Workflow
Zynex(ZYXI) - 2019 Q4 - Annual Report

PART I Item 1. Business Zynex Medical, Inc. (ZMI) designs, manufactures, and markets medical devices for pain management and rehabilitation - Zynex, Inc. was founded in 1996 by Thomas Sandgaard and conducts most operations through its primary subsidiary, Zynex Medical, Inc. (ZMI)1718 - Over 99% of consolidated revenue in 2019 and 2018 was attributable to ZMI, which focuses on medical devices for chronic and acute pain treatment and muscle rehabilitation using electrical stimulation (IFC, TENS, NMES)1920 - Zynex Monitoring Solutions (ZMS) is developing a non-invasive blood volume monitor, which is currently undergoing FDA approval and CE Marking, and has not generated revenue to date2426 History - Zynex, Inc. was founded in 1996 and operates through six subsidiaries, with Zynex Medical, Inc. (ZMI) being the primary operating entity as of December 31, 20191718 Active Subsidiaries - Zynex Medical, Inc. (ZMI) designs, manufactures, and markets medical devices like NexWave®, NeuroMove, and InWave for pain management, stroke/SCI rehabilitation, and urinary incontinence, respectively. These products require a physician's prescription and are marketed in the U.S. following FDA regulations202122 - Zynex Monitoring Solutions (ZMS) is developing the CM-1500 blood volume monitor for non-invasive cardiac monitoring, currently awaiting FDA 510(k) clearance in the U.S. and CE Marking in Europe. ZMS generated no revenue in 2019 or 2018242526 - Zynex International (ZEU) was formed in 2012 for international expansion but did not produce significant revenue in 2019 or 201828 Products Product Name | Description | Product Name | Description | | :--- | :--- | | Zynex Medical Products | | | NexWave | Dual Channel, multi-modality IFC, TENS, NMES Device | | NeuroMove | Electromyography (EMG) triggered Electrical Stimulation Device | | InWave | Electrical stimulation for treatment of female urinary incontinence | | TENSWave | Dual Channel TENS Device | | Private Labeled Supplies | | | Electrodes | Supplies, re-usable for delivery of electrical current to the body | | Batteries | Supplies, for use in electrotherapy products | | Distributed Complementary Products | | | Comfortrac/Saunders | Cervical traction | | JetStream | Hot/Cold therapy | | LSO Back Braces | Lumbar support | | Zynex Monitoring Solutions Products | | | CM-1500 | Blood Volume Monitor | Product Uses - Electrotherapy devices like NexWave® (FDA 510(k) cleared) are used for pain management, offering benefits such as pain relief, increased blood flow, and reduced edema, without the negative side effects of medications3032 - The NeuroMove product, a Class II medical device cleared by the FDA, is designed for stroke and spinal cord injury (SCI) rehabilitation, utilizing neuroplasticity to help patients regain movement and functionality. Sales of NeuroMove have not generated material revenue in 2019 or 2018343536 Our Markets - Zynex Medical primarily competes in the domestic home electrotherapy market for pain management, estimated at approximately $500 million annually. The company sees an opportunity to grow due to the opioid epidemic, offering non-pharmacological alternatives37 - Zynex Monitoring Solutions (ZMS) is developing products for the non-invasive multi-parameter patient-monitoring market, specifically its blood volume monitor, but has not yet identified competitors for this product39 Sales and Growth Strategies - ZMI accounts for substantially all revenue and profit. The company is expanding its sales force, aiming for 400 field sales representatives across the U.S., up from 176 as of December 31, 20194041 - To increase revenue and diversify, Zynex is adding new products like hot/cold therapy, cervical traction, and LSO back braces to its ZMI sales channel and pursuing opportunities with the CM-1500 blood volume monitor42 Manufacturing and Product Assembly - Zynex utilizes contract manufacturers (primarily in the U.S.) for components and performs in-house manufacturing/assembly for NexWave and NeuroMove units. The company does not have long-term supply agreements but uses purchase orders44 - The manufacturing strategy includes compliance with regulations, use of contract manufacturers for flexibility, in-house final assembly and testing, and proprietary software/hardware development53 Distribution and Revenue Streams - Most revenue is generated through the ZMI subsidiary from electrotherapy products, sold via a direct sales force in the United States4546 - A significant portion of revenue comes from private health insurance carriers, government payers (Medicare/Medicaid), and worker's compensation claims, with remaining revenue from attorneys, hospitals, clinics, and private-pay individuals47 - A large part of revenue is recurring, primarily from the sale of consumable supplies like surface electrodes and batteries to existing patients48 Intellectual Property - Zynex holds a U.S. utility patent for its Blood Volume Monitor (obtained in 2018) and a European utility patent (January 2020). The company also uses non-disclosure and trade secret agreements to protect proprietary information5052 Regulatory Approval and Process - All ZMI products are Class II (Medium Risk) devices regulated by the FDA, requiring 510(k) market clearance. NexWave, NeuroMove, and InWave have received FDA 510(k) clearance54 - Zynex has received CE Marking for several products, a requirement for sale in the EU, and is in the process of renewing/obtaining CE Marking for its CM-1500 Blood Volume Monitor56 - The company holds ISO13485:2016 certification for quality management systems, crucial for international expansion58 Competition - Zynex competes in the medical electrotherapy market against manufacturers like RS Medical, EMSI, and H-Wave, as well as alternative medical therapies from pharmaceutical companies61 Research and Development Research and Development Expenses (in millions) | Year | Expense (millions) | | :--- | :--- | | 2019 | $0.6 | | 2018 | $0.2 | - Research and development expenditures are expected to be limited throughout 202062 Employees - As of December 31, 2019, Zynex employed 283 full-time employees, including 134 direct sales representatives, and engaged 42 independent commission-only sales contractors65 Item 1A. Risk Factors Zynex faces various risks including significant volatility in operating results, dependence on insurance reimbursement policies, and estimating revenue accurately - The company's operating results have shown significant volatility, despite recent improvements, with no assurance of continued revenue and profit increases66 - Past operating losses led to a 'going concern' opinion from auditors, and future liquidity challenges could arise from swings in operating results6770 - The company is highly dependent on reimbursement from insurance companies and government health care programs; changes in policies or delays in payment can significantly impact revenue and cash flow7174 - Significant estimating risks are associated with revenue, refund liabilities, accounts receivable, and provider discounts due to complex billing and changing reimbursement practices, which could impact financial results or lead to restatements75 RISKS RELATED TO OUR BUSINESS - The company's operating results have shown significant volatility, despite recent improvements, with no assurance of continued revenue and profit increases66 - Past operating losses led to a 'going concern' opinion from auditors, and future liquidity challenges could arise from swings in operating results6770 - Dependence on physician prescriptions means that factors preventing institutional customer acceptance, such as cost concerns or adverse patient events, could lead to decreased revenues8283 RISKS RELATING TO OUR COMMON STOCK - Sales of significant amounts of shares by CEO Thomas Sandgaard (beneficial owner of ~50%) could adversely affect the common stock's market price and discourage potential acquirers112103 - As a 'controlled company' under NASDAQ rules, Zynex is exempt from certain corporate governance requirements, which might make its common stock less attractive to some investors113 - Future equity capital raises could dilute existing shareholders, and cash used for dividends (like the $0.07 per share paid in January 2019) reduces funds available for other corporate purposes115116 Operating Results Volatility (in millions) | Year | Revenues | Profit (Loss) | | :--- | :--- | :--- | | 2015 | $11.6 | $(2.9) | | 2016 | $13.3 | $0.07 | | 2017 | $23.4 | $7.4 | | 2018 | $31.9 | $9.6 | | 2019 | $45.5 | $9.5 | Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report Item 2. Properties Zynex leases its corporate headquarters in Englewood, Colorado, which expanded to approximately 108,227 square feet through amendments in March 2019 and January 2020 - Zynex's corporate headquarters in Englewood, Colorado, expanded to approximately 108,227 square feet through lease amendments in March 2019 and January 2020120 - The current lease for the corporate offices runs through June 30, 2023, with an option for a two-year extension until June 2025120 Item 3. Legal Proceedings Zynex is not currently a party to any material pending legal proceedings - The company is not involved in any material pending legal proceedings121 Item 4. Mine Safety Disclosures This item is not applicable to Zynex, Inc PART II Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Zynex's common stock began trading on The Nasdaq Capital Market under the symbol "ZYXI" on February 12, 2019 - Zynex common stock began trading on The Nasdaq Capital Market under the symbol "ZYXI" on February 12, 2019, previously quoted on OTCQB124 - As of February 27, 2020, there were 32,811,832 shares of common stock outstanding and approximately 233 record holders7124 - A one-time special cash dividend of $0.07 per share was declared in Q4 2018 and paid in January 2019; future dividends are at the Board's discretion127 Item 6. Selected Financial Data This item is not required for Zynex, Inc Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Zynex operates primarily in the electrotherapy and pain management segment through ZMI, with ZMS and ZEU not generating material revenue - Zynex operates in one primary business segment: electrotherapy and pain management products, primarily through its active subsidiary ZMI130 - Zynex Monitoring