
Governing Law
. This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of Colorado without regard to conflict of law provisions. Any
disputes with respect to the interpretation of this Agreement or the rights and obligations of the
parties hereto shall be exclusively brought in any federal or state court of competent jurisdiction
located in the State of Colorado. Each of the parties waives any right to object to the
jurisdiction or venue of such courts or to claim that such courts are an inconvenient forum.
15.
Additional Provisions
.
(a) The Executive may not assign or delegate the performance of any of his rights and/or
obligations under this Agreement. The Employer may assign its rights and/or obligations under this
Agreement.
(b) This Agreement constitutes the entire agreement, representation and understanding of the
parties hereto with respect to the subject matter hereof, and no amendment or modification hereof
shall be valid or binding unless made in writing and signed by the parties hereto.
(c) All agreements between the parties related to the Executives employment by the Employer,
whether oral or written and including but not limited to the Original Employment Agreement, are
terminated and of no further force or effect.
(d) No waiver of any provision of this Agreement shall be valid unless the same is in writing
and signed by the party against whom it is sought to be enforced. No waiver of any default or
breach of this Agreement shall be deemed a continuing waiver or a waiver of any other breach or
default.
(e) Executive acknowledges that prior to the execution of this Agreement he had full
opportunity to consult with his independent attorneys and advisors as he deemed appropriate and he
fully understands the nature and scope of his rights and obligations hereunder.
-7-
(f) The Employer may withhold from any amounts payable under this Agreement such federal,
state and local income and employment taxes as the Employer shall determine are required to be
withheld pursuant to any applicable law or regulation.
(g) The parties intend that this Agreement and the payments and other benefits provided
hereunder be exempt from the requirements of Section 409A of the Internal Revenue Code (Section
409A) to the maximum extent possible, whether pursuant to the short-term deferral exception
described in Treasury Regulation Section 1.409A-1(b)(4), the involuntary separation pay plan
exception described in Treasury Regulation Section 1.409A-1(b)(9)(iii), or otherwise. To the
extent Section 409A is applicable to this Agreement, the parties intend that this Agreement comply
with the deferral, payout and other limitations and restrictions imposed under Section 409A. If
either party believes, at any time, that any payments and other benefits under this is not so
exempt or does not so comply, such party will promptly advise the other party and they each will
negotiate reasonably to amend the terms of this Agreement such that it is exempt or complies with
the most limited possible economic effect on the parties or to mitigate any additional tax or
interest (or both) that may apply under Section 409A if exemption or compliance is not practicable.
With respect to any payments and benefits under this Agreement to which Section 409A applies, all
references in this Agreement to the termination of the Executives employment are intended to mean
the Executives separation from service, within the meaning of Section 409A(a)(2)(A)(i).
Notwithstanding the foregoing, no provision of this Agreement shall be interpreted or construed to
transfer any liability for failure to comply with Section 409A from the Executive or any other
individual to the Employer or any of its affiliates.
(h) If any provision of this Agreement is invalid or unenforceable in any jurisdiction such
provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or
unenforceability, but the foregoing shall not render invalid or unenforceable in such jurisdiction
the remainder of this Agreement or the remainder of such provision or affect the validity or
unenforceability of any provision of this Agreement in any other jurisdiction.
-8-
IN WITNESS WHEREOF, the parties have executed this Agreement or caused this Agreement to be
executed on the date first above written.
|
|
|
|
|
|
ZYNEX MEDICAL, INC.
|
|
|
/s/ Anthony Scalese
|
|
|
By: Anthony Scalese
|
|
|
Its: Chief Financial Officer
|
|
|
|
THOMAS SANDGAARD
|
|
|
/s/ Thomas Sandgaard
|
|
|
Thomas Sandgaard
|
|
|
|
|
|
-9-