10-Q 1 zyxi-20240331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2024

OR

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 001-38804

Zynex, Inc.

(Exact name of registrant as specified in its charter)

NEVADA

    

90-0275169

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

9655 Maroon Cir.

Englewood, CO

80112

(Address of principal executive offices)

(Zip Code)

(303) 703-4906

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol

    

Name of each exchange on which registered

Common Stock, par value $0.001 per share

ZYXI

NASDAQ Stock Market LLC

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes     No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

    

Shares Outstanding as of April 26, 2024

Common Stock, par value $0.001

31,775,183

ZYNEX, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

    

Page

PART I—FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023

3

Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2024 and 2023

4

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023

5

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2024 and 2023

6

Unaudited Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

PART II—OTHER INFORMATION

27

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

Item 3.

Defaults Upon Senior Securities

28

Item 4.

Mine Safety Disclosures

28

Item 5.

Other Information

28

Item 6.

Exhibits

29

SIGNATURES

30

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ZYNEX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)

March 31, 2024

December 31, 

    

(unaudited)

    

2023

    

ASSETS

Current assets:

 

  

 

  

 

Cash and cash equivalents

$

32,861

$

44,579

Accounts receivable, net

 

25,439

 

26,838

Inventory, net

 

15,476

 

13,106

Prepaid expenses and other

 

4,213

 

3,332

Total current assets

 

77,989

 

87,855

Property and equipment, net

3,234

 

3,114

Operating lease asset

11,857

12,515

Finance lease asset

537

587

Deposits

409

 

409

Intangible assets, net of accumulated amortization

7,932

8,158

Goodwill

20,401

20,401

Deferred income taxes

3,866

 

3,865

Total assets

$

126,225

$

136,904

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

10,325

8,433

Operating lease liability

3,881

 

3,729

Finance lease liability

183

 

196

Income taxes payable

637

 

633

Accrued payroll and related taxes

6,729

 

5,541

Total current liabilities

21,755

18,532

Long-term liabilities:

 

  

Convertible senior notes, less issuance costs

57,839

57,605

Operating lease liability

13,184

 

14,181

Finance lease liability

347

457

Total liabilities

93,125

 

90,775

Commitments and contingencies

 

 

Stockholders’ equity:

 

  

 

  

Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2024 and December 31, 2023

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized;
42,048,385 issued and 31,879,892 outstanding as of March 31, 2024. 41,980,166 issued and 32,933,776 outstanding as of December 31, 2023.

 

32

 

33

Additional paid-in capital

 

91,259

 

90,878

Treasury stock of 9,666,879 and 8,545,044 shares at March 31, 2024 and December 31, 2023, respectively, at cost

 

(84,981)

 

(71,562)

Retained earnings

 

26,790

 

26,780

Total stockholders’ equity

 

33,100

 

46,129

Total liabilities and stockholders’ equity

$

126,225

$

136,904

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

ZYNEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

(unaudited)

For the Three Months Ended March 31, 

    

2024

    

2023

NET REVENUE

 

  

 

  

Devices

$

14,025

$

11,944

Supplies

 

32,506

 

30,226

Total net revenue

 

46,531

 

42,170

COSTS OF REVENUE AND OPERATING EXPENSES

 

 

Costs of revenue - devices and supplies

 

9,298

 

9,269

Sales and marketing

 

23,380

 

21,227

General and administrative

13,328

 

11,390

Total costs of revenue and operating expenses

 

46,006

 

41,886

Income from operations

 

525

 

284

Other income (expense)

 

  

 

  

Gain on sale of fixed assets

 

2

Gain on change in fair value of contingent consideration

 

1,400

Interest expense, net

 

(512)

 

(84)

Other income (expense), net

 

(512)

 

1,318

Income from operations before income taxes

 

13

 

1,602

Income tax expense

 

3

 

33

Net income

$

10

$

1,569

Net income per share:

 

 

Basic

$

0.00

$

0.04

Diluted

$

0.00

$

0.04

Weighted average basic shares outstanding

 

32,344

 

36,694

Weighted average diluted shares outstanding

 

32,827

 

37,442

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

ZYNEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

(unaudited)

For the Three Months Ended March 31, 

    

2024

    

2023

    

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

 

Net income

$

10

$

1,569

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

Depreciation

638

615

Amortization

 

461

 

229

Non-cash reserve charges

408

Stock-based compensation

 

734

 

307

Non-cash lease expense

 

(187)

 

(272)

Benefit for deferred income taxes

(1)

8

Change in fair value of contingent consideration

(1,400)

Gain on sale of fixed assets

(2)

Change in operating assets and liabilities:

 

 

Accounts receivable

 

1,399

 

2,596

Prepaid and other assets

 

(813)

 

(1,262)

Accounts payable and other accrued expenses

 

2,709

 

369

Inventory

 

(2,882)

 

(1,139)

Deposits

 

 

(92)

Net cash provided by operating activities

 

2,068

 

1,934

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchase of property and equipment

(153)

(184)

Proceeds on sale of fixed assets

10

Net cash used in investing activities

 

(153)

 

(174)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Payments on finance lease obligations

 

(123)

 

(31)

Cash dividends paid

 

(3)

 

Purchase of treasury stock

 

(13,280)

 

(3,353)

Proceeds from the issuance of common stock on stock-based awards

13

27

Principal payments on long-term debt

(1,333)

Taxes withheld and paid on employees’ equity awards

(240)

