10-Q 1 zyxi-20220930x10q.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: September 30, 2022

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)

(800) 495-6670

(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

Ticker symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value per share

ZYXI

The 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 October 25, 2022

Common Stock, par value $0.001

37,453,445

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 September 30, 2022 (unaudited) and December 31, 2021

3

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021

4

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021

5

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021

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

26

Item 4.

Controls and Procedures

26

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

27

Item 4.

Mine Safety Disclosures

27

Item 5.

Other Information

27

Item 6.

Exhibits

28

SIGNATURES

29

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ZYNEX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)

September 30, 2022

December 31, 

    

(unaudited)

    

2021

ASSETS

Current assets:

 

  

 

  

Cash

$

23,532

$

42,612

Accounts receivable, net

 

28,350

 

28,632

Inventory, net

 

14,366

 

10,756

Prepaid expenses and other

 

1,134

 

689

Total current assets

 

67,382

 

82,689

Property and equipment, net

 

2,199

 

2,186

Operating lease asset

13,783

16,338

Finance lease asset

300

389

Deposits

 

591

 

585

Intangible assets, net of accumulated amortization

9,296

9,975

Goodwill

20,401

20,401

Deferred income taxes

 

1,483

 

711

Total assets

$

115,435

$

133,274

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

5,139

4,739

Cash dividends payable

16

3,629

Operating lease liability

 

2,943

 

2,859

Finance lease liability

 

126

 

118

Income taxes payable

 

916

 

2,296

Current portion of debt

5,333

5,333

Accrued payroll and related taxes

 

5,297

 

3,897

Total current liabilities

 

19,770

 

22,871

Long-term liabilities:

 

 

  

Long-term portion of debt, less issuance costs

6,621

10,605

Contingent consideration

9,700

9,700

Operating lease liability

 

13,936

 

15,856

Finance lease liability

221

317

Total liabilities

 

50,248

 

59,349

Commitments and contingencies

 

 

Stockholders’ equity:

 

  

 

  

Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2022 and December 31, 2021

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 41,625,663 issued and 37,467,494 outstanding as of September 30, 2022 41,400,834 issued and 39,737,890 outstanding as of December 31, 2021 (including 3,606,970 shares declared as a stock dividend on November 9, 2021 and issued on January 21, 2022)

 

39

 

41

Additional paid-in capital

 

81,873

 

80,397

Treasury stock of 3,738,224 and 1,246,399 shares at September 30, 2022 and December 31, 2021, respectively, at cost

 

(26,321)

 

(6,513)

Retained earnings

 

9,596

 

Total stockholders’ equity

 

65,187

 

73,925

Total liabilities and stockholders’ equity

$

115,435

$

133,274

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

3

ZYNEX, INC.

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

(unaudited)

For the Three Months Ended September 30, 

For the Nine Months Ended September 30, 

    

2022

    

2021

    

2022

    

2021

NET REVENUE

 

  

 

  

  

 

  

Devices

$

11,349

$

9,071

$

27,579

$

23,264

Supplies

 

30,171

 

25,715

 

81,783

 

66,671

Total net revenue

 

41,520

 

34,786

 

109,362

 

89,935

COSTS OF REVENUE AND OPERATING EXPENSES

 

 

 

  

 

  

Costs of revenue - devices and supplies

 

8,391

 

6,837

 

22,617

 

19,990

Sales and marketing

 

17,212

 

13,083

 

47,950

 

40,662

General and administrative

9,359

6,820

25,967

18,503

Total costs of revenue and operating expenses

 

34,962

 

26,740

 

96,534

 

79,155

Income from operations

 

6,558

 

8,046

 

12,828

 

10,780

Other (expense)

 

  

 

  

 

  

 

  

Loss on change in fair value of contingent consideration

(100)

Interest expense

 

(106)

 

(18)

 

(345)

 

(72)

Other (expense) net

 

(206)

 

(18)

 

(345)

 

(72)

Income from operations before income taxes

 

6,352

 

8,028

 

12,483

 

10,708

Income tax expense

 

1,479

 

1,921

 

2,887

 

2,499

Net income

$

4,873

$

6,107

$

9,596

$

8,209

Net income per share:

 

 

 

 

Basic

$

0.13

$

0.16

$

0.25

$

0.21

Diluted

$

0.13

$

0.16

$

0.24

$

0.21

Weighted average basic shares outstanding

 

38,046

 

38,245

 

38,881

 

38,286

Weighted average diluted shares outstanding

 

38,865

 

39,043

 

39,729

 

39,142

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 Nine Months Ended September 30, 

    

2022

    

2021

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

9,596

$

8,209

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

  

Depreciation

1,590

1,689

Amortization

 

695

 

Non-cash reserve charges

65

(83)

Stock-based compensation

 

1,702

 

1,042

Non-cash lease expense

 