Solutions (ZMS) is developing a blood volume monitoring device awaiting FDA approval and CE Marking, and has not generated revenue to date130 OVERVIEW - Zynex operates in one primary business segment: electrotherapy and pain management products, with ZMI as the only active subsidiary generating revenue as of December 31, 2019130 - ZMS is developing a blood volume monitoring device awaiting FDA approval and CE Marking, having generated no revenue to date130 HIGHLIGHTS Financial Highlights (in millions) | Metric | 2019 | 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net Revenue | $45.5 | $31.9 | +42% | | Net Income | $9.5 | $9.6 | -1% | | Operating Cash Flows | $6.3 | $9.4 | -33% | | Working Capital (Dec 31) | $17.4 | $7.3 | +138% | - The company paid cash dividends of $0.07 per share in 2019, which were declared in 2018133 RESULTS OF OPERATIONS Consolidated Statements of Operations (in thousands) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | NET REVENUE | | | | | Devices | $10,713 | $6,822 | $3,891 | | Supplies | $34,759 | $25,095 | $9,664 | | Total net revenue | $45,472 | $31,917 | $13,555 | | COSTS OF REVENUE AND OPERATING EXPENSES | | | | | Costs of revenue – devices and supplies | $8,814 | $6,038 | $2,776 | | Sales and marketing | $14,016 | $6,503 | $7,513 | | General and administrative | $11,576 | $9,006 | $2,570 | | Total costs of revenue and operating expenses | $34,406 | $21,547 | $12,859 | | Income from operations | $11,066 | $10,370 | $696 | | Other income/(expense) | $875 | $(154) | $1,029 | | Income from operations before income taxes | $11,941 | $10,216 | $1,725 | | Income tax expense | $2,449 | $664 | $1,785 | | Net income | $9,492 | $9,552 | $(60) | | Net income per share (Basic) | $0.29 | $0.29 | $0 | | Net income per share (Diluted) | $0.28 | $0.28 | $0 | Consolidated Statements of Operations (as % of total revenue) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | NET REVENUE | | | | Devices | 24% | 21% | | Supplies | 76% | 79% | | Total net revenue | 100% | 100% | | COSTS OF REVENUE AND OPERATING EXPENSES | | | | Costs of revenue – devices and supplies | 19% | 19% | | Sales and marketing | 31% | 20% | | General and administrative | 25% | 28% | | Total costs of revenue and operating expenses | 75% | 67% | | Income from operations | 24% | 32% | | Other income | 2% | -% | | Income from operations before income taxes | 26% | 32% | | Income tax expense | 5% | 2% | | Net Income | 21% | 30% | Net Revenue - Net revenue increased by $13.6 million (42%) to $45.5 million in 2019 from $31.9 million in 2018, primarily due to an 83% growth in device orders and increased consumable supply sales142 - Revenue is reported net of estimated third-party payer reimbursement deductions and allowances for uncollectible amounts, which are subject to ongoing adjustments and disputes common in the industry139140141 Device Revenue - Device revenue increased by $3.9 million (57%) to $10.7 million in 2019 from $6.8 million in 2018, driven by an 83% growth in device and complimentary product orders due to an increased sales force143 Supplies Revenue - Supplies revenue increased by $9.7 million (39%) to $34.8 million in 2019 from $25.1 million in 2018, primarily due to growth in the customer base from higher device sales and improved billing procedures144 Operating Expenses - Costs of revenue increased by $2.8 million (46%) to $8.8 million in 2019, remaining at 19% of revenue for both 2019 and 2018145 - Sales and marketing expense increased by 116% to $14.0 million in 2019, rising to 31% of revenue (from 20% in 2018) due to a 148% increase in the sales force146 - General and administrative expense increased by 29% to $11.6 million in 2019, but decreased as a percentage of revenue to 25% (from 28% in 2018) as net revenue growth outpaced G&A cost increases147 Other Income (Expense) - Other income was $0.9 million in 2019, related to a deferred insurance reimbursement from 2016, which was recognized as income after management determined the refund obligation was remote148149 - Other expense was $0.2 million in 2018, primarily due to debt discount amortization and interest expense related to a private placement that was paid off early150 Income Tax Expense - Income tax expense increased to $2.4 million in 2019 (20% effective rate) from $0.7 million in 2018 (7% effective rate), primarily due to increased profitability and the release of the valuation allowance against net operating losses in 2018152 FINANCIAL CONDITION - The increase in working capital is primarily due to the company's increase in orders and profit during 2019153 Working Capital (in millions) | Metric | December 31, 2019 | December 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Working Capital | $17.4 | $7.3 | +$10.1 | LIQUIDITY AND CAPITAL RESOURCES - The decrease in operating cash flows in 2019 was primarily due to increased income taxes paid, higher accounts receivable from revenue growth, and increased inventory to support order volumes157 - The company believes its cash, cash equivalents, and anticipated cash flow from operations will be sufficient to meet working capital and capital expenditure requirements for at least the next twelve