(422)

Net cash used in financing activities

 

(13,633)

 

(5,112)

Net decrease in cash

 

(11,718)

 

(3,352)

Cash and cash equivalents at beginning of period

 

44,579

 

20,144

Cash and cash equivalents at end of period

$

32,861

$

16,792

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid on interest, net

$

238

$

(90)

Cash paid for rent

$

(1,056)

$

(1,382)

Supplemental disclosure of non-cash investing and financing activities:

 

 

Treasury stock not yet paid

$

(140)

$

Excise tax accrual

$

(126)

$

Inventory transferred to property and equipment under lease

$

511

$

438

Capital expenditures not yet paid

$

44

$

77

Prepaid expenses not yet paid

$

69

$

Non-cash dividend adjustment

$

(1)

$

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

ZYNEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

(unaudited)

Additional

Total

Common Stock

Paid-in

Treasury

Retained

Stockholders’

    

Shares

    

Amount

    

Capital

    

Stock

    

Earnings

    

Equity

Balance at December 31, 2022

36,825,081

$

39

$

82,431

$

(33,160)

$

17,048

$

66,358

Exercised and vested stock-based awards

66,045

 

 

27

 

 

 

27

Stock-based compensation expense

 

 

307

 

 

 

307

Warrants exercised

10,000

Shares of common stock withheld to pay taxes on employees’ equity awards

(22,387)

(422)

(422)

Purchase of treasury stock

(232,698)

(3,353)

(3,353)

Net income

 

 

 

 

1,569

 

1,569

Balance at March 31, 2023

36,646,041

$

39

$

82,343

$

(36,513)

$

18,617

$

64,486

Additional

Total

Common Stock

Paid-in

Treasury

Retained

Stockholders’

    

Shares

    

Amount

    

Capital

    

Stock

    

Earnings

    

Equity

Balance at December 31, 2023

32,933,776

$

33

$

90,878

$

(71,562)

$

26,780

$

46,129

Exercised and vested stock-based awards

70,992

13

13

Stock-based compensation expense

 

 

734

 

 

 

734

Warrants exercised

20,000

Shares of common stock withheld to pay taxes on employees’ equity awards

(23,041)

(240)

(240)

Purchase of treasury stock

(1,121,835)

(1)

(13,419)

(13,420)

Excise tax on net treasury stock purchases

(126)

(126)

Net income

 

 

 

 

10

 

10

Balance at March 31, 2024

31,879,892

$

32

$

91,259

$

(84,981)

$

26,790

$

33,100

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Table of Contents

ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)   BASIS OF PRESENTATION

Organization

Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado. The term “the Company” refers to Zynex, Inc. and its active and inactive subsidiaries. The Company operates in one primary business segment, medical devices which include electrotherapy and pain management products. As of March 31, 2024, the Company’s only active subsidiaries are Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) through which the Company conducts most of its operations, and Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation). ZMS has developed a fluid monitoring system which received approval by the U.S. Food and Drug Administration (“FDA”) during 2020 and is still awaiting CE Marking in Europe. ZMS has achieved no revenues to date. The Company’s inactive subsidiaries include Zynex Europe, Zynex NeuroDiagnostics, Inc. (“ZND,” a wholly-owned Colorado corporation) and Pharmazy, Inc. (“Pharmazy”, a wholly-owned Colorado Corporation). The Company’s compounding pharmacy operated as a division of ZMI dba as Pharmazy through January 2016.

In December 2021, the Company acquired 100% of Kestrel Labs, Inc. (“Kestrel”), a laser-based, noninvasive patient monitoring technology company. Kestrel’s laser-based products include the NiCOTM CO-Oximeter, a multi-parameter pulse oximeter, and HemeOxTM, a total hemoglobin oximeter that enables continuous arterial blood monitoring. Both NiCO and HemeOx are yet to be presented to the FDA for market clearance. All activities related to Kestrel flow through the ZMS subsidiary.

Nature of Business

The Company designs, manufactures, and markets medical devices that treat chronic and acute pain, as well as activate and exercise muscles for rehabilitative purposes with electrical stimulation. The Company’s devices are intended for pain management to reduce reliance on medications and provide rehabilitation and increased mobility through the utilization of non-invasive muscle stimulation, electromyography technology, interferential current (“IFC”), neuromuscular electrical stimulation (“NMES”) and transcutaneous electrical nerve stimulation (“TENS”). All the Company’s medical devices are designed to be patient friendly and designed for home use. The devices are small, portable, battery operated, and include an electrical pulse generator which is connected to the body via electrodes. All of the medical devices are marketed in the U.S. and are subject to FDA regulation and approval. All of the products require a physician’s prescription before they can be dispensed in the U.S. The Company’s primary product is the NexWave device. The NexWave is marketed to physicians and therapists by the Company’s field sales representatives. The NexWave requires consumable supplies, such as electrodes and batteries, which are shipped to patients on a recurring monthly basis, as needed.

During the three months ended March 31, 2024 and 2023, the Company generated all of its revenue in North America from sales and supplies of its devices to patients and healthcare providers.

Unaudited Condensed Consolidated Financial Statements

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Amounts as of December 31, 2023 are derived from those audited consolidated financial statements. These interim condensed consolidated financial statements should be read in conjunction with the annual audited financial statements, accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

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 March 31, 2024 and the results of its operations and its cash flows for the periods presented. The results of operations for the three months ended March 31, 2024 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.

