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).
x
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.
The aggregate market value of the common stock held by non-affiliates
of the Registrant as of June 30, 2018, the last business day of the Registrant’s last completed second quarter, based
upon the closing price of the common stock as reported by the OTCQB Stock Market on such date was approximately $47.4 million.
This computation is based on the number of issued and outstanding shares held by persons other than officers, directors and shareholders
of 10% or more of the registrant’s common stock
As of February 22, 2019, 33,309,244 shares of common stock are issued and 32,238,024 shares are outstanding.
This report includes statements of our expectations, intentions,
plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Nonetheless, it is important
for an investor to understand that these statements, involve risks and uncertainties. These statements relate to the discussion
of our business strategies and our expectations concerning future operations, margins, profitability, liquidity and capital resources
and to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable.
We have used words such as “may,” “will,” “should,” “expect,” “intend,”
“plan,” “anticipate,” “believe,” “think,” “estimate,” “seek,”
“expect,” “predict,” “could,” “project,” “potential” and other similar
terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking
statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties,
risks and factors relating to our operations and business environment, all of which are difficult to predict and many of which
are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by these
forward-looking statements.
Such risks and other factors also include those listed in Item 1A.
“Risk Factors and elsewhere in this report and our other filings with the Securities and Exchange Commission. When considering
these forward-looking statements, you should keep in mind the cautionary statements in this report and the documents incorporated
by reference. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us.
We assume no obligation to update any forward-looking statements after the date of this report as a result of new information,
future events or developments, except as required by applicable laws and regulations.
When used in this annual report, the terms the “Company,”
“Zynex”, “we,” “us,” “ours,” and similar terms refer to Zynex, Inc., a Nevada
corporation, and its subsidiaries, Zynex Medical, Inc., Zynex NeuroDiagnostics, Inc., Zynex Monitoring Solutions Inc., Zynex Europe
ApS, Zynex Billing and Consulting, LLC and Pharmazy, Inc. As of the date of this annual report, our only operating subsidiary
is Zynex Medical, Inc. (“ZMI”). Zynex Monitoring Solutions, Inc. (“ZMS”) has developed its
blood volume monitoring product as described below.
PART I
ITEM 1. BUSINESS
History
Zynex, Inc. was founded by Thomas Sandgaard in 1996, when he
founded two privately held companies that eventually were folded into Zynex, Inc. Zynex, Inc., a Nevada corporation
was formed in December 2001 and is the parent company of and conducts business within six subsidiaries: Zynex Medical, Inc. (“ZMI”),
a Colorado corporation, Zynex Neurodiagnostics, Inc. (“ZND”), a Colorado corporation, Zynex Monitoring Solutions, Inc.
(“ZMS”), a Colorado corporation, Zynex Billing and Consulting, LLC (“ZBC”), a Colorado limited liability
company, Zynex Europe (Zynex Europe ApS) (“ZEU”), a Danish corporation, and Pharmazy, Inc. (“Pharmazy”),
which was incorporated under the laws of Colorado in June 2015 as a wholly-owned subsidiary of ZMI (Zynex, Inc. collectively with
the foregoing subsidiaries may be referred to as “Zynex” or the “Company”).
As of December 31, 2018, the Company’s primary subsidiary
is ZMI through which the Company conducts most of its operations. One other subsidiary, ZEU, generated minimal revenues during
the years ended December 31, 2018 and 2017 from international sales and marketing. ZMS has developed a blood volume monitoring
device which is in the process of approval by the Food and Drug Administration (“FDA”) in the United States of America
and CE Marking in Europe. As a result, ZMS has achieved no revenues to date. Our inactive subsidiaries include ZND, ZBC, and Pharmazy.
The Company’s compounding pharmacy operated as a division of ZMI dba as Pharmazy through January 2016.
Over 99% of our consolidated revenue in 2017 and 2018 is attributable
to ZMI. Our headquarters are located in Englewood, Colorado.
Active Subsidiaries
Zynex Medical, Inc. (ZMI):
ZMI designs, manufactures
and markets medical devices designed to treat chronic and acute pain, as well as activate and exercise muscles for rehabilitative
purposes with electrical stimulation. ZMI devices are intended for pain management to reduce reliance on medications
and are designed to 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 our medical devices are intended to be patient friendly
and designed for home use. The ZMI devices are small, portable, battery operated and include an electrical pulse generator which
is connected to the body via electrodes. The products are cost effective when compared to traditional physical therapy, and often
result in better mobility, less pain and increased potential for a patient to return to work earlier than with traditional therapies
alone. All of our medical devices are marketed in the U.S. and follow FDA regulations and approval. Our products require
a physician’s prescription before they can be dispensed in the U.S. We consider the physician’s prescription as an
“order”, and it is on this basis that we provide the product to the patient and either bill the patient directly or
the patient’s private or government insurer for payment. ZMI’s primary product is the NexWave® device. The
NexWave is marketed to physicians and therapists by our 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.
ZMI also designs, manufactures and markets the NeuroMove product.
The NeuroMove contains electromyography and electric stimulation technology that is primarily used for stroke, spinal cord and
traumatic brain injury rehabilitation (“SCI”), by reaching parts of the brain to re-connect with muscles, also known
as neuroplasticity. The NeuroMove product is primarily marketed to medical clinics. Zynex did not have material sales
of this product in 2017 or 2018.
Zynex Monitoring Solutions (ZMS):
ZMS was formed in 2011 to develop and market medical devices for non-invasive cardiac monitoring. The blood
volume monitor is a non-invasive medical device for monitoring central blood volume that would be used in operating and recovery
rooms to detect blood loss during surgery and internal bleeding during recovery. This device has been subjected to multiple
clinical studies, which are being utilized for collecting data to further validate the algorithm used to determine changes in central
blood volume, and there are plans to conduct future, additional clinical studies. We have submitted a 510(k) application to the
FDA and are responding to their questions. There is no guarantee when or if the product will be cleared for marketing by the FDA.
Concurrent to our FDA application, we are pursuing European
Union (“EU”) Certificate European (“CE”) Marking. CE Marking is a certification that a product meets the
standards established by the 28 nations of the EU and qualifies for sale in the EU and 4-nation European Free Trade Association.
The blood volume monitor has been tested in several International Review Board (“IRB”) approved
studies and was used in several blood donation settings where hundreds of subjects have donated half a liter of blood with strong
correlation to the index on the device. We have built a number of commercial devices in pilot-production and continue to refine
the algorithms for the Blood Volume Index (BVI). In the fourth quarter of 2018 a U.S. utility patent was obtained for this unique
application, and we believe this product could serve a currently unmet need in the market for safer surgeries and safer
monitoring of patients during recovery. ZMS did not produce any revenue for the years ending December, 31, 2018 and 2017.
Zynex International (Zynex Europe) (ZEU):
ZEU was formed in 2012 to further progress Zynex’s international
expansion. ZEU is currently conducting business and focused on sales and marketing our products within the international marketplace,
upon receipt of necessary regulatory approvals. ZEU did not produce significant revenue for the years ended December 31, 2018
and 2017.
Products
We currently market and sell Zynex-manufactured products as well as distribute complimentary products and
private labeled supplies for Zynex products, as indicated below:
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
|
|
Cervical traction
|
|
|
|
JetStream
|
|
Hot/Cold therapy
|
|
|
|
LSO Back Braces
|
|
Lumbar support
|
|
|
|
Zynex Monitoring Solutions Products
|
|
|
|
|
|
Non-Invasive Blood Volume Monitor
|
|
Blood Volume Monitor
|
Product Uses
Pain Management and Control
Standard electrotherapy is a clinically proven and medically
accepted alternative to manage acute and chronic pain. Electrical stimulation has been shown to reduce most types of local
pain, such as tennis elbow, neck or lower back pain, arthritis, and others. The devices used to accomplish this are commonly described
as the TENS family of devices. Electrotherapy is not known to have any negative side effects, a significant advantage over
most pain relief medications. The benefits of electrotherapy can include: pain relief, increased blood flow, reduced edema, prevention
of venous thrombosis, increased range-of-motion, prevention of muscle disuse atrophy, and reduced urinary incontinence.
Electrotherapy introduces an electrical current applied through
surface electrodes. The electrical current “distorts” a pain signal on its way to the central nervous system and the
brain, thus reducing the pain. Additionally, by applying higher levels of electricity, muscles contract and such contraction is
believed to assist in the benefits mentioned above.
Numerous clinical studies have been published over several
decades showing the effectiveness of IFC and TENS for pain relief. Zynex’s primary TENS device, the NexWave has received
FDA 510(k) clearance. The NexWave is a digital IFC, TENS and NMES device that delivers pain-alleviating electrotherapy.
Stroke and Spinal Cord Injury Rehabilitation
Our proprietary NeuroMove product is a Class II medical device
that has been cleared by the FDA for stroke and SCI rehabilitation. Stroke and SCI usually affect a survivor’s mobility,
functionality, speech, and memory, and the NeuroMove is designed to help the survivor regain movement and functionality.
The NeuroMove product utilizes the relatively new science of
“neuroplasticity” the process by which healthy parts of the brain learn to compensate and assume functions previously
carried out by the damaged areas. To accomplish this task, the extraordinarily sensitive NeuroMove technology monitors muscle
activity and detects brain signals that indicate, even without any visible movement, the brain’s effort to move a specific
muscle or area of the body. Once the effort is detected, the NeuroMove induces actual movement through electrical stimulation,
thus providing effective feedback to initiate relearning in the healthy part of the brain.
We believe the NeuroMove product is unique because its built-in
microprocessor can recognize low-level attempts by muscles to contract and then “reward” such detection with electrical
stimulation. We do not believe there are similar products in the stroke rehabilitation market. Some generic devices are being
offered in international markets; however, we do not believe these products provide similar results with respect to stroke rehabilitation.
When conscientiously using the NeuroMove product for three to twelve months, studies show that the majority of NeuroMove patients
can re-establish the connection between the brain and impaired muscle and thus regain movement and functionality.
When movement and functionality are restored, the patient may experience increased mobility, increased productivity, an improved
outlook, and a reduced risk of accidents, and may be able to engage in activities they were precluded from before using the NeuroMove.
Sales of NeuroMove have not generated material revenue for years ended December 31, 2018 and 2017.
Our Markets
Zynex Medical (ZMI):
To date, the majority of our revenue has been generated by
our ZMI electrotherapy products. Thus, we primarily compete in the home electrotherapy market, with products based on IFC, TENS
and NMES devices and consumable supplies. We estimate the annual domestic market for home electrotherapy products at approximately
$500 million. Due to our recently improved financial performance and related cash flows, we are currently growing our sales force
to address what we believe is an unaddressed market in the electrotherapy market. The current opioid epidemic has been declared
a health emergency and we are uniquely positioned to help reduce the amount of opioids prescribed for treatment of chronic and
acute pain symptoms. We are committed to providing health care professionals with alternatives to traditional opioid based treatment
programs with our prescription-strength products which have no side-effects. This has never been more necessary than it is today
considering the staggering statistics.
|
·
|
Pain
impacts the lives of more Americans than diabetes, heart disease and cancer combined.
|
|
·
|
Pain is the leading cause of disability and seeking treatment for chronic or acute pain is the most common
reason American’s seek health care.
|
|
·
|
Approximately
100 million Americans suffer from chronic pain.
|
|
·
|
Nearly
20 million Americans experienced high-impact chronic pain, defined as "limiting life or work
activities on most days or every day in the past 6 months
."
|
|
·
|
If
pharmaceuticals such as opioids continue to be used as the first line of defense America
will continue to see a rise in opioid misuse, addiction and drug-related deaths.
|
We also distribute products such as JetStream Hot/Cold Therapy,
Aspen LSO Back bracing and Comfortrac cervical traction, all products targeted at treating acute as well as chronic pain with
minimal side-effects.
Key characteristics of our electrotherapy market are:
|
·
|
Collection cycles of initial payment from insurance carriers
can range from 30 days to many months and considerably longer for many attorney, personal
injury and worker’s compensation cases. Such delayed payment impacts our cash flow
and can slow our growth or strain our liquidity. Collections are also impacted by
whether effective billing submissions are made by our billing and collections department
to the insurance carriers and other payors.
|
|
·
|
Prior to payment, the third party payors often make or
take significant payment “adjustments or discounts.” This can also lead to
denials and billing disputes with third party payors.
|
|
·
|
The majority of our revenue is generated by the sale of
medical devices and from recurring patient supplies, specifically from our electrotherapy
products sold through ZMI. We are reliant on insurance and our payor reimbursement.
|
Zynex Monitoring Solutions (ZMS):
ZMS is focused on developing products within the non-invasive
multi-parameter patient-monitoring marketplace. ZMS is currently focusing on its blood volume monitor. We believe our product,
once released into the marketplace (of which there can be no guarantee), will compete against multiple competitors, ranging from
large manufacturers with multiple business lines to small manufacturers that offer a limited range of products. We have not yet
identified competitors for this product. ZMS has not generated any revenue as this product is still in the process of FDA approval
and CE Marking.
Sales and Growth Strategies
To date, ZMI accounts for substantially all of our revenue
and profit. We are currently focused on expanding our sales force to address what we believe is an untapped market for electrotherapy
products which has recently become more attractive due to large competitors exiting the market.
In an effort to increase revenue and diversification to become
less sensitive to reimbursement changes, we are continually adding new products to our ZMI sales channel, such as our hot/cold
therapy, cervical traction and LSO back braces, which may offset any impact on revenue due to changes in insurance reimbursement
rates of electrotherapy devices. We are also pursuing other opportunities, including the Blood Volume Monitor. We believe these
events and actions will serve to focus and increase our market share in the market place and, in the future, grow our core business
by providing our electrotherapy patients additional non-pharmacological pain relief and complementary products to our manufactured
devices. We also continue to modify and refine our geographic sales channels through experienced sales representatives, representing
a mix of Zynex employees, sales contractors and international distributors. As of December 31, 2018 we had approximately150 active
field sales representatives. An insignificant amount of our revenue is derived from international sales; however, we continue
to take steps to penetrate the global medical device marketplace.