months160 Liquidity and Cash Flows (in millions) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Cash and Cash Equivalents (Dec 31) | $14.0 | $10.1 | +$3.9 | | Accounts Receivable (Dec 31) | $5.8 | $2.8 | +$3.0 | | Net Cash from Operating Activities | $6.3 | $9.4 | -$3.1 | | Net Cash Used in Investing Activities | $0.2 | $1.1 | -$0.9 | | Net Cash Used in Financing Activities | $2.2 | $3.8 | -$1.6 | Contractual Obligations Future Cash Disbursements (in thousands) | Obligation | Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases | $4,988 | $1,344 | $1,408 | $1,473 | $763 | - | - | | Finance leases | $226 | $57 | $45 | $45 | $45 | $34 | - | | Total | $5,214 | $1,401 | $1,453 | $1,518 | $808 | $34 | - | Off – Balance Sheet Arrangements - As of December 31, 2019, and 2018, Zynex had no off-balance sheet arrangements or obligations165 CRITICAL ACCOUNTING POLICIES - Key estimates include allowances for billing adjustments and uncollectible accounts, inventory reserves, leased device life, stock-based compensation, and valuation of long-lived assets and deferred tax assets239 Revenue Recognition and Accounts Receivable - Revenue from device sales (purchased or leased) and supplies is recognized upon delivery to the patient. Leased device revenue is recognized monthly as leases are month-to-month170171172249 - Revenues are estimated using a portfolio approach based on historical collection rates, aging of receivables, and trends in third-party payer reimbursement, with inherent risks of revision due to industry changes173253 Device Revenue Breakdown (in thousands) | Type | 2019 | 2018 | | :--- | :--- | :--- | | Purchased | $4,035 | $1,950 | | Leased | $6,678 | $4,872 | | Total Device Revenue | $10,713 | $6,822 | Stock-based Compensation - Stock-based compensation cost is recognized over the employee's service period based on the grant date fair value of equity instruments, with performance-based awards recognized when achievement is probable176 Income Taxes - Significant judgment is required for income tax provisions, including assessing the recoverability of deferred tax assets and establishing valuation allowances based on future taxable income projections and historical results177 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Zynex is exposed to market risks, including changes in interest rates and inflation - The company is exposed to market risks, specifically changes to interest rates and inflation179 Item 8. Financial Statements and Supplementary Data The consolidated financial statements, notes, and auditor's report are filed as part of this report, starting on page F-1 - Consolidated financial statements, related notes, and the report from Plante & Moran PLLC are included starting on page F-1180 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures There are no changes in or disagreements with accountants to report Item 9A. Controls and Procedures Management, with CEO and CFO participation, evaluated the effectiveness of disclosure controls and procedures as of December 31, 2019, concluding they were effective - Disclosure controls and procedures were evaluated and deemed effective as of December 31, 2019, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely182183 - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the 2013 COSO framework185186 Evaluation of disclosure controls and procedures. - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2019, providing reasonable assurance for timely and accurate financial reporting183 Management's report on internal control over financial reporting. - Management, with CEO and CFO participation, evaluated and concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework185186 Changes in Internal Control over Financial Reporting - There were no material changes in internal control over financial reporting during the quarter ended December 31, 2019188 Item 9B. Other Information There is no other information to report under this item PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance will be included in the Proxy Statement, to be filed within 120 days after fiscal year-end - Information for this item will be incorporated by reference from the Proxy Statement, to be filed within 120 days after December 31, 2019191 Item 11. Executive Compensation Information regarding executive compensation will be included in the Proxy Statement, to be filed within 120 days after fiscal year-end - Information for this item will be incorporated by reference from the Proxy Statement, to be filed within 120 days after December 31, 2019192 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on equity compensation plans, including outstanding options, warrants, and shares available for future issuance - The 2005 Stock Option Plan was terminated as of December 31, 2014, but options previously granted remain active. The 2017 Stock Option Plan was approved by shareholders on June 1, 2017195 Equity Compensation Plan Information (as of December 31, 2019, in thousands) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | | :--- | :--- | :--- | :--- | | 2005 Stock Option Plan | 696 | $0.41 | — | | Equity Compensation Plans not approved by Shareholders | 72 | $0.31 | — | | Warrants | 100 | $2.63 | | | 2017 Stock Option Plan | 1,189 | $3.62 | 3,672 | | Total | 2,057 | $2.37 | 3,672 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence will be included in the Proxy Statement - Information for this item will be incorporated by reference from the Proxy Statement196 - Zynex is a 'controlled company' under NASDAQ rules due to CEO Thomas Sandgaard's approximate 50% beneficial ownership, which exempts it from certain director independence requirements197 - Despite being a controlled company, the Audit Committee directors (Messrs. Cress, Disbrow, and Michaels) are all considered 'independent directors' under NASDAQ Listing Rules197 Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services will be included in the Proxy Statement, to be filed within 120 days after fiscal year-end - Information for this item will be incorporated by reference from the Proxy Statement, to be filed within 120 days after December 31, 2019198 PART IV Item 15. Exhibits, Financial Statement Schedules This section lists the consolidated financial statements, including the Independent Registered Public Accounting Firm's Report, Balance Sheets, Statements of Comprehensive Income, Cash Flows, Stockholders' Equity, and Notes to Consolidated Financial Statements - The consolidated financial statements, including the Report of Independent Registered Public Accounting Firm, Balance Sheets, Statements of Comprehensive Income, Cash Flows, Stockholders' Equity, and Notes, are filed starting on page F-1200 - A detailed list of exhibits, including organizational documents, employment agreements, lease agreements, and certifications, is provided200201202203 SIGNATURES Signatures The report is duly signed on February 27, 2020, by Thomas Sandgaard (Chairman, President, CEO, and Principal Executive Officer), Daniel Moorhead (CFO and Principal Financial Officer), and Directors Barry D. Michaels, Michael Cress, and Joshua R. Disbrow - The report was signed on February 27, 2020, by key executives and directors, including Thomas Sandgaard (CEO) and Daniel Moorhead (CFO)207208 Report of Independent Registered Public Accounting Firm Opinion on the Financial Statements and Internal Control over Financial Reporting Plante & Moran PLLC, the independent registered public accounting firm, issued an unqualified opinion on Zynex's consolidated financial statements as of December 31, 2019 and 2018, and on the effectiveness of its internal control over financial reporting as of December 31, 2019, based on the COSO framework - Plante & Moran PLLC provided an unqualified opinion that Zynex's financial statements for 2019 and 2018 present fairly, in all material respects, the financial position, results of operations, and cash flows213 - The firm also opined that Zynex maintained effective internal control over financial reporting as of December 31, 2019, based on the COSO framework213 - Plante & Moran, PLLC has served as the Company's auditor since 2016219 ZYNEX, INC. CONSOLIDATED BALANCE SHEETS Consolidated Balance Sheets as of December 31, 2019 and 2018 Zynex's consolidated balance sheets show significant growth in total assets and stockholders' equity from 2018 to 2019 Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2019 | Dec 31, 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Cash | $14,040 | $10,128 | +38.6% | | Accounts receivable | $5,833 | $2,791 | +109.0% | | Inventory, net | $2,378 | $837 | +184.1% | | Total current assets | $22,566 | $14,324 | +57.5% | | Total assets | $28,277 | $19,251 | +46.9% | | Total current liabilities | $5,197 | $6,983 | -25.6% | | Total liabilities | $8,624 | $9,960 | -13.4% | | Total stockholders' equity | $19,653 | $9,291 | +111.5% | ZYNEX, INC. CONSOLIDATED STATEMENTS OF INCOME Consolidated Statements of Comprehensive Income for the years ended December 31, 2019 and 2018 Zynex reported a 42.5% increase in total net revenue to $45.5 million in 2019, driven by strong growth in both device (57.0%) and supplies (38.5%) sales Consolidated Statements of Income (in thousands) | Metric | 2019 | 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Devices Revenue | $10,713 | $6,822 | +57.0% | | Supplies Revenue | $34,759 | $25,095 | +38.5% | | Total Net Revenue | $45,472 | $31,917 | +42.5% | | Costs of revenue - devices and supplies | $8,814 | $6,038 | +46.0% | | Sales and marketing | $14,016 | $6,503 | +115.5% | | General and administrative | $11,576 | $9,006 | +28.5% | | Total costs of revenue and operating expenses | $34,406 | $21,547 | +59.7% | | Income from operations | $11,066 | $10,370 | +6.7% | | Other income/(expense), net | $875 | $(154) | N/A | | Income from operations before income taxes | $11,941 | $10,216 | +16.9% | | Income tax expense | $2,449 | $664 | +268.8% | | Net Income | $9,492 | $9,552 | -0.6% | | Basic EPS | $0.29 | $0.29 | 0% | | Diluted EPS | $0.28 | $0.28 | 0% | ZYNEX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018 Zynex's net cash provided by operating activities decreased by 33% to $6.3 million in 2019, primarily due to higher income taxes paid, increased accounts receivable, and inventory growth - The decrease in operating cash flows in 2019 was primarily