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(2)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Zynex, Inc. and its 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, 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 condensed consolidated financial statements are associated with the allowance for billing adjustments and uncollectible accounts receivable, the reserve for obsolete and damaged inventory, stock-based compensation, assumptions related to the valuation of contingent consideration, valuation of long-lived assets, and realizability of deferred tax assets.

Cash, Cash Equivalents, and Short-Term Investments

Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase. We classify investments with maturities of greater than three months but less than one year as short-term investments. Short-term investments are classified as held-to-maturity as the Company has the positive intent and ability to hold the investments until maturity. Held-to-maturity investments are carried at amortized cost. Due to the short-term nature, the carrying amounts reported in the consolidated balance sheet approximate fair value.

Accounts Receivable, Net

The Company’s accounts receivable represent unconditional rights to consideration and are generated when a patient receives one of the Company’s devices, related supplies, or complementary products. In conjunction with fulfilling the Company’s obligation to deliver a product, the Company invoices the patient’s third-party payer and/or the patient. Billing adjustments represent the difference between the list price and the reimbursement rates set by third-party payers, including Medicare, commercial payers, and amounts billed directly to the patient. Specific amounts, if uncollected over a period of time, may be written-off after several appeals, which in some cases may take longer than twelve months. Primarily all of the Company’s receivables are due from patients with commercial or government health plans and worker’s compensation claims with a smaller portion related to private pay individuals, attorney, and auto claims. The Company maintains a constraint for third-party payer refund requests, deductions, and adjustments. See Note 14 – Concentrations for discussion of significant customer accounts receivable balances.

Inventory, Net

Inventories are stated at the lower of cost or net realizable value. Cost is computed using standard costs, which approximates actual costs on an average cost basis.

The Company monitors inventory for turnover and obsolescence and records losses for excess and obsolete inventory, as appropriate. The Company provides reserves for estimated excess and obsolete inventories based upon assumptions about future demand. If future demand is less favorable than currently projected by management, additional inventory write-downs may be required.

Long-lived Assets

The Company records intangible assets based on estimated fair value on the date of acquisition. Long-lived assets consist of net property and equipment and intangible assets. The finite-lived intangible assets are patents and are amortized on a straight-line basis over the estimated lives of the assets.

The Company assesses impairment of long-lived assets when events or changes in circumstances indicates that their carrying value amount may not be recoverable. Circumstances which could trigger a review include but are not limited to: (i) significant decreases in

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

the market price of the asset; (ii) significant adverse changes in the business climate or legal or regulatory factors; or (iii) expectations that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.

If the estimated future undiscounted cash flows, excluding interest charges, from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.

Useful lives of finite-lived intangible assets by each asset category are summarized below:

Estimated

Useful Lives

    

in years

Patents

 

11

Goodwill

Goodwill is recorded as the difference between the fair value of the purchase consideration and the estimated fair value of the net identifiable tangible and intangible assets acquired.

Goodwill is not subject to amortization but is subject to impairment testing. The Company utilizes the simplified test for goodwill impairment. The amount recognized for impairment is equal to the difference between the carrying value and the asset’s fair value. The valuation methods used in the quantitative fair value assessment was a discounted cash flow method and required management to make certain assumptions and estimates regarding certain industry trends and future profitability of our reporting units. The Company tests more frequently if indicators are present or changes in circumstances suggest that impairment may exist. These indicators include, among others, declines in sales, earnings, or cash flows, or the development of a material adverse change in the business climate. The Company assesses goodwill for impairment at the reporting unit level. The estimates of fair value and the determination of reporting units requires management judgment.

Revenue Recognition

Revenue is derived from sales and leases of the Company’s electrotherapy devices and sales of related supplies and complementary products. Device sales can be in the form of a purchase or a lease. Supplies needed for the device can be set up as a recurring shipment or ordered through the customer support team or online store as needed. The Company recognizes revenue when the performance obligation has been met and the product has been transferred to the patient, in the amount that reflects the consideration the Company expects to receive. In general, revenue from sales of devices and supplies is recognized once the product is delivered to the patient, which is when the performance obligation has been met and the product has been transferred to the patient.

Sales of devices and supplies are primarily shipped directly to the patient, with a small amount of revenue generated from sales to distributors. In the healthcare industry there is often a third party involved that will pay on the patients’ behalf for purchased or leased devices and supplies. The terms of the separate arrangement impact certain aspects of the contracts, with patients covered by third party payers, such as contract type, performance obligations and transaction price, but for purposes of revenue recognition the contract with the customer refers to the arrangement between the Company and the patient. The Company does not have any material deferred revenue in the normal course of business as each performance obligation is met upon delivery of goods to the patient. There are no substantial costs incurred through support or warranty obligations.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table provides a breakdown of disaggregated net revenues for the three months ended March 31, 2024 and 2023 related to devices accounted for as purchases subject to Accounting Standards Codification (“ASC”) 606 – “Revenue from Contracts with Customers” (“ASC 606”), leases subject to ASC 842 – “Leases” (“ASC 842”), and supplies (in thousands):

For the Three Months Ended March 31, 

    

2024

    

2023

    

Device revenue

  

 

  

Purchased

$

6,515

$

4,642

Leased

 

7,510

 