Manufacturing and Product Assembly
Our manufacturing and product assembly strategy consists of
the following elements:
|
·
|
Compliance with relevant legal and regulatory requirements.
|
|
·
|
Use of contract manufacturers as needed, thereby allowing us to quickly respond to changes in volume and avoid
large capital investments for assembly and manufacturing equipment of certain product components. Domestically and internationally,
we believe there is a large pool of highly qualified contract manufacturers for the type of manufacturing assistance needed for
our manufactured devices.
|
|
·
|
Utilization of in-house final assembly and test capabilities.
|
|
·
|
Development of proprietary software and hardware for all
products in house.
|
|
·
|
Testing all units in a real-life, in-house environment
to help ensure the highest possible quality and patient safety while reducing the cost
of warranty repairs.
|
We utilize contract manufacturers (principally located in
the United States) to manufacture components for our NexWave and NeuroMove units and for some of our other products; and
manufacture / assemble in-house for our NexWave and NeuroMove units. We do not have long-term supply agreements with our
contract manufacturers, but we utilize purchase orders with agreed upon terms for our ongoing needs. We believe there are
numerous suppliers that can manufacture our products and provide our required raw materials. Generally, we have been able to
obtain adequate supplies of our required raw materials and components. We are always evaluating our suppliers for price,
quality, delivery time and service. The reduction or interruption in supply, and an inability to develop alternative sources
for such supply, could adversely affect our operations.
Distribution and Revenue Streams:
Currently, almost all of our revenue is generated through our ZMI subsidiary from our electrotherapy products.
We sell most of our medical devices through direct and independent sales representatives in the United States.
Our field sales representatives are engaged to sell in predefined geographic markets and are compensated based on fixed amounts
depending on the type of product sold and insurance carrier of the patient. Currently, the United States has been the market that
we have focused on; however, we have established international distributors in Canada, Australia, Russia, China, India, Singapore,
Holland, Germany, the United Arab Emirates (UAE), Malaysia, Saudi Arabia, Egypt and Vietnam. Typically, we sell and ship product
directly to our international distributors, who work directly with the ultimate patient or end-user. To date these international
distributors have not generated significant revenue.
A significant portion of our revenue is derived from patients with
insurance plans held by private health insurance carriers, typically known as HMO or PPO, who pay on behalf of their insureds and
worker’s compensation claims. The remaining portion of revenue is primarily received from attorneys representing injured
patients, hospitals, clinics and private-pay individuals.
A large part of our revenue is recurring. Recurring revenue
results primarily from the sale of surface electrodes and batteries sent to existing patients with our units. Electrodes and batteries
are consumable items that are considered an integral part of our products.
Private Labeled Distributed Products
In addition to our own products, we distribute, through our sales force, a number of private labeled supplies
and complimentary products from other domestic manufacturers. These products generally include patient consumables, such as electrodes
and batteries plus cervical traction, lumbar support and hot/cold therapy. Customarily, there are no formal contracts between vendors
in the durable medical equipment industry. Replacement products and components are easily found, either from our own products or
other manufacturers, and purchases are made by purchase order.
Intellectual Property
We believe that our products contain certain proprietary software.
During 2018, we received a US utility patent for our Blood
Volume Monitor. We currently have applied for a utility patent in Europe as well. In the future, we may seek patents for advances
to our existing products and for new products as they are developed.
Zynex is trademarked in the U.S.
We utilize non-disclosure and trade secret agreements with
employees and third parties to protect our proprietary information.
Regulatory Approval and Process
Federal Drug Association (FDA)
All our ZMI products are classified as Class II (Medium Risk)
devices by the FDA, and clinical studies with our products are considered to be NSR (Non-Significant Risk Studies). Our business
is regulated by the FDA, and all products typically require 510(k) market clearance before they can be put in commercial distribution.
Section 510(k) of the Federal Food, Drug and Cosmetics Act, is available in certain instances for Class II (Medium Risk)
products. It requires that before introducing most Class II devices into interstate commerce, the product must first submit information
to the FDA demonstrating that the device is substantially equivalent in terms of safety and effectiveness to a device legally
marketed prior to March 1976 or to devices that have been reclassified in accordance with the provisions of the Federal Food,
Drug, and Cosmetic Act that do not require approval of a premarket approval application. When the FDA determines that the device
is substantially equivalent, the agency issues a “clearance” letter that authorizes marketing of the product. We are
also regulated by the FDA’s “GMP” (Good Manufacturing Practice) and “QSR” (Quality Systems Regulation).
We believe that our products have obtained or are good candidates for the requisite FDA clearance or are exempt from the FDA clearance
process. In November 2001, Zynex received FDA 510(k) clearance to market NeuroMove. In September 2011, Zynex received FDA
510(k) clearance to market the NexWave, our current generation IFC, TENS and NMES device. In August 2012, Zynex received FDA 510(k)
clearance to market the InWave, our next generation muscle stimulator for treatment of female incontinence. Failure to comply
with FDA requirements could adversely affect us.
International
Zynex has received CE Marking for several of its products.
CE marking is the medical device manufacturer's claim that a product meets the essential requirements of all relevant
European Medical Device Directives. The CE mark is a legal requirement to place a device on the
market in the EU. Zynex is currently in the process of renewing the CE marking on several devices and obtaining initial CE marking
for its CM-1500 Blood Volume Monitor
The Far East, Middle East, Eastern Europe and Latin American
markets have different regulatory requirements. We comply with applicable regulatory requirements within the markets in which
we currently sell. If and when we decide to enter additional geographic areas, we intend to comply with applicable regulatory
requirements within those markets.
Zynex has received ISO13485: 2012 certification for its
compliance with international standards in quality management systems for design, development, manufacturing and distribution
of medical devices. This certification is not only important as an assurance that we have the appropriate quality systems in
place but is also crucial to our international expansion efforts as many countries require this certification as part of
their regulatory approval. The quality management system is audited on an annual basis and the current recertification is
pending final audit review.
Government Regulation
The delivery of health care services and products has become
one of the most highly regulated of professional and business endeavors in the United States. Both the federal government and
individual state governments are responsible for overseeing the activities of individuals and businesses engaged in the delivery
of health care services and products. Federal law and regulations are based primarily upon the Medicare and Medicaid programs.
Each program is financed, at least in part, with federal funds. State jurisdiction is based upon the state’s interest in
regulating the quality of health care in the state, regardless of the source of payment. Many state and local jurisdictions impose
additional legal and regulatory requirements on our business including various states and local licenses, taxes, limitations regarding
insurance claim submission and limitations on relationships with referral parties. Failure to comply with this myriad of regulations
in a particular jurisdiction may subject us to fines or other penalties, including the inability to sell our products in certain
jurisdictions.
Federal health care laws apply to us when we submit a claim
to any other federally funded health care program, in addition to requirements to meet government standards. The principal federal
laws that we must abide by in these situations include:
|
·
|
Those that prohibit the filing of false or improper claims
for federal payment.
|
|
·
|
Those that prohibit unlawful inducements for the referral
of business reimbursable under federally funded health care programs.
|
The federal government may impose criminal, civil and administrative
penalties on anyone who files a false claim for reimbursement from federally funded programs.
A federal law commonly known as the “anti-kickback law”
prohibits the knowing or willful solicitation, receipt, offer or payment of any remuneration made in return for:
|
·
|
The referral of patients covered under federally-funded
health care programs; or
|
|
·
|
The purchasing, leasing, ordering, or arranging for any
goods, facility, items or service reimbursable under those programs.
|
Competition
In the market for medical electrotherapy products we face a
mixture of competitors ranging from large manufacturers with multiple business lines to small manufacturers that offer a limited
selection of products. Our principal competitors include International Rehabilitative Sciences, Inc. d/b/a RS Medical, EMSI, and
H-Wave. In addition, we face competition from providers of alternative medical therapies, such as pharmaceutical companies.
Research and Development
During 2018 and 2017, we incurred approximately $0.2 million
and $0.1 million, respectively, of research and development expenses. We expect our research and development expenditures will
be limited throughout 2019.
Employees
As of December 31, 2018, we employed 182 full time employees
of which 63 are employed as direct sales representatives in the field. Additionally, we also engage approximately 100 independent
commission-only sales contractors.
ITEM 1A. RISK FACTORS
RISKS RELATED TO OUR BUSINESS
We’ve encountered significant volatility in our
recent operating results.
The Company’s results from operations have improved significantly
in recent years, but there has been significant volatility in our results over the past 5 years as reflected in the following table
(in millions):
Year
|
|
Revenues
|
|
|
Profit (Loss)
|
|
2014
|
|
$
|
11.1
|
|
|
$
|
(6.2
|
)
|
2015
|
|
$
|
11.6
|
|
|
$
|
(2.9
|
)
|
2016
|
|
$
|
13.3
|
|
|
$
|
0.07
|
|
2017
|
|
$
|
23.4
|
|
|
$
|
7.4
|
|
2018
|
|
$
|
31.9
|
|
|
$
|
9.6
|
|
Our financial results could continue to be volatile, and there
is no assurance we will continue our current increase in revenue and profits.
We’ve had lack of liquidity in recent periods which
led to a going concern opinion in prior years.
During 2013-2015, the Company suffered operating losses which
caused a lack of liquidity and a substantial working capital deficit. This raised substantial doubt about the Company’s
ability to continue as a going concern.
During 2016, the Company generated net income during Q3 and
Q4 and combined with the profitability in 2017 and 2018, the Company has recorded ten consecutive profitable quarters, paid off
its line of credit with Triumph Healthcare Finance, a division of TBK Bank, SSB, formerly known as Triumph Community Bank, (“Triumph”)
and generated cash reserves and positive working capital.
Our history of operating losses could make it difficult to
raise any new capital and may have an adverse impact on our relationship with third parties with whom we do business, including
our customers, vendors and employees.
We cannot be certain the Company won’t be impacted by
liquidity challenges in the future due to the volatile operating results mentioned above.
We are dependent on reimbursement from insurance companies;
changes in insurance reimbursement policies or application of them have resulted in decreased or delayed revenues.
A large percentage of our revenues come from insurance company
and government health care program reimbursement. Upon delivery of our products to our customers, we directly bill the customers’
private insurance companies or government payors for reimbursement. If the billed payors do not remit payment on a timely basis or
if they change their policies to exclude or reduce coverage for our products, we would experience a decline in our revenue as
well as cash flow. In addition, we may deliver products to customers based on past practices and billing experiences with
health insurance companies and have a health insurance company later deny coverage for such products.
In some cases our delivered product may not be covered pursuant
to a policy statement of a health insurance provider, despite a payment history of the insurance provider and benefits to the
patients. A health insurance provider may seek repayment of amounts previously paid for covered products. We maintain an allowance
for provider discounts for amounts intended to cover legitimate requests for repayment. Failure to adequately identify and provide
for amounts for resolution of repayment demands in our allowance for provider discounts could have a material adverse effect on
our results of operations and cash flows. For government health care programs, if we identify a deficiency in prior claims or
practices, we may be required to repay amounts previously reimbursed to us by government health care programs.
We frequently receive, and expect to continue to receive, refund
requests from insurance providers relating to specific patients and dates of service. Billing and reimbursement disputes are very
common in our industry. 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. During the
adjudication process we review claims where we are rebilling or pursuing additional reimbursement from that insurance provider.
We frequently have significant offsets against such refund requests which may result in amounts that are due to us in excess of
the amounts of refunds requested by the insurance providers. Therefore, at the time of receipt of such refund requests we are
generally unable to determine if a refund request is valid. Although we cannot predict whether or when a request for repayment
or our subsequent request for reimbursement will be resolved, it is not unusual for such matters to be unresolved for a long period
of time. No assurances can be given with respect to our estimates for our allowance for provider discounts for reimbursements
and offsets or the ultimate outcome of the refund requests.
During the first quarter of 2016, the Company collected $880,000
from a single insurance company for accounts receivable. The accounts receivable had been previously reduced to zero by the allowance
for billing adjustments. Subsequent to March 31, 2016, the insurance company verbally communicated to the Company that this payment
was made in error and requested it be refunded to the insurance company. The Company recorded this $880,000 insurance reimbursement
as a deferred insurance liability. However, the Company is disputing the refund request and has initiated an internal review of
the reimbursement to determine that the original sales arrangement was properly executed, the products had been delivered, the
price of the products and the reimbursement rate is determinable, and the Company’s ultimate claim to the reimbursement
is reasonably assured. The Company will record the appropriate amount as net revenue when such internal review is complete and
any refund obligation is deemed remote.
Future changes in coverage and reimbursement policies
for our products or reductions in reimbursement rates for our products by third party payors could adversely affect our business
and results of operations.
In the United States, our products are prescribed by physicians
for their patients. Based on the prescription, which we consider an order, we submit a claim for payment directly to third-party
payors such as private commercial insurance carriers, government payors and others as appropriate and the payor reimburses us
directly. Federal and state statutes, rules or other regulatory measures that restrict coverage of our products or reimbursement
rates could have an adverse effect on our ability to sell or rent our products or cause physical therapists and physicians to
dispense and prescribe alternative, lower-cost products.
There are significant estimating risks associated with
the amount of revenue, related refund liabilities, accounts receivable and provider discounts that we recognize, and if we are
unable to accurately estimate these amounts, it could impact the timing of our revenue recognition, have a significant impact
on our operating results or lead to a restatement of our financial results.
There are significant estimating risks associated with the
amount of revenues, related refund liabilities, accounts receivable and provider discounts that we recognize in a reporting period.
The billing and collection process is complex due to ongoing insurance coverage changes, geographic coverage differences, differing
interpretations of coverage, differing provider discount rates and other third party payor issues. Determining applicable primary
and secondary coverage for our customers at any point in time, together with the changes in patient coverage that occur each month,
requires complex, resource-intensive processes. Errors in determining the correct coordination of benefits may result in refunds
to payors. Revenues associated with government programs are also subject to estimating risk related to the amounts not paid by
the primary government payor that will ultimately be collectable from other government programs paying secondary coverage, the
patient’s commercial health plan secondary coverage or the patient. Collections, refunds and pay or retractions typically
continue to occur for up to three years and longer after our products are provided. While we typically look to our past experience
in collections with a payor in estimating ultimate amounts expected to be collected on current billings, nonetheless recent trends
and current changes in reimbursement practice, the overall healthcare environment, and other factors could ultimately impact the
amount of revenues recorded and the receivables ultimately collected. If our estimates of revenues, related refund liabilities,
accounts receivable or provider discounts are materially inaccurate, it could impact the timing of our revenue recognition and
have a significant impact on our operating results. It could also lead to a restatement of our financial results.
In
May 2014, the FASB issued ASU No. 2014-09—“Revenue from Contracts with Customers” (Topic 606) which amended
revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires
an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures
relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally,
qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments,
and assets recognized from the costs to obtain or fulfill a contract. The Company adopted the new ASU as of January
1, 2018 using the modified retrospective method and resulted in no material changes to previously issued financial statements
.
Tax laws and regulations require compliance efforts that
can increase our cost of doing business and changes to these laws and regulations could impact financial results.
