July 28, 2020, 5:30 p.m. EDT

10-Q: ZYNEX INC

(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Notice Regarding Forward-Looking Statements

This quarterly report contains statements that are forward-looking, such as statements relating to plans for future organic growth and other business development activities, as well as the impact of reimbursement trends, other capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks include the ability to engage effective sales representatives, the need to obtain U.S. Food and Drug Administration ("FDA") clearance and Certificate European ("CE") marking of new products, the acceptance of new products as well as existing products by doctors and hospitals, our dependence on the reimbursement from third-party payors for products sold or leased to our patients, acceptance of our products by health third-party payors for reimbursement, larger competitors with greater financial resources, the need to keep pace with technological changes, our dependence on third-party manufacturers to produce key components of our products on time and to our specifications, implementation of our sales strategy including a strong direct sales force, the impact of COVID-19 on our business, and other risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2019.

These interim financial statements and the information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the annual audited consolidated financial statements, and notes to consolidated financial statements, included in the Company's 2019 Annual Report on Form 10-K and subsequently filed reports, which have previously been filed with the Securities and Exchange Commission.

General

Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado. We operate one primary business segment: medical devices which include electrotherapy and pain management products. As of June 30, 2020, the Company's only active subsidiary is Zynex Medical, Inc. ("ZMI," a wholly-owned Colorado corporation) through which the Company conducts most of its operations. One other subsidiary, Zynex Europe, ApS ("ZEU," a wholly-owned Denmark corporation), did not generate material revenues during the three or six months ended June 30, 2020 and 2019 from international sales and marketing. Zynex Monitoring Solutions, Inc. ("ZMS," a wholly-owned Colorado corporation) has developed a blood volume monitoring device, which was approved by the U.S. Food and Drug Administration ("FDA") in February 2020 and is awaiting CE Marking approval in Europe. ZMS has achieved no revenues to date.

RESULTS OF OPERATIONS

Summary

Net revenue was $19.3 million and $10.3 million for the three months ended June 30, 2020 and 2019, respectively, and $34.5 million and $19.5 million for the six months ended June 30, 2020 and 2019, respectively. Net revenue increased 87% and 77% for the three and six-month periods ended June 30, 2020, respectively. Net income was $3.0 million for the three months ended June 30, 2020 compared with $2.2 million during the same period in 2019. Net income was $6.0 million for the six months ended June 30, 2020 compared with $4.5 million during the same period in 2019. We generated cash flows from operating activities of $3.3 million during the six months ended June 30, 2020. Working capital at June 30, 2020 was $23.8 million, an increase of 37% from $17.4 million as of December 31, 2019.

Net Revenue

Net revenues are comprised of device and supply sales, constrained by estimated third-party payor reimbursement deductions and estimated uncollectible amounts. Device revenue is primarily comprised of sales and rentals of our electrotherapy products and also includes our cervical traction, lumbar support and hot/cold therapy products.

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Supplies revenue is primarily comprised of sales of our consumable supplies to patients using our electrotherapy products, consisting primarily of surface electrodes and batteries.

Revenue related to both devices and supplies is reported net, after adjustments for estimated third-party payor reimbursement deductions and estimated uncollectible amounts. Estimates for third-party payor reimbursement deductions and uncollectible accounts are adjusted on an ongoing basis in conjunction with the processing of third-party payor insurance claims and other customer collection history. Billing allowance adjustments are common in our industry whereby third-party payors unilaterally reduce the amount they reimburse for our products as compared to the sales price charged by us. These deductions from gross revenue take into account the estimated denials, net of resubmitted billings of claims for products placed with patients which may affect collectability. See our Significant Accounting Policies in Note 1 to the Consolidated Financial Statements for a more complete explanation of our revenue recognition policies.

We occasionally receive, and expect to continue to receive, refund requests from insurance providers relating to specific patients and dates of service. Billing and reimbursement disputes are very common in our industry. These requests are sometimes related to a few patients and other times include a significant number of refund claims in a single request. We review and evaluate these requests and determine if any refund is appropriate. We also review claims that have been resubmitted or where we are pursuing additional reimbursement from that insurance provider. We frequently have significant offsets against such refund requests which may result in amounts that are due to us in excess of the amounts of refunds requested by the insurance providers. Therefore, at the time of receipt of such refund requests we are generally unable to determine if a refund request is valid.