7,302

Total device revenue

$

14,025

$

11,944

Supplies revenue

32,506

30,226

Total revenue

$

46,531

$

42,170

Revenues are estimated using the portfolio approach by third-party payer type based upon historical rates of collection, aging of receivables, trends in historical reimbursement rates by third-party payer types, and current relationships and experience with the third-party payers, which includes estimated constraints for third-party payer refund requests, deductions, allowance for uncollectible accounts, and billing allowance adjustments. Inherent in these estimates is the risk they will have to be revised as additional information becomes available and constraints are released. If initial estimates are updated, these changes are accounted for as increases or decreases in the transaction price. Assuming the underlying performance obligation to which the change in price relates has already been satisfied, those changes in transaction price are immediately recognized as increases or decreases in revenue (not credit losses (bad debt expense)) in the period in which the estimate changes. Additionally, the complexity of third-party payer billing arrangements, the uncertainty of reimbursement amounts for certain products from third-party payers, or unanticipated requirements to refund payments previously received may result in adjustments to amounts originally recorded. Settlements with third-party payers for retroactive revenue adjustments due to audits, reviews, or investigations are considered variable consideration and are included in the determination of the estimated transaction price using the expected amount method. These adjustments to transaction price are estimated based on the terms of the payment agreement with the payer, correspondence from the payer, and historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Due to continuing changes in the healthcare industry and third-party payer reimbursement, it is possible the Company’s forecasting model to estimate collections could change, which could have an impact on the Company’s results of operations and cash flows. Any differences between estimated and actual collectability are reflected in the period in which payment is received.

The Company monitors the variability and uncertain timing over third-party payer types in the portfolios. If there is a change in the Company’s third-party payer mix over time, it could affect net revenue and related receivables. The Company believes it has a sufficient history of collection experience to estimate the net collectible amounts by third-party payer type. However, changes to constraints related to billing adjustments and refund requests have historically fluctuated and may continue to fluctuate significantly from quarter-to-quarter and year-to-year.

Leases

The Company determines if an arrangement is a lease at inception or modification of a contract.

The Company recognizes finance and operating lease right-of-use assets and liabilities at the lease commencement date based on the estimated present value of the remaining lease payments over the lease term. For the finance leases, the Company uses the implicit rate to determine the present value of future lease payments. For operating leases that do not provide an implicit rate, the Company uses incremental borrowing rates to determine the present value of future lease payments. The Company includes options to extend or terminate a lease in the lease term when it is reasonably certain to exercise such options. The Company recognizes leases with an initial term of 12 months or less as lease expense over the lease term and those leases are not recorded on the Company’s condensed consolidated balance sheets. For additional information on the leases where the Company is the lessee, see Note 13 - Leases.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A significant portion of device revenue is derived from patients who obtain devices under month-to-month lease arrangements where the Company is the lessor. Revenue related to devices on lease is recognized in accordance with ASC 842. Using the guidance in ASC 842, the Company concluded the transactions should be accounted for as operating leases based on the following criteria below:

The lease does not transfer ownership of the underlying asset to the lessee by the end of the lease term.
The lease does not grant the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
The lease term is month-to-month, which does not meet the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease.
There is no residual value guaranteed and the present value of the sum of the lease payments does not equal or exceed substantially all of the fair value of the underlying asset.
The underlying asset is expected to have alternative uses to the lessor at the end of the lease term.

Lease commencement occurs upon delivery of the device to the patient. The Company retains title to the leased device and those devices are classified as property and equipment on the balance sheet. Since the leases are month-to-month and can be returned by the patient at any time, revenue is recognized monthly for the duration of the period in which the patient retains the device.

Debt Issuance Costs

Debt issuance costs are costs incurred to obtain new debt financing. Debt issuance costs are presented in the accompanying condensed consolidated balance sheets as a reduction in the carrying value of the debt and are accreted to interest expense using the effective interest method.

Stock-based Compensation

The Company accounts for stock-based compensation through recognition of the cost of employee services received in exchange for an award of equity instruments, which is measured based on the grant date fair value of the award that is ultimately expected to vest during the period. The stock-based compensation expenses are recognized over the period during which an employee is required to provide service in exchange for the award (the requisite service period, which in the Company’s case is the same as the vesting period). For awards subject to the achievement of performance metrics, stock-based compensation expense is recognized when it becomes probable that the performance conditions will be achieved over the respective performance period.

Segment Information

The Company defines operating segments as components of the business enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. The Company has identified our Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer as our Chief Operating Decision-Makers (“CODM”).

The Company currently operates business as one operating segment which includes two revenue types: Devices and Supplies.

Income Taxes

The Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying condensed consolidated balance sheets, as well as operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.

Tax benefits are recognized from uncertain tax positions if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Inflation Reduction Act (“IRA”) was enacted into law on August 16, 2022. Included in the IRA was a provision to implement a 15% corporate alternative minimum tax on corporations whose average annual adjusted financial statement income during the most recently completed three year period exceeds $1 billion. This provision is effective for tax years beginning after December 31, 2022. The IRA did not have a material impact on our reported results, cash flows, or financial position during the period ended March 31, 2024.