We are subject to a variety of tax laws and regulations in
the jurisdictions in which we do business. Maintaining compliance with these laws can increase our cost of doing business and
failure to comply could result in audits or the imposition of fines or penalties. Further, our future effective tax rates in any
of these jurisdictions could be affected, positively or negatively, by changing tax priorities, changes in statutory rates, or
changes in tax laws or the interpretation thereof. The most significant recent example of this is the impact of the U.S Tax Cuts
and Jobs Act of 2017 (the “Tax Act”) which was enacted on December 22, 2017. These changes significantly revised
the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing
a territorial tax system, imposing a one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain
costs, among other things. The Company has implemented the U.S. Tax Act and does not expect any significant changes related to
the Tax Act at this time.
The Patient Protection and Accountability act of 2010
has had an impact on our business which may be in part beneficial and in part detrimental.
In March 2010, broad federal health care reform legislation
was enacted in the United States. This legislation did not become effective immediately in total, and may be modified prior to
the effective date of some provisions. This legislation has had an impact on our business in a variety of ways including increased
number of Medicaid recipients, increased number of individuals with commercial insurance, additional audits conducted by public
health insurance plans such as Medicaid and Medicare, changes to the rules that govern employer group health insurance and other
factors that influence the acquisition and use of health insurance from private and public payors. This legislation has resulted
in a change in reimbursement for certain durable medical equipment. We believe the new healthcare legislation and these changes
to reimbursement have caused uncertainty with prescribers, which we believe contributed to our drop in orders and revenue during
2013 and 2014 and the lack of any significant increase in 2015. Orders and revenue increased in2016, 2017 and 2018; however, we
are currently unable to determine whether such trend will continue in future periods or whether the health care reform legislation
will have other adverse consequences to our business and results of operations. To the extent prescribers write fewer prescriptions
for our products or there is an adverse change to insurance reimbursement for our products, due to the new law or otherwise, our
revenue and profitability will be materially adversely affected.
Effective 2013, there was a 2.3% excise tax on the first sale
of medical devices, with certain exceptions. We believe that a majority of our ZMI products are not subject to this tax but currently
we can make no assurance. For our products that are or become subject to this excise tax, we are uncertain of our ability to pass
this tax on to third parties. Thus far this excise tax has not had a material impact on our financial results.
The uncertainty of continuing healthcare changes and
regulations may place our business model in doubt.
There is substantial doubt on the continuation of the Affordable
Care Act and the legislation that the current Congress will enact to replace it, if any. There is also substantial doubt whether,
even if the Affordable Care Act remains the law of the land, the President will support it or take regulatory action to negatively
impact its benefits. This significant amount of uncertainty creates a significant concern on our customer’s willingness
to buy products which may, or may not, be covered by future health care benefits even if they are covered currently.
Hospitals and clinicians may not buy, prescribe or use
our products in sufficient numbers, which could result in decreased revenues and profits.
Hospitals and clinicians may not accept any of our products
as effective, reliable, or cost-effective. Factors that could prevent such institutional customer acceptance include:
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If customers conclude that the costs of these products
exceed the cost savings associated with the use of these products;
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If customers are financially unable to purchase these products;
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If adverse patient events occur with the use of these products,
generating adverse publicity;
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If we lack adequate resources to provide sufficient education
and training to our customers;
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If frequent product malfunctions occur, leading clinicians
to believe that the products are unreliable;
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Uncertainty regarding or change in government or third-party payor reimbursement policies for our products; and
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If physicians or other health care providers believe that
our products will not be reimbursed by insurers or decide to prescribe competing products.
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Because our sales are dependent on prescriptions from physicians,
if any of these or other factors results in fewer prescriptions for our products being written, we will have reduced revenues
and may not be able to fully fund operations. Although we experienced an increase in orders for our ZMI products during 2017 and
2018 compared to prior years, we can make no assurances that demand for our products will not decline in future periods.
Any new competitor could be larger than us and have greater
financial and other resources than we do, and those advantages could make it difficult for us to compete with them.
Many competitors to our products may have substantially greater financial, technical, marketing, and other
resources. Competition could result in our need to reduce prices, fewer orders, reduced gross margins, and loss of market share.
Our products are regulated by the FDA in the United States. Competitors may develop products that are substantially equivalent
to our FDA cleared products, thereby using our products as predicate devices to more quickly obtain FDA approval for their own
products. If overall demand for our products should decrease it could have a material adverse effect on our operating results. Substantial
competition is expected in the future in the area of stroke rehabilitation that may directly compete with our NeuroMove product. These
competitors may use standard or novel signal processing techniques to detect muscular movement and generate stimulation to such
muscles. Other companies may develop rehabilitation products that perform better and/or are less expensive than our products,
which could have a material adverse effect on our operating results.
Failure to keep pace with the latest technological changes
could result in decreased revenues.
The market for some of our products is characterized by rapid
change and technological improvements. Failure to respond in a timely and cost-effective way to these technological developments
could result in serious harm to our business and operating results. We have derived, and we expect to continue to derive, a substantial
portion of our revenues from the development and sale of products in the medical device industry. As a result, our success will
depend, in part, on our ability to develop and market product offerings that respond in a timely manner to the technological advances
of our competitors, evolving industry standards and changing patient preferences. There is no assurance that we will keep up with
technological improvements.
A third-party manufacturer’s inability to produce
our goods on time and to our specifications could result in lost revenue.
Third-party manufacturers assemble and manufacture components of the NexWave and NeuroMove and some of our
other products to our specifications. The inability of a manufacturer to ship orders of our products in a timely manner or to meet
our quality standards could cause us to miss the delivery date requirements of our customers for those items, which could result
in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse
effect on our revenues. Because of the timing and seriousness of our business, and the medical device industry in particular, the
dates on which customers need and require shipments of products from us are critical. Further, because quality is a leading factor
when customers, doctors, health insurance providers and distributors accept or reject goods, any decline in quality by our third-party
manufacturers could be detrimental not only to a particular order, but also to our future relationship with that particular customer.
If we need to replace manufacturers, our expenses could
increase resulting in smaller profit margins.
We compete with other companies for the production capacity
of our manufacturers and import quota capacity. Some of these competitors have greater financial and other resources than we have,
and thus have an advantage in the competition for production and import quota capacity. If we experience a significant increase
in demand, or if we need to replace an existing manufacturer, we may have to expand our third-party manufacturing capacity. We
cannot assure that this additional capacity will be available when required on terms that are acceptable to us or similar to existing
terms, which we have with our manufacturers, either from a production standpoint or a financial standpoint. We enter into a number
of purchase order commitments specifying a time for delivery, method of payment, design and quality specifications and other standard
industry provisions, but do not have long-term contracts with any manufacturer. None of the manufacturers we use produce our products
exclusively. Should we be forced to replace one or more of our manufacturers, we may experience increased costs or an adverse
operational impact due to delays in distribution and delivery of our products to our customers, which could cause us to lose customers
or lose revenue because of late shipments.
Cyber-attacks and security vulnerabilities could lead
to reduced revenue, increased costs, liability claims, or harm to our competitive position.
Increased sophistication and
activities of perpetrators of cyber-attacks have resulted in an increase in information security risks in recent years. Hackers
develop and deploy viruses, worms, and other malicious software programs that attack products and services and gain access to
networks and data centers. If we were to experience difficulties maintaining existing systems or implementing new systems, we
could incur significant losses due to disruptions in our operations. Additionally, these systems contain valuable proprietary
and confidential information and may contain personal data of our customers. A security breach could result in disruptions of
our internal systems and business applications, harm to our competitive position from the compromise of confidential business
information, or subject us to liability under laws that protect personal data. As cyber threats continue to evolve, we may be
required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate
any information security vulnerabilities. Any of these consequences would adversely affect our revenue and margins.
If we are unable to retain the services of Mr. Sandgaard
or if we are unable to successfully recruit qualified managerial and sales personnel, we may not
be able to continue our operations.
Our success depends to a significant extent upon the continued service of Mr. Thomas Sandgaard, our Chief
Executive Officer and Founder and beneficial owner of 53% of our outstanding stock. Loss of the services of Mr. Sandgaard
could have a material adverse effect on our growth, revenues, and prospective business. There is currently no employment agreement
with Mr. Sandgaard. We do not maintain key-man insurance on the life of Mr. Sandgaard. In addition, in order to successfully
implement and manage our business plan, we will be dependent upon, among other things, successfully retaining and recruiting qualified
managerial and sales personnel. Competition for qualified individuals is intense. Various factors, such as marketability of our
products, our reputation, our liquidity, and sales commission structure can affect our ability to find, attract or retain sales
personnel. There can be no assurance that we will be able to find and attract qualified new employees and sales representatives
and retain existing employees and sales representatives.
We need to maintain insurance coverage, which could become
very expensive or have limited availability.
Our marketing and sales of medical device products creates an
inherent risk of claims for product liability. As a result, we carry product liability insurance and will continue to maintain
insurance in amounts we consider adequate to protect us from claims. We cannot, however, be assured that we have resources sufficient
to satisfy liability claims in excess of policy limits if required to do so. Also, if we are subject to such liability claims,
there is no assurance that our insurance provider will continue to insure us at current levels or that our insurance rates will
not substantially rise in the future, resulting in increased costs to us or forcing us to either pay higher premiums or reduce
our coverage amounts, which would result in increased liability to claims.
We depend upon obtaining regulatory approval of any new
products and/or manufacturing operations we develop and maintain approvals of current products; failure to obtain or maintain
such regulatory approvals could result in increased costs, lost revenue, penalties and fines.
Before marketing any new products, we will need to complete
one or more clinical investigations of each product. There can be no assurance that the results of such clinical investigations
will be favorable to us. We may not know the results of any study, favorable or unfavorable to us, until after the study has been
completed. Such data must be submitted to the FDA as part of any regulatory filing seeking approval to market the product. Even
if the results are favorable, the FDA may dispute the claims of safety, efficacy, or clinical utility and not allow the product
to be marketed. The sale price of the product may not be enough to recoup the amount of our investment in conducting the investigative
studies and we may expend significant funds on research and development on products that are rejected by the FDA. Some of our
products are marketed based upon our interpretation of FDA regulation allowing for changes to an existing device. If our interpretations
are incorrect, we could suffer consequences that could have a material adverse effect on our results of operations and cash flows
and could result in fines and penalties. There can be no assurance that we will have the financial resources to complete development
of any new products or to complete the regulatory approval process or to maintain regulatory compliance of existing products.
We may not be able to obtain clearance of a 510
(k) notification or approval of a de novo or pre-market approval application with respect to any products on a timely
basis, if at all.
If timely FDA clearance or approval of new products is
not obtained, our business could be materially adversely affected. Clearance of a 510(k) notification or de novo application
may also be required before marketing certain previously marketed products, which have been modified after they have been
cleared. Should the FDA so require, the filing of a new 510(k) notification for the modification of the product may be
required prior to marketing any modified devices.
To determine whether adequate compliance has been achieved,
the FDA may inspect our facilities at any time. Such compliance can be difficult and costly to achieve and maintain. Our compliance
status may change due to future changes in, or interpretations of, FDA regulations or other regulatory agencies. Such changes
may result in the FDA withdrawing marketing clearance or requiring product recall. In addition, any changes or modifications to
a device or its intended use may require us to reassess compliance with good manufacturing practices guidelines, potentially interrupting
the marketing and sale of products. We may also fail to comply with complex FDA regulations due to their complexity or otherwise.
Failure to comply with regulations could result in enforceable actions, including product seizures, product recalls, withdrawal
of clearances or approvals, and civil and criminal penalties, any of which could have a material adverse effect on our operating
results and reputation.
We continue to incur substantial expenses.
This area of medical device research is subject to rapid and
significant technological changes. Developments and advances in the medical industry by either competitors or other parties can
affect our business in either a positive or negative manner. Developments and changes in technology that are favorable to us may
significantly advance the potential of our research while developments and advances in research methods outside of the methods
we are using may severely hinder, or halt completely our development.
We are a small company in terms of employees, technical and
research resources, and we have limited liquidity. We expect to incur research and development, sales and marketing, and general
and administrative expenses. These amounts may increase before any commensurate incremental revenue from these efforts may be
obtained and may adversely affect our potential profits and we may lack the liquidity to pay for such expenditures. These factors
may also hinder our ability to meet changes in the medical industry as rapidly or effectively as competitors with more resources.
We may be unable to protect our trademarks, trade secrets
and other intellectual property rights that are important to our business.
We consider our trademarks, trade secrets and other intellectual
property an integral component of our success. We rely on trademark law and trade secret protection and confidentiality agreements
with employees, customers, partners and others to protect our intellectual property. Effective trademark and trade secret protection
may not be available in every country in which our products are available. In 2018 we obtained a utility patent on the blood volume
monitor. We cannot be certain that we have taken adequate steps to protect our intellectual property, especially in countries
where the laws may not protect our rights as fully as in the United States. In addition, if our third-party confidentiality agreements
are breached there may not be an adequate remedy available to us. If our trade secrets become publicly known, we may lose competitive
advantages.
Substantial costs could be incurred defending against
claims of infringement.
Other companies, including competitors, may obtain patents
or other proprietary rights that would limit, interfere with, or otherwise circumscribe Zynex’s ability to make, use, or
sell products. Should there be a successful claim of infringement against us and if we could not license the alleged infringed
technology at a reasonable cost, our business and operating results could be adversely affected. There has been substantial litigation
regarding patent and other intellectual property rights in the medical device industry. The validity and breadth of claims covered
in medical technology patents involve complex legal and factual questions for which important legal principles remain unresolved.
Any litigation claims against us, independent of their validity, may result in substantial costs and the diversion of resources
with no assurance of success. Intellectual property claims could cause us to:
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Cease selling, incorporating, or using products that incorporate
the challenged intellectual property:
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Obtain a license from the holder of the infringed intellectual
property right, which may not be available on reasonable terms, if at all; and
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Re-design Zynex’s products excluding the infringed
intellectual property, which may not be possible.
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Our business could be adversely affected by reliance
on sole suppliers.
Notwithstanding our current multiple supplier approach, in
the future certain essential product components may be supplied by sole, or a limited group of, suppliers. Most of our products
and components are purchased through purchase orders rather than through long term supply agreements and large volumes of inventory
may not be maintained. There may be shortages and delays in obtaining certain product components. Disruption of the supply or
inventory of components could result in a significant increase in the costs of these components or could result in an inability
to meet the demand for our products. In addition, if a change in the manufacturer of a key component is required, qualification
of a new supplier may result in delays and additional expenses in meeting customer demand for products. These factors could adversely
affect our revenues and ability to retain our experienced sales force.