driven by increased income taxes paid, higher accounts receivable due to revenue growth, and increased inventory157227 - Cash used in financing activities in 2019 was mainly due to a $2.3 million dividend payment, compared to a share buyback program and debt payments in 2018159227 Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 2019 | 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $6,303 | $9,408 | -33.0% | | Net cash used in investing activities | $(160) | $(1,082) | +85.2% | | Net cash used in financing activities | $(2,231) | $(3,763) | +40.7% | | Net increase in cash and cash equivalents | $3,912 | $4,563 | -14.2% | | Cash and cash equivalents at end of period | $14,040 | $10,128 | +38.6% | ZYNEX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Consolidated Statements of Stockholders' Equity for the years ended December 31, 2019 and 2018 Zynex's total stockholders' equity significantly increased by 111.5% from $9.3 million in 2018 to $19.7 million in 2019 - Net income of $9.492 million in 2019 significantly contributed to the increase in retained earnings228 - Additional paid-in capital increased due to exercised and vested stock-based awards ($221k) and stock-based compensation expense ($820k) in 2019228 Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Dec 31, 2019 | Dec 31, 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Common Stock (Amount) | $34 | $34 | 0% | | Additional Paid-in Capital | $9,198 | $8,157 | +12.8% | | Treasury Stock | $(3,846) | $(3,675) | -4.7% | | Retained Earnings | $14,356 | $4,864 | +195.1% | | Total Stockholders' Equity | $19,653 | $9,291 | +111.5% | ZYNEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION, NATURE OF BUSINESS AND MANAGEMENT'S PLANS Zynex, Inc. is headquartered in Englewood, Colorado, and primarily operates through its Zynex Medical, Inc. (ZMI) subsidiary, focusing on electrotherapy and pain management medical devices - Zynex, Inc. operates in one primary business segment, medical devices for electrotherapy and pain management, with Zynex Medical, Inc. (ZMI) as its only active subsidiary generating substantial revenue231 - Zynex Monitoring Solutions (ZMS) is developing a blood volume monitoring device, awaiting FDA approval and CE Marking, and has not generated revenue to date231 - The company's medical devices, such as NexWave, are designed for home use, require a physician's prescription, and are marketed in the U.S. under FDA regulations233 (2) SIGNIFICANT ACCOUNTING POLICIES This section details Zynex's significant accounting policies, including principles of consolidation, non-controlling interest, reclassifications, and the use of estimates in financial reporting - Financial statements are prepared in conformity with U.S. GAAP, requiring management to make significant estimates for items like billing adjustments, inventory reserves, and deferred tax assets238239 - Revenue from device sales (purchased or leased) and supplies is recognized upon delivery to the patient, with leased device revenue recognized monthly due to month-to-month arrangements249251 - The company adopted ASU 2016-02, Leases (Topic 842), as of January 1, 2019, resulting in the recording of approximately $3.6 million in net lease assets and $3.9 million in lease liabilities as of January 1, 2018264266 Organization - Zynex, Inc. is a Nevada corporation headquartered in Englewood, Colorado, operating primarily through its Zynex Medical, Inc. (ZMI) subsidiary231 Nature of Business - The company designs, manufactures, and markets medical devices for chronic/acute pain treatment and muscle rehabilitation using electrical stimulation, with over 99.99% of revenue from North America in 2019 and 2018233234 Principles of Consolidation - The consolidated financial statements include Zynex, Inc. and its subsidiaries, with all intercompany balances and transactions eliminated235 Non-controlling Interest - Non-controlling interest represents the 20% ownership in the inactive subsidiary, Zynex Billing and Consulting, LLC (ZBC), and is reported as a decrease in shareholders' equity236 Reclassifications - Selling and marketing costs were reclassified from general and administrative costs in 2019, with 2018 figures adjusted for comparability, having no effect on net earnings, retained earnings, or cash flows237 Use of Estimates - Preparation of financial statements requires management to make significant estimates, particularly for billing adjustments, uncollectible accounts, inventory reserves, and deferred tax assets238239 Fair Value of Financial Instruments - The carrying amounts of cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short-term nature240 Cash and Cash Equivalents - Highly liquid investments with a maturity of three months or less when purchased are considered cash equivalents241 Inventory - Inventories are stated at the lower of cost and net realizable value, with cost computed using standard costs approximating actual average costs. Reserves are provided for estimated excess and obsolete inventories242243 Inventory Components (in thousands) | Component | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Raw Materials | $953 | $454 | | Work-in-process | $200 | $55 | | Finished Goods | $1,640 | $576 | | Total | $2,793 | $1,085 | | Less: reserve | $(415) | $(248) | | Net Inventory | $2,378 | $837 | Property and Equipment - Property and equipment are recorded at cost and depreciated on a straight-line basis over estimated useful lives, ranging from 9 months for leased devices to 7 years for assembly equipment244 Leases - The company recognizes finance and operating lease right-of-use assets and liabilities at commencement, using implicit rates for finance leases and incremental borrowing rates for operating leases246 - Device leases are accounted for as operating leases under ASC 842, with revenue recognized monthly, as the company retains title and leases are month-to-month247248 Revenue Recognition, Accounts Receivable, Allowance for Billing Adjustments and Collectability - Revenue from devices and supplies is recognized when control is transferred to the patient, typically upon delivery. The company does not have material deferred revenue249251 - Revenues and receivables from commercial/government health plans are estimated using a portfolio approach based on historical collection rates and trends, with adjustments for estimated third-party payer deductions and refund requests253 Stock-based Compensation - Stock-based compensation cost is recognized over the employee's service period based on the grant date fair value of equity instruments, with performance-based awards recognized when achievement is probable256 Earnings Per Share - Basic EPS is calculated on the weighted-average common shares outstanding, while diluted EPS includes the effect of potential dilutive common shares using the treasury stock method257 Advertising Advertising Expense (in millions) | Year | Expense | | :--- | :--- | | 2019 | $0.3 | | 2018 | $0.1 | Research and Development - Research and development costs are expensed when incurred and include salaries and raw materials, reported within general and administrative expenses259 Research and Development Expense (in millions) | Year | Expense | | :--- | :--- | | 2019 | $0.6 | | 2018 | $0.2 | Income Taxes - Deferred tax assets and liabilities are recorded for temporary differences, with a valuation allowance established if recovery is not likely. The company finalized its analysis of the U.S. Tax Cuts and Jobs Act of 2017 with no material adjustments260261 Recently Adopted Accounting Pronouncements - The company adopted ASU 2018-07 (Stock Compensation) and ASU 2018-02 (Income Statement—Reporting Comprehensive Income) in 2019, neither of which had a material impact on consolidated financial statements262263 - Adoption of ASU 2016-02 (Leases) on January 1, 2019, using the modified retrospective approach, resulted in recording approximately $3.6 million in net lease assets and $3.9 million in lease liabilities as of January 1, 2018, with an immaterial impact on the statement of operations and no impact on cash flows264266 Recently Issued Accounting Pronouncements - The company is currently evaluating the impact of ASU 2016-13 (Credit Losses) and ASU 2019-12 (Income Taxes), which are effective for annual periods beginning after December 15, 2022, and December 15, 2020, respectively267268 (3) PROPERTY AND EQUIPMENT Zynex's net property and equipment increased by 4.8% to $858 thousand in 2019 - Total depreciation expense for purchased property and equipment was $0.3 million in 2019 and $0.2 million in 2018271 - Depreciation expense for devices out on lease was $0.5 million in 2019 and $0.3 million in 2018, reflected as cost of revenue272 Property and Equipment (in thousands) | Component | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Office furniture and equipment | $1,178 | $1,172 | | Assembly equipment | $128 | $128 | | Vehicles | $181 | $184 | | Leasehold improvements | $500 | $480 | | Leased devices | $934 | $317 | | Total | $2,921 | $2,281 | | Less accumulated depreciation | $(2,063) | $(1,462) | | Net Property and Equipment | $858 | $819 | (4) EARNINGS PER SHARE Basic and diluted earnings per share remained stable at $0.29 and $0.28, respectively, for both 2019 and 2018 - Approximately 0.3 million and 0.4 million shares of common stock were excluded from the dilutive stock calculation in 2019 and 2018, respectively, due to their anti-dilutive effect275 Earnings Per Share (in thousands, except per share amounts) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net income available to common stockholders | $9,492 | $9,552 | | Basic weighted-average shares outstanding | 32,439 | 32,503 | | Basic earnings per share | $0.29 | $0.29 | | Diluted weighted-average shares outstanding | 33,963 | 34,043 | | Diluted earnings per share | $0.28 | $0.28 | (5) STOCK-BASED COMPENSATION PLANS Zynex's stock-based compensation plans include the 2017 Stock Incentive Plan and the expired 2005 Stock Option Plan - The 2017 Stock Incentive Plan authorizes grants of stock options and restricted stock, with 1.2 million stock options and 0.1 million unvested restricted stock awards outstanding, and 3.7 million shares available for future grants as of December 31, 2019276 - As of December 31, 2019, there was approximately $3.5 million of total unrecognized compensation