Recent Accounting Pronouncements

In October 2023, the Financial Accounting Standards Board (“FASB”) issued ASU (“Accounting Standards Update”) 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative” (“ASU 2023-06”). This ASU incorporates certain SEC disclosure requirements into the FASB ASC. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of ASC Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the ASC with the SEC’s regulations. The ASU has an unusual effective date and transition requirements since it is contingent on future SEC rule setting. If the SEC fails to enact required changes by June 30, 2027, this ASU is not effective for any entities. Early adoption is not permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): “Improvements to Reportable Segment Disclosures” (“ASU 2023-07”) to update reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and information used to assess segment performance. This update is effective beginning with the Company’s 2024 fiscal year annual reporting period, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, “Improvements to Income Tax Disclosures” (“ASU 2023-09”) to enhance the transparency and decision-usefulness of income tax disclosures, particularly in the rate reconciliation table and disclosures about income taxes paid. This ASU applies to all entities subject to income taxes. This ASU will be effective for public companies for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.

In March 2024, the FASB issued ASU 2024-02 “Codification Improvements – Amendments to Remove References to the Concepts Statements.” This amendments to the Codification that remove references to various Concepts Statement. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2025. Early application of the amendments in this update is permitted for all entities, for any fiscal year or interim period for which financial statements have not yet been issued (or made available for issuance). If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.

Management does not believe that any other recently issued accounting pronouncements will have a material impact on the Company’s consolidated financial statements.

(3)   FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments include cash, accounts receivable, accounts payable, accrued liabilities, and contingent consideration. The carrying amounts of financial instruments, including cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short maturities. The Company measures its long-term debt at fair value which approximates book value as the long-term debt bears market rates of interest. The fair value of acquisition-related contingent consideration is based on a Monte Carlo model. The valuation policies are determined by management, and the Company’s Board of Directors is informed of any policy change.

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:

Level I: Inputs that reflect unadjusted quoted prices in active markets that are accessible to Zynex for identical assets or liabilities;

Level II: Inputs include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and

Level III: Unobservable inputs that are supported by little or no market activity.

The Company’s assets and liabilities, which are measured at fair value, on a recurring basis, are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy as of the date in which the event or change in circumstances caused the transfer. The Company has consistently applied the valuation techniques discussed below in all periods presented.

The Company classified its contingent consideration liability in connection with the acquisition of Kestrel within Level 3 as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity.

The contingent consideration related to Kestrel was valued at $9.7 million using a Monte Carlo simulation as of December 22, 2021. As of December 31, 2022 and March 31, 2023, the value of contingent consideration was estimated at $10.0 million and $8.6 million, respectively. An adjustment of $1.4 million during the quarter ended March 31, 2023 was recorded as a gain on change in fair value of contingent consideration in the Company’s Consolidated Statements of Income. The fair value of acquisition-related contingent consideration was based on a Monte Carlo model prior to December 31, 2023. See Note 6 - Business Combinations for additional details on the removal of contingent consideration during the year ended December 31, 2023. Contingent consideration was fully removed during the year ended December 31, 2023 and there was no contingent consideration during the three months ended March 31, 2024. The following table presents the Company’s financial liabilities that were accounted for at fair value on a recurring basis prior to December 31, 2023, which were included within Level III of the fair value hierarchy for the quarter ended March 31, 2023:

    

Contingent Consideration

Balance as of December 31, 2022

$

10,000

Change in fair value of contingent consideration

 

(1,400)

Balance as of March 31, 2023

 

$

8,600

(4)   INVENTORY

The components of inventory are as follows (in thousands):

    

March 31, 2024

    

December 31, 2023

Raw materials

$

4,296

$

4,601

Work-in-process

 

1,535

 

530

Finished goods

7,357

6,929

Inventory in transit

 

2,588

 

1,346

$

15,776

$

13,406

Less: reserve

(300)

(300)

$

15,476

$

13,106

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(5)   PROPERTY AND EQUIPMENT

The components of property and equipment are as follows (in thousands):

    

March 31, 2024

    

December 31, 2023

Property and equipment

  

 

  

Office furniture and equipment

$

2,907

$

2,768

Assembly equipment

 

314

 

178

Vehicles

 

75

 

75

Leasehold improvements

 

1,832

 

1,174

Leased devices

910

796

Capital projects

 

128

 

869

$

6,166

$

5,860

Less accumulated depreciation

 

(2,932)

 

(2,746)

$

3,234

$

3,114

Total depreciation expense related to our property and equipment was $0.2 million for the three months ended March 31, 2024 and 2023.

Total depreciation expense related to devices out on lease was $0.4 million for the three months ended March 31, 2024 and 2023. Depreciation on leased units is reflected on the income statement as cost of revenue.

(6)   BUSINESS COMBINATIONS

On December 22, 2021, the Company and its wholly-owned subsidiary Zynex Monitoring Solutions, Inc., entered into a Stock Purchase Agreement (the “Agreement”) with Kestrel and each of the shareholders of Kestrel (collectively, the “Selling Shareholders”). Under the Agreement, the Selling Shareholders agreed to sell all of the outstanding common stock of Kestrel (the “Kestrel Shares”) to the Company. The consideration for the Kestrel Shares consisted of $16.1 million cash and 1,467,785 shares of the Company’s common stock (the “Zynex Shares”). All of the Zynex Shares were subject to a lock-up agreement for a period of one year from the closing date under the Agreement (the “Closing Date”). The Agreement provides the Selling Shareholders with piggyback registration rights. 978,524 of the Zynex Shares were deposited in escrow (the “Escrow Shares”). The number of Escrow Shares were subject to adjustment on the one-year anniversary of the Closing Date (or in connection with any Liquidation Event (as defined in the Agreement) that occurs prior to such anniversary date) based on the number of shares equal to $10.0 million divided by a 30-day volume weighted average closing price of the Company’s common stock. The Escrow Shares were adjusted on the anniversary date, which resulted in the cancellation of 156,673 Escrow Shares. Half of the Escrow Shares were to be released on submission of a dossier on a laser-based photoplethysmographic device (the “Device”) to the FDA for permission to market and sell the Device in the United States. The other half of the Escrow Shares were to be released upon determination by the FDA that the Device can be marketed and sold in the United States.