Our products are subject to recall even after receiving
FDA or foreign clearance or approval, which would harm our reputation and business.
We are subject to medical device reporting regulations that
require us to report to the FDA or respective governmental authorities in other countries if our products cause or contribute
to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury
if the malfunction were to recur. The FDA and similar governmental authorities in other countries have the authority to require
the recall of our products in the event of material deficiencies or defects in design or manufacturing. A government mandated
or voluntary recall by us could occur as a result of component failures, manufacturing errors or design defects, including defects
in labeling.
Any recall would divert managerial and financial resources
and could harm our reputation with customers. We cannot assure you that we will not have product recalls in the future or that
such recalls would not have a material adverse effect on our business. We have not undertaken any voluntary or involuntary recalls
to date.
Our principal executive officer owns a controlling interest
in our voting stock, and investors will not have any voice in our management.
Our President, Chief Executive Officer, and Chairman, Thomas Sandgaard, beneficially owns approximately 54%
of our outstanding common stock as of February 22, 2019. As a result, Mr. Sandgaard has the ability to control substantially
all day to day operations of our company and all matters submitted to our stockholders for approval, including:
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Election of our board of directors;
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Removal of any of our directors;
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Amendment of our articles of incorporation or bylaws;
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Approval of significant corporate transactions, such as
a sale, merger or liquidation of our Company; and
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Adoption of measures that could delay or prevent a change
in control or impede a merger, takeover or other business combination involving us.
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We are a relatively small company with a limited number
of products and staff. Sales fluctuations and employee turnover may adversely affect our business.
We are a relatively small company. Consequently, compared to
larger companies, sales fluctuations could have a greater impact on our revenue and profitability on a quarter-to-quarter and
year-to-year basis and delays in patient orders could cause our operating results to vary significantly from quarter to quarter
and year-to-year. In addition, as a small company we have limited staff and are heavily reliant on certain key personnel to operate
our business. If a key employee were to leave the company it could have a material impact on our business and results of operations
as we might not have sufficient depth in our staffing to fill the role that was previously being performed. A delay in filling
the vacated position could put a strain on existing personnel or result in a failure to satisfy our contractual obligations or
to effectively implement our internal controls, and materially harm our business.
We’ve had material weaknesses in our internal controls
over financial reporting in previous periods.
We believe our material weaknesses have been remediated, but
as a small company with limited resources, it is possible we identify material weaknesses in the future. If we do not remediate
any such weaknesses in the future, in addition to any impact on our stock price, it could also impact our ability to raise capital
and could affect adversely our reputation, which collaterally could affect our ability to retain sales personnel and business
relationships with insurance companies paying for our products and vendors.
We may fail to protect the privacy, integrity and security
of customer information.
We possess and process sensitive customer information and Protected
Health Information protected by the Health Insurance Portability and Affordability Act (“HIPAA”). While we have taken
reasonable and appropriate steps to protect that information, if our security procedures and controls were compromised, it could
harm our business, reputation, results of operations and financial condition and may increase the costs we incur to protect against
such information security breaches, such as increased investment in technology, the costs of compliance with health care privacy
and consumer protection laws. A compromise of our privacy or security procedures could also subject us to liability under certain
health care privacy laws applicable to us.
Expansion of our operations and sales internationally
may subject us to additional risks, including risks associated with unexpected events.
A component of our growth strategy is to expand our operations
and sales internationally. There can be no assurance that we will be able to successfully market, sell and deliver our products
in foreign markets, or that we will be able to successfully expand our international operations. Global operations could cause
us to be subject to unexpected, uncontrollable and rapidly changing risks, events and circumstances.
The following factors, among others, could adversely affect
our business, financial condition and results of operations:
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difficulties in managing foreign operations and attracting
and retaining appropriate levels of senior management and staffing;
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longer cash collection cycles;
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proper compliance with local tax laws which can be complex
and may result in unintended adverse tax consequences;
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difficulties in enforcing agreements through foreign legal
systems;
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failure to properly comply with U.S. and foreign laws and regulations applicable to our foreign activities including, without limitation, product approval, healthcare and employment law requirements and the Foreign Corrupt Practices Act;
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fluctuations in exchange rates that may affect product
demand and may adversely affect the profitability in U.S. dollars of the products we
provide in foreign markets;
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the ability to efficiently repatriate cash to the United
States and transfer cash between foreign jurisdictions; and
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changes in general economic conditions or political circumstances
in countries where we operate.
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Changes in financial accounting standards or practices
may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.
We are required to prepare our financial statements in accordance
with generally accepted accounting principles in the United States of America (“GAAP”), which is periodically revised
and/or expanded. From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative
bodies, including the FASB and the SEC. It is possible that future accounting standards we are required to adopt may require additional
changes to the current accounting treatment that we apply to our financial statements and may require us to make significant changes
to our reporting systems. Such changes could result in a material adverse impact on our business, results of operations and financial
condition.
RISKS RELATING TO OUR COMMON STOCK
Sales of significant amounts of shares held by Mr. Sandgaard,
or the prospect of these sales, could adversely affect the market price of our common stock
Sales of significant amounts of shares held by Mr. Sandgaard,
or the prospect of these sales, could adversely affect the market price of our common stock. As a resolution in certain issues
in his divorce, in December 2015 Mr. Sandgaard transferred 250,000 shares of common stock he owned to his former spouse, which
shares will become tradeable after complying with the legal requirements under Rule 144 and other guidance. Mr. Sandgaard has no
control whether or when his former spouse may choose to sell those shares or other shares of the Company’s common stock she
may own. Mr. Sandgaard’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of the Company, which in turn could reduce our stock price or prevent our stockholders from realizing
a premium over our stock price..
Our status as a ‘controlled
company’ could make our common stock less attractive to some investors or otherwise harm our stock price.
On February 12, 2019, we began trading
on The Nasdaq Capital Market. We currently qualify as a "controlled company" under the corporate governance rules, therefore
we are not required to have a compensation committee or an independent nominating function. Accordingly, should the interests
of our controlling stockholder differ from those of other stockholders; the other stockholders may not have the same protections
afforded to stockholders of companies that are subject to all corporate governance rules. Our status as a controlled company could
make our common stock less attractive to some investors or otherwise harm our stock price.
Our existing shareholders may experience
dilution if we elect to raise equity capital to meet our liquidity needs
Due to our past liquidity issues, we have
had to raise capital in the form of debt and/or equity to meet working capital needs. We may also be required to issue
equity (or debt) securities in the future to meet our liquidity needs which would result in additional dilution to our existing
stockholders. Although we will attempt to minimize the dilutive impact of any future capital-raising activities, we
cannot offer any assurance that we will be able to do so. If we raise additional working capital, we may have to issue
additional shares of our common stock at prices at a discount from the then-current market price of our common stock.
We paid a dividend on our common stock, and cash used
to pay dividends will not be available for other corporate purposes
In 2018, our Board of Directors declared a special one-time
dividend of $0.07 per share which was paid in January 2019. The decision to pay dividends in the future will depend on general
business conditions, the impact of such payment on our financial condition and other factors our Board of Directors may consider
to be relevant. If we elect to pay future dividends, this could reduce our cash reserves to levels that may be inadequate
to fund expansions to our business plan or unanticipated contingent liabilities.
Our stock price could become more volatile and your investment
could lose value.
All of the factors discussed in this section could affect our
stock price. A significant drop in our stock price could also expose us to the risk of securities class actions lawsuits, which
could result in substantial costs and divert management’s attention and resources, which could adversely affect our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
In October 2017, we signed a lease for a new corporate headquarters in Englewood, Colorado beginning in January
2018. The lease is for approximately 41,715 square feet and continues through June 30, 2023 with an option for a two-year extension
through June 2025. Our prior headquarters lease contained a termination clause upon 30 days’ notice by either party which
we executed during October 2017. We also lease a small office in Denmark. We believe these leased properties are sufficient to
support our current requirements and that we will be able to locate additional facilities as needed. See Note 11 to the Consolidated
Financial Statements for additional information on these leases.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The following table and paragraphs that follow provide information
concerning each of our directors and executive officers at February 22, 2019.
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Director/Officer
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Name
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Age
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Since
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Position
or Office
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Thomas Sandgaard
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60
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1996
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President, Chief Executive Officer
and Chairman
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Barry D. Michaels
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69
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2018
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Director
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Michael Cress
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61
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2018
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Director
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Joshua R. Disbrow
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43
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2018
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Director
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Daniel Moorhead
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46
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2017
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Chief Financial Officer
|
On March 5, 2018, the Board of Directors approved a resolution
to increase the size of the Board of Directors from three to four members.
On March 5, 2018, Joshua R. Disbrow was appointed to the Board
of Directors and joined the audit committee.
Thomas Sandgaard,
age 60
,
founded the Company in 1996 after a successful European-based career in the semiconductor, telecommunications
and medical equipment industries with ITT, Siemens and Philips Telecom. Mr. Sandgaard has been our President, CEO and Chairman
since 1996. Prior to the appointments of Messrs. Michaels and Cress Mr. Sandgaard was and had been our only member of
the board of directors. Mr. Sandgaard held middle and senior management positions in the areas of international sales and
distribution, technology transfers, mergers and acquisitions and marketing. Mr. Sandgaard holds a degree in electronics engineering
from University of Southern Denmark and an MBA from Copenhagen Business School. Mr. Sandgaard founded the Company in 1996
and has been the President, CEO and Chairman of the Board since the business was founded. Mr. Sandgaard currently does not hold,
and has not held in the past five years, directorships with any company with a class of securities registered pursuant to section
12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered
as an investment company under the Investment Company Act of 1940. Mr. Sandgaard is qualified to serve as a member of our
Board of Directors based on his historical knowledge of the Company and its products.
Barry D. Michaels
, age 69, is a
retired senior executive with both general and financial management experience in emerging growth companies. Mr. Michaels has
more than 35 years of financial and general management experience in the medical device and biotechnology industries with industry
leaders including Medtronic, Johnson and Johnson, and Baxter Healthcare. Mr. Michaels served as Chief Financial Officer of three
private and four publicly traded companies including Cardima, Inc., Lipid Sciences, Inc., ICN Biomedicals, Inc., IntraTherapeutics,
Inc., VIA Medical, and Webster Laboratories. In addition, he served as President of a Johnson and Johnson division and acting Chief
Executive Officer of Lipid Sciences, Inc. He has raised nearly $800 million in capital within public and private market environments,
has taken two companies public, and has led three private companies to favorable liquidity events. He has also served as an independent
consultant to medical device and biotechnology companies since 1997 leveraging his strong mix of organizational, operational,
and financial management skills to advise senior management and directors. During his tenure in executive management Mr. Michaels
has added over 1,100 jobs to the economy and increased shareholder value by more than $2 billion. Mr. Michaels holds a BA in Audiology
and an MBA in Finance from San Diego State University and is a graduate of the Executive Program at the University of California,
Los Angeles. In addition, he has completed the UCLA Director’s Education Program certification exam and has served as Corporate
Secretary to three publicly traded companies. Mr. Michaels has also been appointed Audit Committee Chair of the Company’s
Audit Committee. Mr. Michaels qualifies as an audit committee financial expert within the meaning of Section 407 of the Sarbanes-Oxley
Act of 2002 and Item 407(d)(5) of Regulation S-K.
With his years of executive experience,
Mr. Michaels brings to the board senior-level management experience with deep knowledge of the medical device industry. Mr. Michaels
also served as CFO for a Nasdaq listed medical company and brings significant public company experience to the Board where he
serves as Audit Committee Chair.
Michael Cress
, age 61, currently serves as Chairman
and Managing Partner of MD Cress Ventures, a national firm that owns, operates and advises companies within the healthcare sector.
Mr. Cress also serves as Chairman of Rainier Healthcare. Prior to MD Cress Ventures he served as the President and CEO
of the Cornerstone Healthcare Group which owns and manages hospitals throughout the country. Mr. Cress also served
as Vice President of Business Development for Kindred Healthcare, a publicly traded healthcare company that owns and
operates hospitals, nursing homes, rehabilitation, pharmacy and other segments of the healthcare continuum. He served
as the CEO of Vencor Hospital of San Diego and was also an Adjunct Professor for the Masters of Healthcare Administration program
at the University of Kansas. Mr. Cress currently serves on several not-for-profit boards including Rachel’s Challenge and
is a co-founder and board member for The Neighborhood as well as serving on the boards or advisory boards of several companies,
including the Austin Healthcare Council, Linley Capital, Rainier Hospice and Sleep Research.
Mr. Cress has extensive experience in the medical industry
and brings not only board experience but also merger and acquisition and strategic planning experience to Zynex’s Board
of Directors.
Joshua Disbrow
, age 43, has been in the life sciences industry for over twenty-two years across pharmaceuticals, diagnostics, and
medical devices. Currently, Mr. Disbrow serves as the Chairman and Chief Executive Officer of Aytu BioScience, Inc. (“Aytu”
Nasdaq: AYTU), a commercial-stage specialty life pharmaceutical company focused on global commercialization of novel products addressing
large therapeutic areas. Prior to forming Aytu in April of 2015, starting in December of 2012 Mr. Disbrow was the Chief Operating
Officer of Ampio Pharmaceuticals (“Ampio” NYSE MKT: AMPE) and led the Luoxis Diagnostics subsidiary (“Luoxis”).
Luoxis was merged into Aytu in April 2015 following Luoxis’ development of the technology behind the company’s MiOXSYS
in vitro diagnostic platform. Prior to joining Ampio in 2012, he served as Vice President of Commercial Operations at Arbor Pharmaceuticals
(“Arbor”). Josh has served as Aytu’s Chairman of the Board since 2016. Josh is an executive/non-independent director
and serves on no committees for Aytu.
Mr. Disbrow began as Arbor’s second employee and oversaw
the commercialization of the company’s first product, scaling the commercial organization to over 150 people across sales,
marketing, payer markets, distribution, and national accounts. In less than four years, Arbor grew from a company without any
product revenues to a company with net sales of $127 million. Prior to joining Arbor, he was the Director of Marketing at LipoScience
(Nasdaq: LPDX), a cardiovascular in vitro diagnostic company. Mr. Disbrow also served in sales management at Cyberonics (Now LivaNova
plc, Nasdaq: LIVN), a medical device company then commercializing implantable neuromodulation devices. He started his career at
Glaxo Wellcome (now GlaxoSmithKline plc), holding positions in both sales and marketing. He has a Master of Business Administration
from Wake Forest University and Bachelor of Science in Management from North Carolina State University
Daniel Moorhead
, age 46, joined the Company in June
2017 as the Chief Financial Officer and is responsible for all finance and accounting functions. Prior to joining Zynex, Mr. Moorhead
was Chief Financial Officer of Evolving Systems, Inc. (Nasdaq: EVOL) from January 2016 until May 2017, after having served as
Vice President of Finance & Administration from December 2011 through December 2015 and in other financial management roles
from 2002-2005 and 2008-2011. Mr. Moorhead is a CPA and holds a B.B.A. in Accounting from the University of Northern Colorado.