720

 

905

Provision (benefit) for deferred income taxes

(772)

190

Change in operating assets and liabilities:

 

 

Accounts receivable

 

282

 

(10,397)

Prepaid and other assets

 

(446)

 

276

Accounts payable and other accrued expenses

 

364

 

(284)

Inventory

 

(4,801)

 

(1,898)

Deposits

 

(6)

 

(238)

Net cash provided by (used in) operating activities

 

8,989

 

(589)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchase of property and equipment

(332)

(420)

Net cash used in investing activities

 

(332)

 

(420)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Payments on finance lease obligations

 

(87)

 

(73)

Cash dividends paid

 

(3,613)

 

Purchase of treasury stock

 

(19,811)

 

(2,667)

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

27

127

Principal payments on long-term debt

(4,000)

Taxes withheld and paid on employees’ equity awards

(253)

(183)

Net cash used in financing activities

 

(27,737)

 

(2,796)

Net decrease in cash

 

(19,080)

 

(3,805)

Cash at beginning of period

 

42,612

 

39,173

Cash at end of period

$

23,532

$

35,368

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

(317)

$

(72)

Cash paid for rent

$

(2,592)

$

(1,510)

Cash paid for income taxes

(5,028)

(1,019)

Supplemental disclosure of non-cash investing and financing activities:

 

 

Right-of-use assets obtained in exchange for new operating lease liabilities

$

211

$

13,240

Right-of-use assets obtained in exchange for new finance lease liabilities

$

$

175

Inventory transferred to property and equipment as demo devices

$

$

125

Inventory transferred to property and equipment under lease

$

1,191

$

1,254

Capital expenditures not yet paid

$

56

$

56

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, 2020

38,244,310

$

36

$

37,235

$

(3,846)

$

23,430

$

56,855

Exercised and vested stock-based awards

63,546

 

1

 

29

 

 

 

30

Stock-based compensation expense

 

 

108

 

 

 

108

Warrants exercised

9,733

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

(4,135)

(59)

(59)

Purchase of treasury stock

(5,000)

(75)

(75)

Net loss

 

 

 

 

(706)

 

(706)

Balance at March 31, 2021

38,308,454

$

37

$

37,313

$

(3,921)

$

22,724

$

56,153

Exercised and vested stock-based awards, net of tax

93,709

 

$

59

$

$

59

Stock-based compensation expense

 

 

401

 

 

401

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

(35,097)

(76)

(76)

Purchase of treasury stock

(135,179)

(2,045)

(2,045)

Net income

2,808

2,808

Balance at June 30, 2021

38,231,887

$

37

$

37,697

$

(5,966)

$

25,532

$

57,300

Exercised and vested stock-based awards, net of tax

49,682

$

38

$

$

38

Stock-based compensation expense

533

533

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

(3,671)

(48)

(48)

Purchase of treasury stock

(35,000)

(547)

(547)

Net income

6,107

6,107

Balance at September 30, 2021

38,242,898

$

37

$

38,220

$

(6,513)

$

31,639

$

63,383

Additional

Total

Common Stock

Paid-in

Treasury

Retained

Stockholders’

    

    Shares

    

Amount

    

Capital

    

Stock

    

Earnings

    

Equity

Balance at December 31, 2021

39,737,890

$

41

$

80,397

$

(6,513)

$

$

73,925

Exercised and vested stock-based awards

38,355

3

3

Stock-based compensation expense

 

 

589

 

 

 

589

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

(10,873)

(76)

(76)

Stock dividend adjustments

11,444

Net income

 

 

 

 

1,377

 

1,377

Balance at March 31, 2022

39,776,816

$

41

80,913

$

(6,513)

$

1,377

$

75,818

Exercised and vested stock-based awards

178,727

1

11

12

Stock-based compensation expense

535

535

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

(47,603)

(47)

(47)

Purchase of treasury stock

(1,504,374)

(2)

(10,653)

(10,655)

Net income

 

 

 

 

3,346

 

3,346

Balance at June 30, 2022

38,403,566

$

40

$

81,412

$

(17,166)

$

4,723

$

69,009

Exercised and vested stock-based awards

68,060

13

13

Stock-based compensation expense

578

578

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

(16,681)

(130)

(130)

Purchase of treasury stock

(987,451)

(1)

(9,155)

(9,156)

Net income

4,873

4,873

Balance at September 30, 2022

37,467,494

$

39

$

81,873

$

(26,321)

$

9,596

$

65,187

6

Table of Contents

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE (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 September 30, 2022, 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 nine months ended September 30, 2022 and 2021, the Company generated all of its revenue in North America from sales and supplies of its devices to patients and healthcare providers.