On July 27, 2023, the Company, ZMS, Kestrel, and the Selling Shareholders, entered into an amendment to the Stock Purchase Agreement (the “Amendment”). The parties entered into the Amendment to modify certain terms of the Agreement related to the conditions to be satisfied for the release of the Escrow Shares to the Selling Shareholders. The Escrow Shares were released from escrow, simultaneously, the selling stockholders entered into a lock-up agreement. The lock-up agreement includes two lock-up periods which release certain restrictions on the Selling Shareholders on December 31, 2023 and June 30, 2024, respectively.

The amount of Escrow Shares were recalculated at March 31, 2023, and are included in the calculation of diluted earnings per share. No additional calculation was required at March 31, 2024, as the Escrow Shares were released from escrow, and the shares are included in the Company’s calculation of basic earnings per share.

The acquisition of Kestrel has been accounted for as a business combination under ASC 805 – “Business Combinations” (“ASC 805”). Under ASC 805, assets acquired, and liabilities assumed in a business combination must be recorded at their fair values as of the acquisition date.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(7)   GOODWILL AND OTHER INTANGIBLE ASSETS

During the year ended December 31, 2021 the Company completed the acquisition of Kestrel, which resulted in Goodwill of $20.4 million (see Note 6 – Business Combinations).

As of March 31, 2024, there was no change in the carrying amount of goodwill, and there were no impairment indicators of the Company’s net asset value.

The following table provides the summary of the Company’s intangible assets as of March 31, 2024.

Weighted-

 

Average

 

Gross

 

Remaining

 

Carrying

 

Accumulated

 

Net Carrying

 

Life (in

    

Amount

    

Amortization

    

Amount

    

years)

Acquired patents at December 31, 2023

$

10,000

$

(1,842)

$

8,158

9.00

Amortization expense

(226)

(226)

Acquired patents at March 31, 2024

$

10,000

$

(2,068)

$

7,932

 

8.73

The following table summarizes the estimated future amortization expense to be recognized over the remainder of 2024, next five fiscal years, and periods thereafter:

    

(In thousands)

April 1, 2024 through December 31, 2024

684

2025

 

908

2026

 

908

2027

 

908

2028

 

911

Thereafter

 

3,613

Total future amortization expense

$

7,932

(8)   EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding and the number of dilutive potential common share equivalents during the period. Dilution resulting from stock-based compensation plans is determined using the treasury stock method and dilution resulting from the 2023 Convertible Senior Notes is determined using the if-converted method. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other potential common shares outstanding would be anti-dilutive.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The calculation of basic and diluted earnings per share for the three months ended March 31, 2024 and 2023 are as follows (in thousands, except per share data):

For the Three Months Ended March 31, 

    

2024

    

2023

    

Basic earnings per share

 

  

 

  

 

Net income

$

10

$

1,569

Basic weighted average shares outstanding

 

32,344

 

36,694

Basic earnings per share

$

0.00

0.04

Diluted earnings per share

 

  

 

  

Net income

$

10

1,569

Weighted average shares outstanding

 

32,344

 

36,694

Effect of dilutive securities - options and restricted stock

 

483

 

748

Diluted weighted-average shares outstanding

 

32,827

 

37,442

Diluted earnings per share

$

0.00

0.04

For the three months ended March 31, 2024, equity grants of 7,000 of common stock, were excluded from the dilutive stock calculation because their effect would have been anti-dilutive.

For the three months ended March 31, 2024, conversion options to purchase 5.6 million shares of common stock resulting from the 2023 Convertible Senior Notes, were excluded from the dilutive stock calculation because their effect would have been anti-dilutive (see Note 9 – Convertible Senior Notes).

(9)   CONVERTIBLE SENIOR NOTES

In May 2023, the Company issued $52.5 million aggregate principal amount of 5.00% Convertible Senior Notes due May 15, 2026 (the “2023 Convertible Senior Notes”). In May 2023, the Company issued an additional $7.5 million aggregate principal amount of the 2023 Convertible Senior Notes upon the exercise by the initial purchasers of their over-allotment option. As of December 31, 2023 and March 31, 2024, unamortized issuance costs of $2.4 million and $2.2 million, respectively, were included on the Company’s Condensed Consolidated Balance Sheets.

Interest on the 2023 Convertible Senior Notes is payable semiannually in arrears, beginning November 15, 2023. The 2023 Convertible Senior Notes will mature on May 15, 2026, unless earlier converted or repurchased, and are redeemable at the option of the Company on or after May 20, 2025. The 2023 Convertible Senior Notes are direct, unsecured, and unsubordinated obligations of the Company, ranking equally with all of the Company’s other unsecured and unsubordinated indebtedness from time to time outstanding, and are effectively subordinated to all secured indebtedness of the Company.