Information Regarding the Board and its Committees
Board Leadership Structure
Our Board believes it is important to
retain flexibility in allocating the responsibilities of the Chief Executive Officer (“CEO”) and Chairman of the Board
in any way that is in the best interests of our Company based on the circumstances existing at a particular point in time. Accordingly,
we do not have a strict policy on whether these roles should be served independently or jointly. Currently, our CEO, Thomas
Sandgaard serves as Chairman of the Board. He provides valuable experience on the Company’s business and industry and works
closely with the Board in establishing Board meeting agendas to discuss key business and strategic issues.
We do not have a separate Lead Independent
Director.
On February 12, 2019, we began trading on The Nasdaq Capital
Market (“Nasdaq”). We currently qualify as a "controlled company" under the Nasdaq corporate governance
rules, as our CEO Thomas Sandgaard owns approximately 53% of our outstanding common stock. Therefore, we are not required under
Nasdaq listing rules to have either an independent nominating and corporate governance committee or a compensation committee.
Our Board of Directors consists of three independent directors and our Chief Executive Officer, Thomas Sandgaard.
All directors except for Mr. Sandgaard, satisfy the independence standards established by the Securities and Exchange Commission
and the rules of Nasdaq. Mr. Sandgaard is not considered independent under the listing standards of Nasdaq because he is an
employee of the Company. In addition, the Board has determined that each member of the Audit Committee is independent. In making
such determination, the Board reviewed all relationships between the Company and each director.
The Board’s Role in Risk Oversight
The Board as a whole actively oversees
management of the Company’s risks and looks to its audit committee, as well as senior management, to support the Board’s
oversight role. The Company’s Audit Committee assists with oversight of financial risks. The full Board regularly receives
information through committee reports and from members of senior management on areas of material risk to the Company, including
operational, financial, legal and regulatory, technical and strategic risks.
Meetings and Committees of the Board
of Directors
Our business, property and affairs are
managed under the direction of our Board of Directors and its Audit Committee. Our Board of Directors provides management oversight,
helps guide the Company on strategic planning, approves the Company’s operating budgets and meets regularly in executive
sessions. Members of our Board are kept informed of our business through discussions with our Chief Executive Officer and other
officers and employees, by reviewing materials provided to them, by visiting our offices and by participating in meetings of the
Board and its Audit Committee.
Our Board holds regularly scheduled quarterly
meetings. In addition to the quarterly meetings, typically there is at least one other regularly scheduled meeting and several
special meetings each year. Our Board met formally six times in 2018. In fiscal year 2018 each director attended at least 75%
of all Board meetings held during such director’s tenure on the Board.
Controlled Company Status
Our President and Chief Executive Officer, Thomas Sandgaard, beneficially owns approximately 54% of our outstanding
common stock as of
February 22, 2019. As a result, we
are a “controlled company” within the meaning of Nasdaq corporate governance standards.
Audit Committee
The Audit Committee assists the Board of Directors in its oversight
of the integrity of the Company’s accounting, auditing, and reporting practices. The Audit Committee meets with our independent
registered public accounting firm at least annually to review the results of the annual audit and discuss the financial statements.
The Committee meets with our independent registered public accounting firm quarterly to discuss the results of the accountants’
quarterly reviews as well as quarterly results and quarterly earnings releases; recommends to the Board the registered public
accounting firm to be retained; and receives and considers the accountants’ comments as to internal controls and procedures
in connection with audit and financial controls. The Audit Committee reviews all financial reports prior to filing with the Securities
and Exchange Commission (“SEC”) and reviews all financial press releases prior to release. The specific responsibilities
in carrying out the Audit Committee’s oversight role are set forth in the Audit Committee’s Charter, a copy of which
is posted on the Company’s website, www.zynex.com, under "Investors — Corporate Governance." The
Audit Committee currently consists of Messrs. Michaels, Cress and Disbrow, each of whom are independent directors. The Board
of Directors has determined that Mr. Michaels is an "audit committee financial expert" as defined by the rules
of the Securities and Exchange Commission.
Director Nominations by Shareholders
As a controlled company, we are not required under Nasdaq listing
rules to have either an independent nominating and corporate governance committee or to have director nominees selected or recommended
by a majority of the Board’s independent directors. Additionally, as a controlled company we are not required under
Nasdaq listing rules to have a formal written charter addressing the procedures by which a security holder may recommend director
nominees to our Board of Directors.
Stockholders’ Meeting
We have never held a stockholders’ meeting and do not
have plans to hold a meeting in 2019. Since our common stock began trading on The Nasdaq Capital Market on February 12, 2019,
we are required to hold a stockholders’ meeting in 2020.
Code of Ethics
The Board has adopted a written code of ethics for each employee,
including our Chief Executive Officer and Chief Financial Officer. The code also applies to our agents and representatives,
sales representatives and consultants. The code of ethics is posted on our website at www.zynex.com. If we make certain amendments
to or waivers of our code of ethics, we intend to satisfy the SEC disclosure requirements by promptly posting the amendment or
waiver on our website.
Involvement in Certain Legal Proceedings
During the past ten years, none of the
persons serving as executive officers and/or directors of the Company has been the subject matter of any of the following legal
proceedings that are required to be disclosed pursuant to Item 401(f) of Regulation S-K including: (a) any bankruptcy
petition filed by or against any business of which such person was a general partner or executive officer either at the time of
the bankruptcy or within two years prior to that time; (b) any criminal convictions; (c) any order, judgment, or decree permanently
or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking
activities; (d) any finding by a court, the SEC or the CFTC to have violated a federal or state securities or commodities
law, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail
or wire fraud; or (e) any sanction or order of any self-regulatory organization or registered entity or equivalent exchange, association
or entity. Further, no such legal proceedings are believed to be contemplated by governmental authorities against any
director or executive officer.
Section 16(a) Beneficial Ownership Compliance
Based
on a review of reports filed by our directors, executive officers, and beneficial owners of more than 10% of our shares of common
stock pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, and other information available to us, we believe
that all such ownership reports required to be filed by those reporting persons during and with respect to the fiscal year ended
December 31, 2018 were timely made
.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation Objectives and Practices
We designed our executive officer compensation program to attract,
motivate and retain key executives who drive our success. We strive to have pay reflect our performance and align with the interests
of long-term stockholders, which we achieve with compensation that:
|
·
|
Provides
executives with competitive compensation that maintains a balance between cash and stock
compensation, encouraging our executive officers to act as owners with an equity stake
in our company;
|
|
·
|
Enhances
retention by having equity compensation subject to multi-year vesting; and
|
|
·
|
Does
not encourage unnecessary and excessive risk taking.
|
The Company evaluates both performance and compensation to
ensure the Company maintains its ability to attract and retain superior employees in key positions and compensation provided to
key employee’s remains competitive relative to the compensation paid to similarly situated executives of other companies
our size.
Elements of Executive Compensation
Our compensation for senior executive officers may consist
of the following elements:
base salary; incentive compensation; long-term equity compensation in the form of
stock options and restricted stock; and employee benefits that are generally available to all our employees.
Base Salary
The Company provides named executive officers and other
employees with a base salary to compensate them for services rendered during the fiscal year. It is our policy to set base
salary levels taking into account a number of factors, such as annual revenue, the nature of our business, the structure of
other companies’ compensation programs and the availability of compensation information. When setting base salary
levels, in a manner consistent with the objectives outlined above, the Company considers our performance, the
individual’s breadth of knowledge and performance and levels of responsibility.
Incentive Compensation
Our performance-based incentive compensation program is designed to compensate executives when financial performance
goals are achieved. Executives have the opportunity to earn incentive compensation on an annual basis. Mr. Moorhead is eligible
for annual incentive compensation of up to $100,000, based upon achievements of annual targets established by the Board of Directors.
Long-Term Incentive Compensation – Equity Compensation
Our executive officers are eligible for stock awards. We believe
that stock awards give executives a significant, long-term interest in our success, help retain key executives in a competitive
market, and align executive interests with stockholder interests and long-term performance of the Company. We have granted options
as well as restricted stock under our 2017 Stock Incentive Plan and predecessor plans. Stock awards also provide each individual
with an added incentive to manage the Company from the perspective of an owner with an equity stake in the business. Moreover,
the long-term vesting schedule (which is generally four years for employees and three years for non-employee directors, although
this may vary at the discretion of the Company) encourages a long-term commitment to the Company by our executive officers and
other participants.
Summary Compensation Table
The following table shows information concerning compensation
of our named executive officers during the years ended December 31, 2018 and 2017:
Name and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Option
Awards
($) (3)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Thomas Sandgaard (1)
|
|
|
2018
|
|
|
|
480,000
|
|
|
|
5,370
|
|
|
|
567,561
|
|
|
|
32,544
|
(1)
|
|
|
1,085,476
|
|
President, Chief Executive Officer and Chairman
|
|
|
2017
|
|
|
|
397,738
|
|
|
|
2,440
|
|
|
|
398,546
|
|
|
|
9,538
|
(1)
|
|
|
808,262
|
|
Daniel Moorhead (2)
|
|
|
2018
|
|
|
|
220,000
|
|
|
|
69,500
|
|
|
|
82,291
|
|
|
|
32,384
|
(2)
|
|
|
404,175
|
|
Chief Financial Officer
|
|
|
2017
|
|
|
|
108,308
|
|
|
|
226,233
|
|
|
|
59,552
|
|
|
|
5,103
|
(2)
|
|
|
399,196
|
|
|
(1)
|
We
pay 100% of Mr. Sandgaard’s health and dental insurance. In addition, two
company vehicles were provided to Mr. Sandgaard in 2018 and one vehicle in 2017
at our expense.
|
|
(2)
|
Mr.
Moorhead was hired as Chief Financial officer in June 2017. We pay 100% of Mr. Moorhead’s
health and dental insurance.
|
|
(3)
|
The
option awards represent the grant date fair value of stock options and restricted stock
in accordance with Accounting Standards Codification (“ASC”) Topic 718. See
Note 5 of the Consolidated Financial Statements for additional information.
|
All Other Compensation
Name
|
|
Year
|
|
|
Retirement Plan Matching
Contributions ($)
|
|
|
Unused Paid Time
Off ($)
|
|
|
Company Vehicle
($)
|
|
|
Cost of
Healthcare ($)
|
|
Thomas Sandgaard (1)
|
|
2018
|
|
|
|
-
|
|
|
|
13,845
|
|
|
|
11,855
|
|
|
|
6,844
|
|
|
|
2017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,850
|
|
|
|
5,688
|
|
Daniel Moorhead
|
|
2018
|
|
|
|
4,094
|
|
|
|
8,611
|
|
|
|
-
|
|
|
|
19,679
|
|
|
|
2017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,103
|
|
Named Executive Officer Employment Arrangements and Option
Awards
On June 5, 2017, the Company entered into an employment
agreement with Mr. Moorhead which generally provides that in the event the Company terminates his employment, other than
for cause, death or disability, he will be paid severance pay. The amount of his severance is nine months of base salary if terminated
before the one-year anniversary of his hire date or twelve months of severance if terminated on or subsequent to the one-year
anniversary of his hire date. In exchange for severance, Mr. Moorhead is required to execute a full release of all employment
claims with the Company and agree to not compete with us and to not solicit our employees for the period of time during which
severance is paid. The employment agreement does not change the "at will" nature of Mr. Moorhead’s employment
with the Company. Either the Company or the executive may terminate his employment at any time.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information concerning unexercised
options for each executive officer named in the Summary Compensation Table as of December 31, 2018:
|
|
Option Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Number of
|
|
Market Value
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
|
|
|
Shares of
|
|
of Shares of
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Option
|
|
|
Stock
|
|
Stock
|
|
Name
|
|
(#) Exercisable (1)
|
|
|
(#) Unexercisable (1)
|
|
|
Price
|
|
|
Expiration Date
|
|
|
(#) Unvested (6)
|
|
($) Unvested (7)
|
|
Thomas Sandgaard
|
|
|
190,000
|
|
|
|
-
|
(2)
|
|
$
|
0.22
|
|
|
|
31-Oct-23
|
|
|
|
|
|
|
|
|
|
|
|
203,571
|
|
|
|
-
|
(3)
|
|
$
|
0.14
|
|
|
|
2-Jan-26
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
750
|
(4)
|
|
$
|
2.76
|
|
|
|
14-Dec-27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
(8)
|
|
$
|
2.63
|
|
|
|
07-Aug-28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
(9)
|
|
$
|
3.44
|
|
|
|
06-Nov-28
|
|
|
|
|
|
|
|
|
Daniel Moorhead
|
|
|
50,000
|
|
|
|
150,000
|
(5)
|
|
$
|
0.40
|
|
|
|
5-Jun-27
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
7,500
|
(5)
|
|
$
|
1.39
|
|
|
|
5-Sep-27
|
|
|
|
|
|
|
|
|
|
|
|
14,315
|
|
|
|
42,945
|
(5)
|
|
$
|
2.51
|
|
|
|
11-Dec-27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,250
|
|
|
$
|
91,875
|
|
|
(1)
|
Options and restricted stock awards vest at a rate of 25% per
year, commencing on the grant date.
|
|
(2)
|
On October 31, 2013, Mr. Sandgaard was granted 285,000 options
with a strike price of $0.22, with a vesting contingent on achieving certain financial
performance metrics. As of December 31, 2017, 190,000 options remain active.
|
|
(3)
|
On January 2, 2016, Mr. Sandgaard was granted 203,571 options
with a strike price of $0.14.
|
|
(4)
|
On December 14, 2017, Mr. Sandgaard was granted 1,000 options
with a strike price of $2.76.
|
|
(5)
|
On June 5, 2017, Mr. Moorhead was granted 200,000 options with
a strike price of $0.40, 10,000 options with a $1.39 strike price on September 5, 2017
and on December 11, 2017 was granted 57,260 options with strike price of $2.51.
|
|
(6)
|
Mr. Moorhead was granted 10,000 shares on June 5, 2017, 5,000
shares on December 11, 2017, 5,000 on March 5, 2018, 5,000 on June 5, 2018, 5,000 on
September 5, 2018 and 5,000 on December 5, 2018.
|
|
(7)
|
Market value was calculated by multiplying the number of shares
shown in the table by $2.94, which was the closing price per share on December 31,
2018, the last day of our fiscal year.
|
|
(8)
|
On August 7, 2018, Mr. Sandgaard was granted 1,000 options with
a strike price of $2.63
|
|
(9)
|
On November 6, 2018, Mr. Sandgaard was granted 1,000 options with
a strike price of $3.44
|
Director Compensation
The 2018 compensation plan for non-employee members of the
Board of Directors and the committees of the Board is described in the table below.
|
|
Annual
retainer
(payable in quarterly
increments)
|
|
|
Additional
annual cash
compensation for
non-employee Chairperson
|
|
Board of Directors
|
|
$
|
40,000
|
|
|
$
|
N/A
|
|
Audit Committee
|
|
$
|
0
|
|
|
$
|
10,000
|
|
We grant non-employee directors restricted stock upon joining
the Board of Directors. The restricted stock vest quarterly over three years.