Net revenue increased $9.0 million or 87% to $19.3 million for the three months ended June 30, 2020, from $10.3 million for the same period in 2019. Net revenue increased $15.0 million or 77% to $34.5 million for the six months ended June 30, 2020, from $19.5 million for the same period in 2019. For both the three and six-month periods ended June 30, 2020, the growth in net revenue from the same periods in 2019 is primarily related to a 37% and 76% growth in device orders, respectively, which led to an increased customer base and drove higher sales of consumable supplies.

Device Revenue

Device revenue is related to the sale or lease of our electrotherapy and complimentary products. Device revenue increased $2.0 million or 87% to $4.3 million for the three months ended June 30, 2020, from $2.3 million for the same period in 2019.

Device revenue increased $3.5 million or 81% to $7.7 million for the six months ended June 30, 2020, from $4.3 million for the same period in 2019.

The increase in device revenue is primarily related to growth in orders which is attributable our sales force expansion.

Supplies Revenue

Supplies revenue is related to the sale of supplies, primarily electrodes and batteries, for our electrotherapy products. Supplies revenue increased $7.0 million or 87% to $15.0 million for the three months ended June 30, 2020, from $8.0 million for the same period in 2019.

Supplies revenue increased $11.6 million or 76% to $26.8 million for the six months ended June 30, 2020, from $15.2 million for the same period in 2019.

The increase in supplies revenue is primarily related to an increased customer base from increased device sales in 2019 and 2020, plus improvements in our billing and collection procedures.

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Operating Expenses

Cost of Revenue - Device and Supply

Cost of Revenue - device and supply consist primarily of device and supply costs, operations labor and overhead, shipping and depreciation. Cost of revenue for the three months ended June 30, 2020 increased 108% to $4.1 million from $1.9 million for the same period in 2019. As a percentage of revenue, cost of revenue - device and supply increased to 21% for the three months ended June 30, 2020 from 19% for the same period in 2019. The increase in cost of revenue is primarily due to an increase in overhead and freight costs, as well as an increase of 37% in device orders from the three months ended June 30, 2019.

Cost of revenue for the six months ended June 30, 2020 increased 100% to $7.5 million from $3.7 million for the same period in 2019. As a percentage of revenue, cost of revenue - device and supply increased to 22% for the six months ended June 30, 2020 from 19% for the same period in 2019. The increase in cost of revenue is primarily due to an increase in overhead and freight costs, as well as an increase of 76% in device orders from the six months ended June 30, 2019.

Sales and Marketing Expense

Sales and marketing expenses primarily consist of employee related costs, including commissions and other direct costs associated with these personnel including travel expenses and marketing campaign and related expenses.

Sales and marketing expense for the three months ended June 30, 2020 increased 106% to $6.3 million from $3.1 million for the same period in 2019. Sales and marketing expense for the six months ended June 30, 2020 increased 108% to $11.5 million from $5.6 million for the same period in 2019.

The increase in sales and marketing expense for both the three and six months ended June 30, 2020 is primarily due to the expansion of our sales force including adding 185 net additional sales representatives over the past 12 months, of which 135 were added during the six months ended June 30, 2020. As a percentage of revenue, sales and marketing expense increased to 33% for both the three and six months ended June 30, 2020, respectively, from 30% and 28% for the same periods in 2019. The increase as a percentage of revenue is primarily due to the increase in costs associated with the increase in headcount as well as expenses for marketing materials that aid in distance selling during clinic shutdowns related to COVID-19, partially offset by the increase in revenue during the period.

General and Administrative Expense

General and administrative expenses primarily consist of employee-related costs, and other direct costs associated with these personnel including facilities and travel expenses and professional fees, depreciation and amortization. General and administrative expense for the three months ended June 30, 2020 increased 78% to $4.8 million from $2.7 million for the same period in 2019. The increase in general and administrative expense for the three months is primarily due to increased occupancy expense as a result of corporate office expansion and increased compensation and benefit expense related to headcount growth. As a percentage of revenue, general and administrative expense decreased to 25% for the three months ended June 30, 2020 from 26% for the same period in 2019. The decrease as a percentage of revenue is primarily due to the increase in revenue during the period, partially offset by costs associated with increased headcount from the prior year.