Holders could have converted their 2023 Convertible Senior Notes at their option prior to the close of business on the business day preceding March 31, 2024, but only under the following circumstances: during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least twenty trading days (whether or not consecutive) during the period of thirty consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day as determined by the Company; during the five business day period after any ten consecutive trading day period (the “Measurement Period”) in which the trading price per $1,000 principal amount of 2023 Convertible Senior Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; or upon the occurrence of certain corporate events specified in the indenture governing the 2023 Convertible Senior Notes.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On or after February 15, 2026, a holder may convert all or any portion of its 2023 Convertible Senior Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions.

The Company will settle conversions of the 2023 Convertible Senior Notes by paying cash up to the aggregate principal amount of the 2023 Convertible Senior Notes to be converted and paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of the Company's conversion obligation in excess of the aggregate principal amount of the 2023 Convertible Senior Notes being converted. The 2023 Convertible Senior Notes are initially convertible at a rate of 92.8031 shares of common stock per $1,000 principal amount converted, which is approximately equal to $10.78 per share of common stock. The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change, which includes certain change in control transactions, the approval by Zynex’s stockholders of any plan or proposal for the liquidation or dissolution of Zynex and certain de-listing events with respect to Zynex’s common stock, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares of common stock for conversions in connection with the make-whole fundamental change.

Upon the occurrence of a fundamental change, holders of the 2023 Convertible Senior Notes may require the Company to purchase all or a portion of their 2023 Convertible Senior Notes, in principal amounts equal to $1,000 or an integral multiple thereof, for cash at a price equal to 100% of the principal amount of the 2023 Convertible Senior Notes to be purchased plus any accrued and unpaid interest.

The following table summarizes the minimum interest payments over the remainder of 2024 and next two fiscal years until maturity in May 2026.

    

(In thousands)

2024

$

3,000

2025

 

3,000

2026

 

1,500

(10)   STOCK-BASED COMPENSATION PLANS

In June 2017, our stockholders approved the 2017 Stock Incentive Plan (the “2017 Stock Plan”) with a maximum of 5,500,000 shares reserved for issuance. Awards permitted under the 2017 Stock Plan include: Stock Options and Restricted Stock. Awards issued under the 2017 Stock Plan are at the discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to the closing price of our common stock on the date of grant and generally vest over four years. Restricted Stock Awards are issued to the recipient upon grant and are not included in outstanding shares until such vesting and issuance occurs.

During the three months ended March 31, 2024 and 2023, no stock option awards were granted under the 2017 Stock Plan. At March 31, 2024, the Company had 0.3 million stock options outstanding and 0.3 million exercisable under the following plans:

    

    

Outstanding Number of Options

Exercisable Number of Options

(in thousands)

(in thousands)

Plan Category

 

  

 

  

2005 Stock Option Plan

 

1

1

2017 Stock Option Plan

 

341

341

Total

 

342

342

During the three months ended March 31, 2024, 67,000 shares of restricted stock were granted under the 2017 Stock Plan. During the three months ended March 31, 2023, 62,000 shares of restricted stock were granted to the Board of Directors and management under the 2017 Stock Plan. The fair market value of restricted shares for share-based compensation expensing is equal to the closing price of our common stock on the date of grant. The vesting on restricted stock awards typically occur quarterly over three years for the Board of Directors and quarterly or annually over two to four years for management.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following summarizes stock-based compensation expenses recorded in the condensed consolidated statements of income (in thousands):

 

For the Three Months Ended March 31, 

 

    

2024

    

2023

    

Cost of Revenue

$

8

$

8

Sales and marketing expense

 

160

 

61

General, and administrative

566

238

Total stock-based compensation expense

$

734

$

307

The Company received proceeds of $0.1 million related to option exercises during the three months ended March 31, 2024 and 2023.

A summary of stock option activity under all equity compensation plans for the three months ended March 31, 2024, is presented below:

Weighted-

Weighted-

Average

Aggregate

Number of 

Average

Remaining

Intrinsic

Shares

Exercise

Contractual

Value

    

(in thousands)

    

Price

    

Term (Years)

    

(in thousands)

Outstanding at December 31, 2023

 

349

$

1.82

4.12

$

3,163

Granted

 

$

 

Forfeited

$

Exercised

 

(7)

$

2.46

 

Outstanding at March 31, 2024

 

342

$

1.81

3.85

$

3,614

Exercisable at March 31, 2024

 

342

$

1.81

3.85

$

3,614

A summary of restricted stock award activity under all equity compensation plans for the three months ended March 31, 2024, is presented below:

Number of

Shares

 

Weighted Average

    

(in thousands)

    

Grant Date Fair Value

Outstanding at December 31, 2023

502

$

10.73

Granted

67

11.68

Forfeited

(3)

12.55

Vested

(65)

12.09

Outstanding at March 31, 2024

 

501

$

10.73

As of March 31, 2024, the Company had approximately $4.4 million of unrecognized compensation expense related to stock options and restricted stock awards that will be recognized over a weighted average period of approximately 2.3 years.

(11)   STOCKHOLDERS’ EQUITY

Treasury Stock

On October 31, 2022, the Company’s Board of Directors approved a program to repurchase up to $10.0 million of the Company’s common stock at prevailing market prices either in the open market or through privately negotiated transactions through October 31, 2023. From the inception of the plan through December 31, 2022, the Company purchased 495,138 shares of its common stock for $6.6 million or an average price of $13.43 per share. From the inception of the plan through March 31, 2023, the Company purchased 727,836 shares of its common stock for $10 million or an average price of $13.74 per share which completed this program.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On May 10, 2023, the disinterested members of the Board of Directors and Audit Committee approved the purchase of 300,000 shares of the Company’s common stock from Thomas Sandgaard, Chairman, President, Chief Executive Officer and Principal Executive Officer, at the closing market price on May 10, 2023 of $9.61 per share for $2.9 million.