We do not provide any deferred compensation, health or other
personal benefits to our directors. We reimburse each director for reasonable out-of-pocket expenses incurred to attend Board
and Committee meetings.
2018 Director Compensation Table
The table below summarizes the compensation
earned by non-employee directors for the fiscal year ended December 31, 2018.
Name
|
|
Fees
($)
|
|
|
Stock Awards
($)(1)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
Barry D. Michaels
|
|
$
|
48,654
|
|
|
$
|
67,600
|
|
|
$
|
116,254
|
|
Michael Cress .
|
|
$
|
38,923
|
|
|
$
|
67,600
|
|
|
$
|
106,523
|
|
Joshua R. Disbrow
|
|
$
|
33,076
|
|
|
$
|
80,000
|
|
|
$
|
113,076
|
|
(1) The amount in this column reflects the grant date fair
value of stock options granted in 2018, computed in accordance with FASB Statement Accounting Standards Codification (“ASC”) 718,
Compensation-Stock Compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table contains certain information regarding
beneficial ownership of our common stock as of February 22, 2018 by (i) each person who is known by us to own beneficially
more than 5% of our common stock, (ii) each of our directors at February 22, 2018, (iii) our executive officers as of
February 22, 2018, and (iv) all directors and executive officers named as a group. The information provided regarding beneficial
ownership of the principal stockholders is based on publicly available filings and, in the absence of such filings, on the shares
held of record by such persons. The address of each person listed in the table is 9555 Maroon Circle, Englewood, CO 80112.
Name
|
|
Number of
Shares
Beneficially
Owned (1)
|
|
|
Percent
of Class
(2)
|
|
Thomas Sandgaard (3)
|
|
|
17,723,392
|
|
|
|
54.1
|
%
|
Daniel Moorhead (4)
|
|
|
76,815
|
|
|
|
*
|
|
Barry D. Michaels (5)
|
|
|
8,334
|
|
|
|
*
|
|
Michael Cress (6)
|
|
|
8,334
|
|
|
|
*
|
|
Joshua Disbrow (7)
|
|
|
6,668
|
|
|
|
*
|
|
All executive officers and directors as a group (8)
|
|
|
17,823,543
|
|
|
|
54.1
|
%
|
|
*
|
Represents less than
1% of the outstanding common stock.
|
|
(1)
|
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission, (“SEC”), and includes voting and
investment power with respect to shares. Unless otherwise indicated below, to our knowledge,
all persons listed in the table have sole voting and dispositive power with respect to
their shares of common stock, except to the extent authority is shared by spouses under
applicable law. Pursuant to the rules of the SEC, the number of shares of common stock
deemed outstanding includes shares issuable upon settlement of restricted stock held
by the respective person which will vest within 60 days of February 26, 2019 and pursuant
to options held by the respective person that are currently exercisable or may be exercised
within 60 days of February 26, 2019.
|
|
(2)
|
Applicable percentage of ownership is based upon 32,238,024 shares of common stock outstanding as of February
22, 2019 and includes 460,636 stock options exercisable within 60 days of February 26, 2019 and 6,249 shares which will vest within
60 days of February 26, 2019.
|
|
(3)
|
Includes 393,821 stock options which are exercisable within 60
days of February 26, 2019.
|
|
(4)
|
Represents a restricted stock award of 10,000 shares issued on
June 5, 2017, of which 2,500 shares are vested; a restricted stock award of 5,000 shares
issued on December 11, 2017, of which 1,250 shares are vested; a restricted stock award
of 5,000 shares issued on March 5, 2018, of which no shares are vested but includes 1,250
shares which vest within 60 days of February 26, 2019 and a restricted stock award of
5,000 shares issued on June 5, 2018, of which no shares are. All restricted stock awards
vest in four equal annual installments beginning on the one year anniversary of the issue
date. Includes 66,815 stock options which are exercisable within 60 days of February
26, 2019 and 5,000 shares purchased on the open market on August 8, 2018.
|
|
(5)
|
Represents a restricted stock award of 20,000 shares issued on
January 10, 2018. 6,668 shares are vested and 1,666 shares will vest within 60 days of
February 26, 2019. The total award vests in equal quarterly installments over three years
beginning on the three month anniversary of the issue date.
|
|
(6)
|
Represents a restricted stock award of 20,000 shares issued on
January 10, 2018. 6,668 shares are vested and 1,666 shares will vest within 60 days of
February 26, 2019. The total award vests in equal quarterly installments over three years
beginning on the three month anniversary of the issue date
|
|
(7)
|
Represents a restricted stock award of 20,000 shares issued on
March 5, 2018. 5,001 shares are vested and 1,667 shares will vest within 60 days of February
26, 2019. The total award vests in equal quarterly installments over three years beginning
on the three month anniversary of the issue date.
|
|
(8)
|
Includes 460,636 stock options which are exercisable within 60
days of February 26, 2019 and 6,249 shares of common stock issuable upon settlement of
restricted stock which will vest within 60 days of February 26, 2019.
|
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31,
2018 regarding shares of common stock available for issuance under our equity incentive plans (in thousands except exercise price).
|
|
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
(excluding securities
reflected in the first
column)
|
|
Plan Category
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Stock Option Plan (1)
|
|
|
258
|
|
|
$
|
0.40
|
|
|
|
—
|
|
Equity Compensation Plans not approved by Shareholders
(2)
|
|
|
970
|
|
|
|
0.34
|
|
|
|
—
|
|
Warrants
|
|
|
150
|
|
|
|
2.42
|
|
|
|
|
|
2017 Stock Option Plan (3)
|
|
|
734
|
|
|
|
1.45
|
|
|
|
4,241
|
|
Total
|
|
|
2,112
|
|
|
$
|
0.88
|
|
|
|
4,241
|
|
|
(1)
|
All of these securities are available for issuance under the Zynex,
Inc. 2005 Stock Option Plan, approved by the Board of Directors on January 3, 2005
and by our stockholders on December 30, 2005.
|
|
(2)
|
As of December 31, 2014, the 2005 Stock Option Plan was terminated,
termination of the plan did not affect the rights and obligations of the participants
and the company arising under options previously granted.
|
|
(3)
|
The 2017 Stock Option Plan was approved by shareholders on June
1, 2017.
|
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We employ Mr. Sandgaard’s sons. The following
table sets forth the compensation for services rendered in 2018 and 2017:
Name and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Option
Awards
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
Joachim Sandgaard - Information systems
manager
|
|
|
2018
|
|
|
|
100,000
|
(2)
|
|
|
—
|
|
|
|
6,180
|
(1)
|
|
|
106,180
|
|
Joachim Sandgaard - Information systems manager
|
|
|
2017
|
|
|
|
95,833
|
(2)
|
|
|
—
|
|
|
|
5,239
|
(1)
|
|
|
101,072
|
|
Martin Sandgaard—Production manager, marketing
and website/graphic design
|
|
|
2018
|
|
|
|
85,886
|
|
|
|
5,370
|
(3)
|
|
|
6,180
|
(1)
|
|
|
97,436
|
|
Martin Sandgaard—Production manager, marketing
and website/graphic design
|
|
|
2017
|
|
|
|
74,837
|
|
|
|
36,912
|
(3)
|
|
|
5,695
|
(1)
|
|
|
117,444
|
|
|
(1)
|
Includes health and dental insurance provided by the Company
|
|
(2)
|
To meet Mr. Sandgaard’s obligation to his former wife under
a settlement agreement, the Company, during the fourth quarter of 2015, entered into
three-year employment arrangement totaling $100,000 per year with Mr. Joachim Sandgaard.
This agreement terminated in December 2018.
|
|
(3)
|
The option awards represent the grant date fair value of stock
options granted in accordance with Accounting Standards Codification (ASC) Topic 718.
See Note 5 of the Consolidated Financial Statements for additional information.
|
ITEM 14. PRINCIPAL ACCOUNTING
FEES AND SERVICES
The following presents fees for professional services rendered
by our independent registered public accounting firm Plante & Moran, PLLC, formerly known as EKS&H, LLLP for each of the
years ended December 31, 2018 and 2017.
|
|
2018
|
|
|
2017
|
|
Audit Fees
|
|
$
|
183,119
|
|
|
$
|
199,600
|
|
Tax Fees
|
|
|
—
|
|
|
|
—
|
|
All Other Fees
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
183,119
|
|
|
$
|
199,600
|
|
Plante & Moran, PLLC, formerly known as
EKS&H, LLP, has served as our independent registered public accounting firm beginning January 2017.
Audit fees consist of fees related to
professional services rendered in connection with the audit of our annual financial statements and review of our quarterly financial
statements.
Tax
Fees
None.
Our policy is to pre-approve all audit
and permissible non-audit services performed by the independent accountants. These services may include audit services, audit-related
services, tax services and other services. Under our Audit Committee’s policy, pre-approval is generally provided for particular
services or categories of services, including planned services, project-based services and routine consultations. In addition,
the Audit Committee may also pre-approve particular services on a case-by-case basis. Our Audit Committee approved all services
that our independent accountants provided to us in the past two fiscal years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 AND 2017
(1)
ORGANIZATION, NATURE OF BUSINESS AND MANAGEMENT’S
PLANS
Organization
Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado. We operate in one
primary business segment, medical devices which include electrotherapy and pain management products. As of December 31, 2018, 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 years ended December 31, 2018 and 2017 from international sales and
marketing. Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation) has developed a blood volume
monitoring device but is awaiting approval by the U.S. Food and Drug Administration (“FDA”) as well as CE Marking in
Europe; therefore, ZMS has achieved no revenues to date. Its inactive subsidiaries include Zynex NeuroDiagnostics, Inc. (“ZND,”
a wholly-owned Colorado corporation), Zynex Billing and Consulting, LLC (“ZBC,” an 80% owned Colorado limited liability
company) and Pharmazy, Inc. (“Pharmazy”), which was incorporated in June 2015 as a wholly-owned Colorado corporation.
The Company’s compound pharmacy operated as a division of ZMI dba as Pharmazy through January 2016.
The term “the Company” refers to Zynex, Inc. and
its active and inactive subsidiaries.
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 drugs and 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 our medical devices are designed to be patient friendly and designed for home use. Our devices are small,
portable, battery operated and include an electrical pulse generator which is connected to the body via electrodes. All of our
medical devices are marketed in the U.S. and are subject to FDA regulation and approval. Our products require a physician’s
prescription before they can be dispensed in the U.S. Our primary product is the NexWave device. The NexWave is marketed
to physicians and therapists by our 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 years ended December 31, 2018 and 2017, the Company
generated substantially all of its revenue (99.99%) in North America from sales and supplies of its devices to patients and health
care providers.
(2)
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Zynex, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Non-controlling Interest
Non-controlling interest in the equity of a subsidiary is accounted
for and reported as stockholders’ equity (deficit). Non-controlling interest represents the 20% ownership in the Company’s
majority-owned (but currently inactive) subsidiary, ZBC.
Reclassifications
Certain reclassifications have been made to the 2017 financial
statements to conform to the consolidated 2018 financial statement presentation. These reclassifications had no effect on net
earnings or cash flows as previously reported.
Use of Estimates
Preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates. The most significant management estimates used
in the preparation of the accompanying consolidated financial statements are associated with the allowance for billing adjustments
and uncollectible accounts receivable, the reserve for obsolete and damaged inventory, the life of its rented devices, stock-based
compensation, and valuation of long-lived assets and realizability of deferred tax assets.
Fair Value of Financial Instruments
Fair value is the price that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value
is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and
bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value
measurement:
Level 1 — Quoted prices in active markets for identical
assets or liabilities.
Level 2 — Observable inputs other than quoted prices
in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive
markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term
of the assets or liabilities.
Level 3 — Inputs that are generally unobservable and
typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
The Company’s financial instruments include cash, accounts
receivable, accounts payable, and accrued liabilities, for which current carrying amounts approximate fair value due to their
short-term nature. Financial instruments also included the notes payable related to our private placement and capitalized leases,
the carrying value of which approximates fair value because the interest rates on the outstanding borrowings are at rates that
approximate market rates for borrowings with similar terms and average maturities.
Cash and Cash Equivalents
The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents. Short-term investments include investments with
maturities greater than three months, but not exceeding 12 months, or highly liquid investments with maturities greater than 12
months that the Company intends to liquidate during the next 12 months for working capital needs.
Inventory
Inventory, which primarily represents devices, parts and supplies,
are valued at the lower of cost (average) or market.
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 equal to the difference between the costs of inventories on hand and the estimated market value based upon assumptions
about future demand. If future demand is less favorable than currently projected by management, additional inventory write-downs
may be required.
Total gross inventories at December 31, 2018 were $0.8 million
which was comprised of finished goods, work in progress, and parts and supplies as compared to December 31, 2017 of $0.4 million.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and are depreciated over their estimated useful lives or lease term, if shorter, using the straight-line method.
Leasehold improvements are stated at cost, less accumulated amortization, and are amortized over the shorter of the lease term
or estimated useful life of the asset.
Repairs and maintenance costs are charged to expense as incurred.
Revenue Recognition, Accounts Receivable, Allowance for
Billing Adjustments and Collectability
On January 1, 2018 the company adopted the new accounting standard
on revenue recognition issued by the Financial Accounting Standards Board (“FASB”). Pursuant to the revenue from contracts
with customer’s standards the Company recognizes revenue when it transfers promised goods to customers in an amount that
reflects the consideration to which the company expects to be entitled, known as the transaction price. The company elected to
use the modified retrospective method which resulted in immaterial changes to previously issued financial statements and retained
earnings.