The Company’s Board of Directors declared a cash dividend of $0.10 per share and a stock dividend of 10% per share on November 9, 2021. The cash dividend of $3.6 million was paid out on January 21, 2022 to stockholders of record as of January 6, 2022. The 10% stock dividend declaration resulted in the issuance of an additional 3.6 million shares on January 21, 2022 to stockholders of record as of January 6, 2022. Except as otherwise indicated, all related amounts reported in the condensed consolidated financial statements, including common share quantities, earnings per share amounts and exercise prices of options, have been retroactively adjusted for the effect of this stock dividend.

7

Table of Contents

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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, 2021. Amounts as of December 31, 2021, 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, 2021.

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, 2022 and the results of its operations and its cash flows for the periods presented. The results of operations for the nine months ended September 30, 2022 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.

NOTE (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 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 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, and valuation of long-lived assets and realizability of deferred tax assets.

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. Substantially all of the Company’s receivables are due from patients with commercial or government health plans and workers 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.

8

Table of Contents

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 the market price of the asset; (ii) significant adverse changes in the business climate or legal or regulatory factors; (iii) or, 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 in the future. The Company utilized 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.

9

Table of Contents

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table provides a breakdown of disaggregated net revenues for the three and nine months ended September 30, 2022, and 2021 related to devices accounted for as purchases subject to Accounting Standards Codification (“ASC”) 606 – “Revenue from Contracts with Customers” (“ASC 606") and leases subject to ASC 842 (in thousands):

For the Three Months Ended September 30, 

For the Nine Months Ended September 30, 

    

2022

    

2021

    

2022

    

2021

Device revenue

 

  

 

  

  

 

  

Purchased

$

2,900

$

2,076

$

7,357

$

6,734

Leased

 

8,449

 

6,995

 

20,222

 

16,530

Total device revenue

$

11,349

$

9,071

$

27,579

$

23,264

Supplies revenue

30,171

25,715

81,783

66,671

Total revenue

$

41,520

$

34,786

$

109,362

$

89,935

Revenues are estimated using the portfolio approach by third-party payer type based upon historical rates of collection, aging of receivables, trends in historical reimbursement rates by third-party payer types, and current relationships and experience with the third-party payers, which includes estimated constraints for third-party payer refund requests, deductions and adjustments. Inherent in these estimates is the risk that they will have to be revised as additional information becomes available and constraints are released. Specifically, the complexity of third-party payer billing arrangements and the uncertainty of reimbursement amounts for certain products from third-party payers or unanticipated requirements to refund payments previously received may result in adjustments to amounts originally recorded. 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 received. Historically these differences have been immaterial, and the Company has not had a significant reversal of revenue from prior periods.

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 12- Leases.

10

Table of Contents

ZYNEX, INC.

NOTES TO UNAUDITED 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, Leases. 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.

11

Table of Contents

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

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. We are in the process of evaluating the provisions of the IRA, but we do not currently believe the IRA will have a material impact on our reported results, cash flows or financial position when it becomes effective.

Recent Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2020-06 effective as of January 1, 2022. The adoption of ASU 2020-06 did not have an impact on the Company’s condensed consolidated financial statements.

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual periods beginning after December 15, 2022, and interim periods therein for smaller reporting companies. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company adopted this standard during the quarter ended September 30, 2022. The primary instrument that needed to be evaluated was the Company’s trade receivables and the impact was not material.

NOTE (3)   INVENTORY

The components of inventory as of September 30, 2022, and December 31, 2021 are as follows (in thousands):

    

September 30, 2022

    

December 31, 2021

Raw materials

$

3,709

$

4,471

Work-in-process

 

487

 

345

Finished goods

 

8,919

 

4,468

Inventory in transit

1,403

1,624

$

14,518

$

10,908

Less: reserve

 

(152)

 

(152)

$

14,366

$

10,756

12

Table of Contents

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE (4)   PROPERTY AND EQUIPMENT

The components of property and equipment as of September 30, 2022, and December 31, 2021 are as follows (in thousands):

    

September 30, 2022

    

December 31, 2021

Property and equipment

  

 

  

Office furniture and equipment

$

2,657

$

2,391

Assembly equipment

 

103

 

100

Vehicles

 

203

 

203

Leasehold improvements

 

1,173

 

1,054

Leased devices

 

1,117

 

1,080

5,253

4,828

Less accumulated depreciation

 

(3,054)

 

(2,642)

$

2,199

$

2,186

Total depreciation expense related to our property and equipment was $0.1 million and $0.2 million for the three months ended September 30, 2022 and 2021, respectively. Depreciation expense for the nine month periods ended September 30, 2022 and 2021 was $0.5 million and $0.7 million, respectively.

Total depreciation expense related to devices out on lease was $0.3 million and $0.4 million for the three months ended September 30, 2022 and 2021, respectively. Depreciation expense related to devices out on lease was $1.0 million and $1.0 million for the nine months ended September 30, 2022 and 2021, respectively. Depreciation on leased units is reflected in the condensed consolidated statements of operations as cost of revenue.