costs related to unvested stock options and restricted stock, expected to be recognized over a weighted average period of 2.9 years284 Stock-Based Compensation Expenses (in thousands) | Expense Category | 2019 | 2018 | | :--- | :--- | :--- | | Costs of revenue - devices and supplies | $21 | $33 | | Sales and marketing | $205 | $127 | | General, and administrative | $594 | $210 | | Total stock based compensation expense | $820 | $370 | (6) STOCKHOLDERS' EQUITY Zynex paid a one-time cash dividend of $0.07 per share ($2.3 million total) in January 2019 - A cash dividend of $0.07 per share, totaling $2.3 million, was paid on January 18, 2019286 - The company completed two stock repurchase programs: $2.0 million for 495,091 shares by March 2018, and $1.8 million for 576,129 shares by May 2019. No outstanding repurchase programs as of December 31, 2019287288 - As of December 31, 2019, 100 thousand common stock warrants were outstanding with a weighted average exercise price of $2.63290 Stock Warrant Activity (in thousands) | Metric | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Outstanding Warrants | 100 | 150 | | Weighted Average Exercise Price | $2.63 | $2.42 | | Weighted Average Remaining Contractual Life (Years) | 4.77 | 5.77 | | Aggregate Intrinsic Value | $525 | $79 | (7) INCOME TAXES Zynex's pre-tax income from continuing operations was $11.9 million in 2019, leading to an income tax expense of $2.4 million (20% effective rate), significantly higher than $0.7 million (7% effective rate) in 2018 - The increase in income tax expense and effective rate in 2019 was due to increased profitability and the release of the valuation allowance against all remaining net operating losses in 2018152294 - For federal tax purposes, the company fully utilized its $2.7 million in NOL carryforwards by December 31, 2018, and had no recorded valuation allowance as of December 31, 2019293294 Income Tax Expense (in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Pre-tax income from continuing operations | $11,941 | $10,216 | | Total Income Tax Expense | $2,449 | $664 | | Effective Tax Rate | 20% | 7% | (8) DEFERRED INSURANCE REIMBURSEMENT In 2019, Zynex recognized $880 thousand as other income from a deferred insurance reimbursement liability established in 2016 - In Q1 2019, Zynex recognized $880 thousand as other income, reversing a deferred insurance liability from 2016298 - The liability was established after an insurance company verbally requested a refund for a payment made in error; management later determined the repayment obligation was remote based on legal statutes297298 (9) LEASES Zynex has three operating leases for its corporate headquarters in Englewood, CO, with terms extending through June 2023 (with extension options) and a new amendment in January 2020 for additional space - Zynex has three operating leases for its Englewood, CO corporate headquarters, with terms through June 30, 2023, and an option to extend. An amendment in January 2020 added 22,546 square feet299300 - The company also has a 5-year finance lease for office equipment, with an implicit rate of 8.3%. The incremental borrowing rate for operating leases is 4.8%301 Lease Costs (in thousands) | Lease Type | 2019 | 2018 | | :--- | :--- | :--- | | Total Operating Lease expense | $1,150 | $926 | | Total Finance Lease expense | $24 | $12 | (10) COMMITMENTS AND CONTINGENCIES Zynex's primary commitments are under long-term leases - The company's primary commitments are related to its long-term leases303 - Zynex is not a party to any material pending legal proceedings304 (11) CONCENTRATIONS Zynex is exposed to credit risk related to cash balances held at major financial institutions - Zynex maintains cash at major financial institutions and believes it is not exposed to significant credit risk related to its cash balances306 - The company sourced approximately 49% of its electrotherapy product supplies from one major vendor in both 2019 and 2018307 - Receivables from two third-party payers accounted for approximately 39% of the accounts receivable balance at December 31, 2019, compared to one third-party payer making up 23% in 2018308 (12) RETIREMENT PLAN Zynex established a 401(k) Plan in 2012 for eligible employees, offering a discretionary employer match of 35% on the first 6% of employee contributions - Zynex established a 401(k) Plan in 2012, available to employees 18 years or older with three months of service, with a discretionary employer match of 35% on the first 6% of employee contributions309 Retirement Plan Expense (in millions) | Year | Expense | | :--- | :--- | | 2019 | $0.1 | | 2018 | $0.1 | (13) RELATED PARTY TRANSACTIONS A three-year employment agreement with Mr. Joachim Sandgaard, son of CEO Thomas Sandgaard, totaling $0.1 million, concluded at the end of 2018, with no further payments made in 2019 - A $0.1 million employment agreement with Mr. Joachim Sandgaard, son of CEO Thomas Sandgaard, concluded at the end of 2018, with no payments in 2019311 (14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Zynex's quarterly total revenue showed consistent growth throughout 2019, increasing from $9.2 million in Q1 to $14.2 million in Q