Revenue is generated primarily from sales in the United States of our electrotherapy devices and associated
supplies. Sales are primarily made with, and shipped, direct to the patient with a small amount of revenue generated from sales
to distributors. Device sales can be in the form of a purchase or a lease. Revenue related to purchased devices are recognized
in accordance with ASU No. 2014-09—“Revenue from Contracts with Customers” (Topic 606) and is recognized when
the device, which has been prescribed by a doctor, is delivered to the patient which is when control is deemed to have transferred
to the customer.
Revenue related to devices out on lease is recognized in accordance
with ASC 840, Leases. Using the guidance in ASC 840, we concluded our 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.
|
Leased units still require a doctor’s prescription and
the lease inception is dependent upon delivery. The company retains title to the leased device and those devices are classified
as property and equipment on the balance sheet. Since our leases are month-to-month and can be returned by the patient at any
time, revenue is typically recognized monthly as use by the patient persists.
Devices sales between purchased, subject to ASC 606, and leased,
subject to ASC 840, are broken down as following (in thousands):
|
|
For
the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
DEVICE REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
$
|
1,950
|
|
|
$
|
1,643
|
|
|
|
|
|
|
|
|
|
|
Leased
|
|
|
4,872
|
|
|
|
3,377
|
|
|
|
|
|
|
|
|
|
|
Total Device revenue
|
|
$
|
6,822
|
|
|
$
|
5,020
|
|
Supplies revenue is recognized once delivered to the patient, which is when control is deemed to have
transferred to the customer. 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.
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 payors, 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. The Company has $0.9
million at the end of December 31, 2018 in deferred revenue related to an insurance reimbursement claim that is expected to be
resolved in 2019. For additional detail see description below in Note 9. There are no substantial costs incurred through support
or warranty obligations.
Primarily all of The Company’s revenues are derived, and the related receivables are due, from patients
with private health insurance carriers and workers compensation claims (collectively “Third-party Payors”), with a
small portion related to private pay individuals , attorney and auto claims. Transaction price is estimated with variable consideration
using the most likely amount technique for Third-party Payor reimbursement deductions, known throughout the health care industry
as “billing adjustments” whereby the Third-party Payors unilaterally reduce the amount they reimburse for the Company’s
products, refund requests, and for the timing and values of amounts to be billed. 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 billing arrangements and the uncertainty of reimbursement amounts for certain products from payors or unanticipated
requirements to refund payments previously received may result in adjustments to amounts originally recorded. Due to continuing
changes in the health care industry and third-party reimbursement, as well as changes in our billing practices to increase cash
collections, it is possible our forecasting model to estimate collections could change, which could have an impact on our results
of operations and cash flows. Any differences between estimated settlements and final determinations are reflected as an increase
or a reduction to revenue in the period when such final determinations are known. Historically these differences have been immaterial and The Company has not had to go back and reassess
the adjustments of future periods for past billing adjustments.
The basis of estimates includes historical rates of collection,
the aging of the receivables, trends in the historical reimbursement rates by insurance groups, determined using the portfolio
approach, and current relationships and experience with the Third-party Payors. A change in the way estimates are determined can
result from a number of factors, including experience and training of billing personnel, changes in the reimbursement policies
or practices of Third-party Payors, or changes in industry rates of reimbursement. The Company monitors the variability and uncertain
timing over payor groups in our portfolios. If there is a change in our payor mix over time, it could affect our net revenue and
related receivables. We believe we have a sufficient history of collection experience to estimate the net collectible amounts
by payor. However, changes to the allowance for billing adjustments, which are recorded as a reduction of transaction price, have
historically fluctuated and may continue to fluctuate significantly from quarter to quarter and year to year.
The Company frequently receives refund requests from insurance
providers relating to specific patients and dates of service. Billing and reimbursement disputes are very common in the Company’s
industry. These requests are sometimes related to a limited number of patients or products; at other times, they include a significant
number of refund claims in a single request. The Company reviews and evaluates these requests and determines if any refund request
is appropriate. The Company also reviews these refund claims when it is rebilling or pursuing reimbursement from insurance providers.
The Company frequently has significant offsets against such refund requests, and sometimes amounts are due to the Company in excess
of the amounts of refunds requested by the insurance providers. Therefore, at the time of receipt of such refund requests, the
Company is generally unable to determine if a refund request is valid and should be accrued. Such refunds are recorded when the
amount is fixed and determinable. However, management maintains an allowance for estimated future refunds which we believe is
sufficient to cover future claims in connection with its estimates of variable consideration recorded at the time sales are recorded.
The Company estimates the collectability of revenues
based upon historical rates of collection, the aging of receivables, trends in the historical reimbursement rates by insurance
groups, and current relationships and experience with the third – party payors. Billing adjustments are recorded as an adjustment
of transaction price and are reflected as an increase or a reduction to revenue in the period when such adjustments are identified.
As of December 31, 2018, the Company believes its accounts
receivable is reasonably stated at its net collectible value and has an adequate allowance for billing adjustments relating to
all known insurance disputes and refund requests.
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.
Rent
The Company considers all highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents. Short-term investments include investments with maturities greater than three months, but not exceeding
12 months, or highly liquid investments with maturities greater than 12 months that the Company intends to liquidate during the
next 12 months for working capital needs. The lease term begins when the Company has the right to control the use of the property,
which is typically before rent payments are due under the lease agreement. The difference between the rent expense and rent paid
is recorded as Deferred rent in the consolidated balance sheets. Tenant incentives used to fund leasehold improvements are recorded
in deferred rent and amortized as reductions of lease rent expense ratably over the lease term.
Advertising
The Company expenses advertising costs as they are incurred.
Advertising expense for each of the years ended December 31, 2018 and 2017 was approximately $0.1 million.
Research and Development
Research and development costs are expensed when incurred.
Research and development expense for the years ended December 31, 2018 and 2017 was approximately $0.2 million and $0.1 million,
respectively. Research and development which includes salaries related to research and development and raw materials are included
in selling, general and administrative expenses on the consolidated statement of comprehensive income.
Income Taxes
We record 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
consolidated balance sheets, as well as operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities
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. We reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more
likely than not that these benefits will not be realized.
We use a recognition threshold and a measurement attribute
for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those
benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly
revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing
a territorial tax system, imposing a one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain
costs, among other things.
The Company is subject to the provisions of the Financial Accounting
Standards Board (“FASB”) ASC 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities
of a change in tax rates be recognized in the period the tax rate change was enacted. Due to the complexities involved in accounting
for the recently enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”)
118 allows a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related
tax impacts. The company has finalized its analysis of tax impacts as of December 31, 2018 and had recorded no material adjustments.
Recent Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic
815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which amends and
simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management
activities in the financial statements. ASU 2017-12 is effective for us in the first quarter of fiscal 2020, and
earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2017-12 on our
consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”).
These amendments require the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases
currently classified as operating leases under ASC 840 “Leases”. These amendments also require qualitative disclosures
along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. Early application is permitted. Entities are required to apply the amendments
at the beginning of the earliest period presented using a modified retrospective approach. We will adopt the new standard effective
January 1, 2019, on a modified retrospective basis. While we continue to evaluate the effect of adopting this guidance on our consolidated
financial statements and related disclosures, we expect our operating leases; will be subject to the new standard. We estimate
approximately $4.0 million would be recognized as total right of use assets and operating lease liabilities on our consolidated
balance sheet as of January 1, 2019. Other than disclosed we do not expect the new standard to have a material impact on our remaining
consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock
Compensation (Topic 718), Improvements to Nonemployee Share-based Payments (“ASU 2018-07”). This ASU expands the scope
of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The effective date
for the standard is for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. We will
adopt the new standard effective January 1, 2019. The new guidance is required to be applied retrospectively with the cumulative
effect recognized at the date of initial application. The Company is currently evaluating the effect ASU 2018-07, however we do
not anticipate adoption to have a significant impact on the consolidated financial statements,
Management has evaluated other recently issued accounting pronouncements
and does not believe that any of these pronouncements will have a material impact on the Company’s consolidated financial
statements.
Recent Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09—“Revenue
from Contracts with Customers” (Topic 606) which amended revenue recognition guidance to clarify the principles for recognizing
revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or
services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those
goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required
about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill
a contract. The Company adopted the new ASU as of January 1, 2018 using the modified retrospective method and resulted
in no material changes to previously stated financial statements. For further details see the revenue recognition policy described
previously in Note 2.
(3)
BALANCE SHEET COMPONENTS
The components of certain balance sheet line items are as follows
(in thousands):
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Office furniture and
equipment
|
|
$
|
1,172
|
|
|
$
|
998
|
|
Assembly equipment
|
|
|
128
|
|
|
|
128
|
|
Vehicles
|
|
|
184
|
|
|
|
76
|
|
Leasehold improvements
|
|
|
480
|
|
|
|
-
|
|
Leased devices
|
|
|
317
|
|
|
|
-
|
|
|
|
|
2,281
|
|
|
|
1,202
|
|
Less accumulated
depreciation
|
|
|
(1,462
|
)
|
|
|
(1,014
|
)
|
|
|
$
|
819
|
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Assets acquired under capital lease:
|
|
|
|
|
|
|
|
|
Original book value
|
|
$
|
461
|
|
|
$
|
461
|
|
Accumulated
depreciation
|
|
|
(441
|
)
|
|
|
(379
|
)
|
Net book value
|
|
$
|
20
|
|
|
$
|
82
|
|
The Company monitors devices out on lease
for potential loss and places an estimated reserve on the net book value based on historical loss rates.
Total depreciation expense related to our purchased property
and equipment was $0.2 million and $0.1 million for the years ended December 31, 2018 and 2017, respectively.
Total depreciation expense related to devices out on lease
was $0.3 million for the years ended December 31, 2018 and 2017. Depreciation
on leased units is reflected on the income statement as cost of revenue.
Included in office furniture and equipment at December 31,
2018 and 2017 are assets under capital lease. Depreciation expense related to assets under capital leases was approximately $0.1
million for the years ended December 31, 2018 and 2017.
During the year ending December 31, 2017, rental inventory
of $ 0.2 million was written off.
(4)
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.
The calculation of basic and diluted earnings per share for
the years ended December 31, 2018 and 2017 are as follows:
|
|
For
the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Basic income per share:
|
|
|
|
|
|
|
|
|
Net income available
to common stockholders
|
|
$
|
9,552
|
|
|
$
|
7,365
|
|
Basic weighted average shares
outstanding
|
|
|
32,503
|
|
|
|
32,156
|
|
Basic income per share:
|
|
$
|
0.29
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share:
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders
|
|
$
|
9,552
|
|
|
$
|
7,365
|
|
Weighted average shares outstanding
|
|
|
32,503
|
|
|
|
32,156
|
|
Effect of dilutive
securities - options and restricted stock
|
|
|
1,540
|
|
|
|
1,040
|
|
Diluted weighted average shares
outstanding
|
|
|
34,043
|
|
|
|
33,196
|
|
Diluted income per share:
|
|
$
|
0.28
|
|
|
$
|
0.22
|
|
For the year ended December 31, 2018, 0.4 million shares of
common stock were excluded from the dilutive stock calculation because their exercise prices were greater than the average fair
value of our common stock for the period.
For the year ended December 31, 2017, 0.3 million shares of
common stock were excluded from the dilutive stock calculation because their exercise prices were greater than the average fair
value of our common stock for the period.
Prior to their issuance on August 28, 2017, the dilutive securities
calculation included 776,250 shares of common stock issuable related to the private placement which was completed on February
28, 2017. The common shares were issuable six months from the closing of the shareholder notes.
(5)
STOCK-BASED COMPENSATION PLANS
In June 2017, our stockholders approved the 2017 Stock
Incentive Plan (the “2017 Stock Plan”) with a maximum of 5,000,000 shares reserved for issuance. Awards permitted
under the 2017 Stock Plan include: Stock Options and Restricted Stock. Awards issued under the 2017 Stock Plan are
at the discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to the closing
price of our common stock on the date of grant and generally vest over four years. During the years ended December 31, 2018
and 2017, 0.2 million and 0.5 million option awards were granted under the 2017 Stock Plan, respectively. At December 31, 2018,
0.7 million awards remain issued and outstanding.
During the years ended December 31, 2018 and 2017, the Company
awarded 80,000 and 15,000 shares, respectively, of restricted stock to the Board of Directors and management under the 2017 Stock
plan. The fair market value of restricted shares for share based compensation expensing is equal to the closing price of our common
stock on the date of grant. The vesting on Restricted Stock Awards are typically released quarterly over three years for Board
of Directors and annually over four years of management. During the year ended December 31, 2018, 18,753 shares of restricted
stock vested. No shares of restricted stock vested during the year ended December 31, 2017. Restricted stock awards are issued
to the recipient upon vesting and are not included in outstanding shares until such vesting and issuance occurs.
The Company previously reserved 3,000,000 shares of common
stock for issuance under its 2005 Stock Option Plan (the “2005 Stock Plan”). The 2005 Stock Plan expired as of December
31, 2014. Vesting provisions of the expired plan were to be determined by the Board of Directors. All stock options under the
2005 Stock Plan expire no later than ten years from the date of grant. Options granted in 2015, 2016 and through May 2017 prior
to the approval of the 2017 Stock Incentive Plan were approved and certified by the board of directors on September 6, 2017 under
the existing 2005 stock option plan. At December 31, 2018, 1.2 million options remain issued and outstanding under the 2005 stock
option plan.
The following summarizes stock-based compensation expenses
recorded in the condensed consolidated statements of operations:
During the years ended December 31, 2018 and 2017,
the Company recorded compensation expense related to stock options, restricted stock and warrants of approximately $0.4 million
and $0.3 million, respectively.
The following table summarizes share based compensation
expenses recorded in the consolidated statement of income:
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cost of Revenue
|
|
$
|
33
|
|
|
$
|
5
|
|
Selling, General, and administrative
|
|
|
337
|
|
|
|
289
|
|
Total stock based compensation
expense
|
|
$
|
370
|
|
|
$
|
294
|
|
During the year ended December 31, 2018 there were
0.2 million options granted, plus the aforementioned restricted stock grants. The options were granted at a weighted average exercise
price of $2.99 per share. The weighted-average grant date fair value of options granted during the year ended December 31, 2018
was $2.65.
During the year ended December 31, 2017, the Company granted options to purchase up to 0.7 million shares
of common stock to employees at a weighted average exercise price of $0.83 per share. The weighted-average grant date fair value
of options granted during the year ended December 31, 2017 was $0.66. The Company issued 15,000 shares of restricted stock to management
during the year ended December 31, 2017.