General and administrative expense for the six months ended June 30, 2020 increased 67% to $8.9 million from $5.4 million for the same period in 2019. The increase in general and administrative expense for the six months is primarily due to increased compensation and benefit expense related to headcount growth. As a percentage of revenue, general and administrative expense decreased to 26% for the three and six months ended June 30, 2020 from 28% for the same period in 2019. The decrease as a percentage of revenue is primarily due to the increase in revenue during the period, partially offset by the aforementioned expenses.

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Income Taxes

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 26% and 9% for the three and six months ended June 30, 2020, respectively. Discrete items, primarily related to excess tax benefits related to stock option exercises, of $0.1 million and $1.2 million for the three and six months ended June 30, 2020, respectively, are recognized as a benefit against income tax expense. For the three and six months ended June 30, 2020 the Company has an income tax expense of approximately $1.1 million and $0.6 million, respectively. The Company recorded income tax expense of $0.4 million and $1.2 million for the three and six months ended June 30, 2019.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed operations through cash flows from operations, debt and equity transactions. At June 30, 2020, our principal source of liquidity was $16.9 million in cash and $7.3 million in accounts receivables. Our anticipated uses of cash in the future will be to fund the expansion of our business.

Net cash provided by operating activities for the six months ended June 30, 2020 and 2019 was $3.3 million and $2.4 million, respectively. The increase in cash provided by operating activities for the six months ended June 30, 2020 was primarily due to an increase in our net income.

Net cash used in investing activities for the six months ended June 30, 2020 and 2019 was $0.7 million and $0.1 million, respectively. Cash used in investing activities for the six months ended June 30, 2020 was primarily related to the purchase of office equipment, IT infrastructure, and leasehold improvements related to our expansion into the second floor at our corporate headquarters. Cash used in investing activities for the six months ended June 30, 2019 was primarily related to leasehold improvements at our new corporate headquarters.

Net cash provided by financing activities for the six-months ended June 30, 2020 was $0.2 million, compared with net cash used in financing activities of $2.3 million for the same period in 2019. Net cash provided by financing activities for the six months ended June 30, 2020 was primarily due to proceeds from employee stock option purchases.Net cash used in financing activities for the six months ended June 30, 2019 was primarily due to the payment of a dividend of $2.3 million to stockholders of record on January 2, 2019 and re-purchases of our common stock of $0.2 million, which was partially offset by cash received upon the exercise of stock options of $0.1 million.

We believe our cash and cash equivalents, together with anticipated cash flow from operations will be sufficient to meet our working capital, and capital expenditure requirements for at least the next twelve months. In making this assessment, we considered the following:

? Our cash and cash equivalents balance at June 30, 2020 of $16.9 million;

? Our working capital balance of $23.8 million;

? Our profitability during the last 16 quarters; and

? Our projected income and cash flows for the next 12 months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

Please refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operation" and Note 2 to the Consolidated Financial Statements located within our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on February 27, 2020.

OFF BALANCE SHEET ARRANGEMENTS

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The Company had no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

RISKS AND UNCERTAINTIES

In December 2019, a novel Coronavirus disease ("COVID-19") was reported and on March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. During the second quarter, the Company's operations were impacted by closures of clinics and reductions in elective surgeries which decreased availability of physicians to prescribe our products. Additionally, the Company had to navigate the impacts it had on employee and supply chain issues. While the Company did not see a significant impact on its operating results or financial position during the six months ended June 30, 2020 from COVID-19, it is unable at this time to predict the impact that COVID-19 will have on its business, financial position and operating results in future periods due to numerous uncertainties. The Company has been and continues to closely monitor the impact of the pandemic on all aspects of its business. See also the risk factor relating to COVID-19 disclosed in Item 1A of Part II, below.

SUBSEQUENT EVENT

On July 14, 2020, the Company announced commencement of an underwritten public offering of an aggregate of 2,500,000 shares of common stock at a public offering price of $22.00 per share. In the offering, 1,250,000 shares of common stock were sold by the Company and 1,250,000 shares of common stock were sold by a selling stockholder. The selling stockholder was Sandgaard Holdings, LLC., which is 100% controlled by Thomas Sandgaard, CEO and chairman of the board. In addition, the Company and the selling stockholder have each granted the underwriters a 30-day option to purchase up to an additional 187,500 shares of common stock, respectively, at the public offering price, less the underwriting discounts and commissions. The offering closed on July 17, 2020.

Jul 28, 2020

COMTEX_368558584/2041/2020-07-28T17:30:07

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