The Company monitors devices out on lease for potential loss and places an estimated reserve on the net book value based on an analysis of the number of units which are still with patients for which the Company cannot determine the current status.

13

Table of Contents

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE (5)   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 1,334,350 shares of the Company’s common stock (the “Zynex Shares”). All of the Zynex Shares are subject to a lockup 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. 889,566 of the Zynex Shares are being held in escrow (the “Escrow Shares”). The number of Escrow Shares is 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. Half of the Escrow Shares will 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 will be released upon determination by the FDA that the Device can be marketed and sold in the United States. The amount of Escrow Shares were recalculated at September 30, 2022 and are included in the calculation of diluted earnings per share. The maximum amount of Zynex Shares that may be released are limited to 19.9% of the total number of common shares and total voting power of common shares of the Company (see Note 13 for more information regarding this liability).

The acquisition of Kestrel has been accounted for as a business combination under 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.

NOTE (6)   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 5).

For the nine months ended September 30, 2022, there was no change in the carrying amount of goodwill, 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 September 30, 2022.

Weighted-

 

Average

 

Gross

 

Remaining

 

Carrying

 

Accumulated

 

Net Carrying

 

Life (in

    

Amount

    

Amortization

    

Amount

    

years)

Acquired patents at December 31, 2021

$

10,000

$

(25)

$

9,975

11.00

Amortization expense

(679)

(679)

Acquired patents at September 30, 2022

$

10,000

$

(704)

$

9,296

 

10.23

The following table summarizes the estimated future amortization expense to be recognized over the remainder of 2022, next five fiscal years, and periods thereafter:

    

(In thousands)

October 1, 2022 through December 31, 2022

$

229

2023

 

908

2024

 

911

2025

 

908

2026

 

908

2027

908

Thereafter

 

4,524

Total future amortization expense

$

9,296

14

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ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE (7)   EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding and the number of dilutive potential common share equivalents during the period, calculated using the treasury-stock method for outstanding stock options. 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.

The calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2022 and 2021 are as follows (in thousands, except per share data):

For the Three Months Ended September 30, 

For the Nine Months Ended September 30, 

    

2022

    

2021

    

2022

    

2021

Basic earnings per share

 

  

 

  

 

  

 

  

Net income available to common stockholders

$

4,873

$

6,107

9,596

8,209

Basic weighted-average shares outstanding

 

38,046

 

38,245

 

38,881

 

38,286

Basic earnings per share

$

0.13

$

0.16

0.25

0.21

Diluted earnings per share

 

  

 

  

 

  

 

  

Net income available to common stockholders

$

4,873

$

6,107

9,596

8,209

Weighted-average shares outstanding

 

38,046

 

38,245

 

38,881

 

38,286

Effect of dilutive securities - options and restricted stock

 

819

 

798

 

848

 

856

Diluted weighted-average shares outstanding

 

38,865

 

39,043

 

39,729

 

39,142

Diluted earnings per share

$

0.13

$

0.16

0.24

0.21

For both the three and nine months ended September 30, 2022, options to purchase 6,000 and 22,000 shares of common stock were excluded from the dilutive stock calculation, respectively, because their effect would have been anti-dilutive.

For both the three and nine months ended September 30, 2021, options to purchase 268,000 and 176,000 shares of common stock were excluded from the dilutive stock calculation, respectively, because their effect would have been anti-dilutive.

NOTE (8)   NOTES PAYABLE

The Company entered into a loan agreement (the “Loan Agreement”) with Bank of America, N.A. (the “Bank”) in December 2021. Under this Loan Agreement, the Bank extended two facilities to the Company. Specified assets have been pledged as collateral. One facility is a line of credit in the amount of $4.0 million available until December 1, 2024 (“Facility 1”). The Company will pay interest on Facility 1 on the first day of each month beginning January 1, 2022. The interest rate is an annual rate equal to the sum of (i) the greater of the BSBY Daily Floating Rate or (ii) the Index Floor (as defined in the Loan Agreement), plus 2.00%. As of September 30, 2022, the Company had not utilized this facility.

The other facility being extended by the Bank to the Company is a fixed rate term loan in the amount of up to $16.0 million (“Facility 2”). Facility 2 was entered into and funded in conjunction with the purchase of Kestrel Labs. The interest rate is equal to 2.8% per year. The Company must pay interest on the first day of each month which began January 1, 2022 and the Company also repays the principal amount in equal installments of $444,444 per month through December 1, 2024.

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Table of Contents

ZYNEX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes future principal payments on long-term debt as of September 30, 2022:

    

September 30, 2022

 

(In thousands)

October 1, 2022 through December 31, 2022

$

1,333

2023

 

5,333

2024

 

5,334

Future principal payments

 

12,000