On June 13, 2023, the disinterested members of the Board of Directors and Audit Committee approved the purchase of 300,000 shares of the Company’s common stock from Thomas Sandgaard, Chairman, President, Chief Executive Officer and Principal Executive Officer, at the closing market price on June 13, 2023, of $8.62 per share for $2.6 million.

On June 13, 2023 the Company announced that its Board of Directors approved a program to repurchase up to $10.0 million of the Company’s common stock at prevailing market prices either in the open market or through privately negotiated transactions through June 13, 2024. From the inception of the plan through September 13, 2023, the Company purchased 1,242,892 shares of its common stock for $10.0 million or an average price of $8.05 per share, which completed this program.

On September 11, 2023, the Company announced that its Board of Directors approved a program to repurchase up to $10.0 million of the Company’s common stock at prevailing market prices either in the open market or through privately negotiated transactions through September 13, 2024. From the inception of the plan through October 19, 2023, the Company purchased 1,204,239 shares of its common stock for $10.0 million or an average price of $8.30 per share, which completed this program.

On November 1, 2023, the Company announced that its Board of Directors approved a program to repurchase up to $20.0 million of the Company’s common stock at prevailing market prices either in the open market or through privately negotiated transactions through October 31, 2024. From the inception of the plan through December 31, 2023, the Company purchased 1,012,200 shares of its common stock for $9.6 million or an average price of $9.47 per share. During the quarter ended March 31, 2024, the Company purchased 821,000 shares of common stock for $10.4 million or an average price of $11.73, which completed this program.

On March 4, 2024, the Company announced that its Board of Directors approved a program to repurchase up to $20.0 million of the Company’s common stock at prevailing market prices either in the open market or through privately negotiated transactions through March 4, 2025. From the inception of the plan through March 31, 2024, the Company purchased 234,015 shares of its common stock for $3.0 million or an average price of $12.83 per share.

Warrants

A summary of stock warrant activity for the three months ended March 31, 2024 is presented below:

Weighted

Weighted

Average

Aggregate

Number of

Average

Remaining

Intrinsic

Warrants

Exercise

Contractual

Value

    

(in thousands)

    

Price

    

Life (Years)

    

(in thousands)

Outstanding and exercisable at December 31, 2023

 

80

$

2.43

 

0.76

$

677

Granted

 

$

 

Exercised

 

(16)

$

2.27

 

Forfeited(1)

 

(4)

$

 

 

Outstanding and exercisable at March 31, 2024

 

60

$

2.48

 

0.52

$

593

(1)Warrants were exercised under a net exercise provision in the warrant agreement. As a result, approximately 4,000 warrants were forfeited in lieu of cash payment for shares during the three months ended March 31, 2024.

(12)   INCOME TAXES

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, primarily related to excess tax benefits or expense from stock option exercises, the tax impact of the change in fair value of contingent consideration, and true ups related to the filed tax return. For the three months ended March 31, 2024 discrete items

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

adjusted were minimal. For the three months ended March 31, 2023 discrete items adjusted were $1.5 million. At March 31, 2024, the Company is estimating an annual effective tax rate of approximately 25%. As of March 31, 2023 the Company estimated an annual effective tax rate of approximately 25%. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to various factors.

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s effective income tax rate was 23% and 2% for the three months ended March 31, 2024 and 2023, respectively.  Discrete items, primarily related to the tax impact of stock option exercises were minimal for the three months ending March 31, 2024. Discrete items related to the tax impact of the change in fair value of contingent consideration and stock option exercises were $0.4 million for the three months ended March 31, 2023, which are recognized as a benefit against income tax expense. For the three months ended March 31, 2024 and 2023, the Company recorded an income tax expense of approximately $3,000 and an income tax expense of $33,000, respectively.

No taxes were paid during the three months ended March 31, 2024 and 2023.

(13)   LEASES

The Company categorizes leases at their inception as either operating or financing leases. Leases include various office and warehouse facilities which have been categorized as operating leases while certain equipment is leased under financing leases.

During February 2023, the Company entered into a lease agreement for approximately 41,427 square feet of office space for the operations of ZMS in Englewood, CO. The lease commenced on July 1, 2023 and runs through December 31, 2028. At the expiration of the lease term the Company has the option to renew the lease for one additional five year period. The Company is entitled to rent abatements for the first six months of the lease and tenant improvement allowances. Payments based on the initial rate of $24.75 per square foot begin in January 2024. The price per square foot increases by an additional $0.50 during each subsequent twelve-month period of the lease after the abatement period. Upon lease commencement, the Company recorded an operating lease liability of $4.2 million and a corresponding right-of-use asset for $2.8 million. 

The Company’s operating leases do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring the lease liability. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company’s weighted average borrowing rate was determined to be 4.80% for its operating lease liabilities. The Company’s equipment lease agreements have a weighted average rate of 2.83% which was used to measure its finance lease liability. The weighted average remaining lease term was 4.08 years and 3.73 years for operating and finance leases, respectively, as of March 31, 2024.

As of March 31, 2024, the maturities of the Company’s future minimum lease payments were as follows (in thousands):