The Company received proceeds of approximately $0.2
million and $39,000 related to option exercises during the years ended December 31, 2018 and 2017, respectively.
The Company uses the Black Scholes option pricing model to
determine the fair value of stock option grants, using the following assumptions during the years ended December 31, 2018 and
2017:
|
|
2018
|
|
|
2017
|
|
Weighted average expected term
|
|
|
6.25
years
|
|
|
|
6.25
years
|
|
Weighted average volatility
|
|
|
123
|
%
|
|
|
124
|
%
|
Weighted average risk-free interest rate
|
|
|
3.00
|
%
|
|
|
1.83
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The weighted average expected term of stock options represents
the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The weighted
average expected volatility is based on the historical price volatility of the Company’s common stock. The weighted average
risk-free interest rate represents the U.S. Treasury bill rate for the expected term of the related stock options. The dividend
yield represents the Company’s anticipated cash dividend over the expected term of the stock options. Forfeitures are accounted
for as they occur.
A summary of option activity under all equity compensation
plans for the years ended December 31, 2018 and 2017 are presented below:
|
|
Number
of Shares
(in
thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
Outstanding at December 31, 2016
|
|
|
2,261
|
|
|
$
|
0.40
|
|
|
|
|
|
|
$
|
135
|
|
Granted
|
|
|
722
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(38
|
)
|
|
|
1.02
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(803
|
)
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
2,142
|
|
|
$
|
0.56
|
|
|
|
6.5
|
|
|
$
|
5,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
2,142
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
215
|
|
|
$
|
2.99
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(357
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(115
|
)
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,885
|
|
|
$
|
0.80
|
|
|
|
6.32
|
|
|
$
|
4,085
|
|
Exercisable at December 31, 2018
|
|
|
1,317
|
|
|
$
|
0.44
|
|
|
|
5.22
|
|
|
|
|
|
The following is a summary of stock options outstanding under
the plans as of December 31, 2018:
Range
|
|
Outstanding
Number of
Options (in
thousands)
|
|
|
WA
Remaining
Contractual
Life (years)
|
|
|
WA
Outstanding
Strike Price
|
|
|
Exercisable
Number of
Options (in thousands)
|
|
|
Remaining
Exercisable
Contractual Life (years)
|
|
|
WA
Exercisable
Strike Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0 to $1.00
|
|
|
|
1,542
|
|
|
|
5.71
|
|
|
$
|
0.37
|
|
|
|
1,254
|
|
|
|
5.12
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.01 to $2.00
|
|
|
|
31
|
|
|
|
5.08
|
|
|
$
|
1.36
|
|
|
|
19
|
|
|
|
2.57
|
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.01 to $3.00
|
|
|
|
221
|
|
|
|
9.28
|
|
|
$
|
2.63
|
|
|
|
44
|
|
|
|
9.20
|
|
|
$
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.01 to $4.00
|
|
|
|
91
|
|
|
|
9.86
|
|
|
$
|
3.44
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,885
|
|
|
|
6.32
|
|
|
$
|
0.80
|
|
|
|
1,317
|
|
|
|
5.22
|
|
|
$
|
0.44
|
|
A summary of restricted stock award activity under all equity
compensation plans for the year ended December 2018 and 2017 are presented below:
|
|
Number
of Shares
(in
thousands)
|
|
Outstanding at December 31, 2016
|
|
|
-
|
|
Granted
|
|
|
15
|
|
Vested
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Outstanding at December 31, 2017
|
|
|
15
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
15
|
|
Granted
|
|
|
80
|
|
Vested
|
|
|
(19
|
)
|
Forfeited
|
|
|
-
|
|
Outstanding at December 31, 2018
|
|
|
76
|
|
A summary of status of the Company’s non-vested share
awards as of and for the year ended December 31, 2018 is presented below:
|
|
Non-vested
Shares
Under
Option (in
thousands)
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Non-vested at December 31, 2017
|
|
|
658
|
|
|
$
|
0.81
|
|
Granted
|
|
|
215
|
|
|
$
|
2.65
|
|
Vested
|
|
|
(256
|
)
|
|
$
|
0.72
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited
|
|
|
(48
|
)
|
|
$
|
1.98
|
|
Non-vested at December 31, 2018
|
|
|
569
|
|
|
$
|
1.44
|
|
As of December 31, 2018, there was approximately $0.6 million
of total unrecognized compensation costs related to unvested stock options and restricted stock. These costs are expected to be
recognized over a weighted average period of 2.8 years.
The total intrinsic value of stock option exercises for the
years ended December 31, 2018 and 2017 was $1.1 million and $0.1 million, respectively. The total fair value of stock awards vested
during the years ended December 31, 2018, and 2017 was $0.2 million and $0.1 million, respectively.
(6)
STOCKHOLDERS’ EQUITY
Common Stock Dividend
Our Board of Directors declared a cash dividend of $0.07 per
share on November 6, 2018. The dividend is payable on January 18, 2019 to shareholders of record as of January 2, 2019. An
accrued dividend as of December 31, 2018 was $2.3 million.
Any determination to declare a future quarterly dividend, as
well as the amount of any cash dividend which may be declared, will be based on our financial position, earnings, earnings outlook
and other relevant factors at that time.
Treasury Stock
From December 6, 2017 through March 6, 2018, we had the
ability through our stock purchase program to re-purchase our common stock at prevailing market prices either in the open market
or through privately negotiated transactions up to $2.0 million. On March 6, 2018, we reached the limit of $2.0 million and
share re-purchases were ceased. From the inception of the plan through March 6, 2018, we purchased 495,091 shares of our common
stock for $2.0 million or an average price of $4.04 per share.
On May 14, 2018, our Board of Directors approved a new program
to buy back an additional $2.0 million of our common stock at prevailing market prices either in the open market or through privately
negotiated transactions through May 13, 2019. From the inception of the plan through December 31, 2018 the Company purchased 524,129
shares of our common stock for $1.5 million or an average price of $3.20 per share.
For the year ended December 31, 2018 the Company purchased
a total of 932,383 shares of our common stock for $3.4 million or an average price $3.68 per share.
Warrants
In October 2017, 150,000 common stock warrants were issued
in exchange for professional services.
In connection with the agreement entered into on March 28,
2016, with Triumph Bank, the Lender suspended this monthly payment requirement for February, March and April of 2016 up to an
aggregate cap of $250,000, in exchange for the issuance of a common stock warrant to purchase 50,000 shares of the Company’s
common stock.
A summary of stock warrant activity for the years ended December
31, 2018 and 2017 are presented below:
|
|
Number
of
Warrants
(in
thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
Outstanding at December 31, 2016
|
|
|
52
|
|
|
$
|
0.21
|
|
|
|
|
|
|
$
|
-
|
|
Granted
|
|
|
150
|
|
|
$
|
2.42
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2
|
)
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
200
|
|
|
$
|
1.86
|
|
|
|
5.86
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
200
|
|
|
$
|
1.86
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(50
|
)
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable
at December 31, 2018
|
|
|
150
|
|
|
$
|
2.42
|
|
|
|
5.77
|
|
|
$
|
79
|
|
The Company uses the Black Scholes option pricing model to
determine the fair value of common stock warrants, using the following assumptions during the years ended December 31, 2018 and
2017:
|
|
2018
|
|
|
2017
|
|
Weighted average expected term
|
|
|
-
|
|
|
|
4.38
years
|
|
Weighted average volatility
|
|
|
-
|
|
|
|
136.62
|
%
|
Weighted average risk-free interest rate
|
|
|
-
|
|
|
|
1.51
|
%
|
Dividend yield
|
|
|
-
|
|
|
|
0
|
%
|
(7)
INCOME TAXES
The pre-tax income from continuing operations on which the
provision for income taxes was computed is as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
10,237
|
|
|
$
|
7,511
|
|
Foreign
|
|
|
(21
|
)
|
|
|
(17
|
)
|
Total
|
|
|
10,216
|
|
|
|
7,494
|
|
Income tax expense consists of the following for the years
ended December 31, 2018 and 2017 (in thousands):
|
|
2018
|
|
|
2017
|
|
Current tax expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,080
|
|
|
$
|
119
|
|
State
|
|
|
309
|
|
|
|
10
|
|
Total tax expense:
|
|
|
1,389
|
|
|
|
129
|
|
Deferred tax (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(462
|
)
|
|
|
—
|
|
State
|
|
|
(263
|
)
|
|
|
—
|
|
Total Deferred tax (benefit):
|
|
$
|
(725
|
)
|
|
$
|
—
|
|
Total
|
|
$
|
664
|
|
|
$
|
129
|
|
A reconciliation of income tax computed at the U.S. statutory
rate of 21% to the effective income tax rate is as follows:
|
|
2018
|
|
|
2017
|
|
Statutory rate
|
|
|
21
|
%
|
|
|
34
|
%
|
State taxes
|
|
|
4
|
|
|
|
3
|
|
Permanent differences and other
|
|
|
1
|
|
|
|
0
|
|
Change in valuation allowance
|
|
|
(16
|
)
|
|
|
(54
|
)
|
Stock based compensation
|
|
|
(3
|
)
|
|
|
—
|
|
Other (true – up)
|
|
|
0
|
|
|
|
7
|
|
Rate Adjustment
|
|
|
0
|
|
|
|
12
|
|
Effective rate
|
|
|
7
|
%
|
|
|
2
|
%
|
The tax effects of temporary differences that give rise to
deferred tax assets (liabilities) at December 31, 2018 and 2017 are as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
$
|
37
|
|
|
$
|
25
|
|
Deferred Revenue
|
|
|
217
|
|
|
|
217
|
|
Accounts receivable
|
|
|
18
|
|
|
|
19
|
|
Inventory
|
|
|
117
|
|
|
|
92
|
|
Stock based
compensation
|
|
|
138
|
|
|
|
137
|
|
Tax Credits
and NOL Carryforward
|
|
|
354
|
|
|
|
1,141
|
|
Other
|
|
|
150
|
|
|
|
6
|
|
Property and
equipment
|
|
|
-
|
|
|
|
35
|
|
Amortization
|
|
|
57
|
|
|
|
64
|
|
|
|
|
1,088
|
|
|
|
1,736
|
|
Less: Valuation
allowance
|
|
|
(172
|
)
|
|
|
(1,727
|
)
|
Deferred
tax assets
|
|
$
|
916
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
Deferred tax Liabilities:
|
|
|
|
|
|
|
|
|
Property and
equipment
|
|
$
|
(176
|
)
|
|
$
|
-
|
|
Prepaid
Expenses
|
|
|
(15
|
)
|
|
|
(9
|
)
|
Deferred
tax liabilities
|
|
$
|
(191
|
)
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Net
Deferred tax assets
|
|
$
|
725
|
|
|
$
|
-
|
|
For federal tax purposes, the Company completely utilized its remaining $2.7 million in NOL carryforwards
as of December 31, 2018. The Company has state NOL carryforwards of approximately $4.9 million for state purposes, which expire
at various dates ranging from five to seven years. The Company has $0.2 million in federal R&D tax credits that will expire
by the year 2021.
As of December 31, 2017, the Company had a valuation allowance of approximately $1.8 million. The ultimate
realization of deferred tax assets is dependent upon the portion of the asset for which it is more likely than not that a benefit
will be realized. Management considers past history, the scheduled reversal of deferred tax liabilities, available taxes in carryback
periods, projected future taxable income projections and tax planning strategies in making this assessment. During 2018,
Management determined that a valuation allowance was no longer necessary and released the entire amount except those related to
the release of certain tax credits totaling $0.2 million.
The accounting standard related to income taxes applies to
all tax positions and defines the confidence level that a tax position must meet in order to be recognized in the financial statements.
The accounting standard requires that the tax effects of a position be recognized only if it is "more-likely-than-not"
to be sustained by the taxing authority as of the reporting date. If a tax position is not considered "more-likely-than-not"
to be sustained, then no benefits of the position are to be recognized. Differences between financial and tax reporting which
do not meet this threshold are required to be recorded as unrecognized tax benefits. This standard also provides guidance
on the presentation of tax matters and the recognition of potential IRS interest and penalties. As of December 31, 2018 and 2017,
the Company does not have an unrecognized tax liability.
The Company does not classify penalty and interest expense
related to income tax liabilities as an income tax expense.
The Company files income tax returns in the U.S. and various
state jurisdictions, and there are open statutes of limitations for taxing authorities to audit our tax returns from 2011 through
the current period.
(8)
LINE OF CREDIT
The Company had an asset-backed revolving credit facility under
a Loan and Security Agreement as amended, (the “Triumph Agreement”) with Triumph Healthcare Finance. This credit facility
was paid in full on June 30, 2017.
The Triumph Agreement contained certain customary restrictive
and financial covenants for asset-backed credit facilities. The Company had not been in compliance with the financial covenants
under the Triumph Agreement since July 2014.
On July 14, 2014, the Company received notice from the Lender
of an event of default under the Triumph Agreement. The notice relates to the Company’s default under the minimum debt service
coverage ratio requirement for the quarter ended March 31, 2014 and certain other alleged defaults. The Lender notified the Company
that it was exercising its default remedies under the Triumph Agreement, including, among others, accelerating the repayment of
all outstanding obligations under the Triumph Agreement (outstanding principal and accrued interest) and collecting the Company’s
bank deposits to apply towards the outstanding obligations.
As of December 31, 2017, $0 was outstanding under the Triumph
Agreement as compared to $2.8 million at December 31, 2016. Subsequent to the default and prior to the pay off, the effective
interest rate under the Triumph Agreement was approximately 11.0% (6.75% interest rate plus 3% additional default interest rate
and 1.25% fees). The Triumph Agreement required monthly interest payments in arrears on the first day of each month. The Triumph
Agreement originally matured on December 19, 2014. Triumph had agreed to forbear from the exercise of its rights and remedies
under the terms of the Triumph Agreement through June 30, 2017, pursuant to the terms of the March 31, 2017 forbearance agreement.
In connection with the agreement entered into on March 28, 2016, the Lender suspended this monthly payment requirement for February,
March and April of 2016 up to an aggregate cap of $250,000, in exchange for the issuance of a warrant to purchase 50,000 shares
of the Company’s common stock.
The Company used the Black Scholes option pricing model to
determine the fair value of the stock warrant, using the following assumptions:
Contractual term
|
|
5.0 years
|
|
Volatility
|
|
|
122.44
|
%
|
Risk-free interest rate
|
|
|
1.48
|
%
|
Dividend yield
|
|
|
1.44
|
%
|
During 2016 the Company recorded bank fee expense related to
this stock warrant of $15,000.
(9)
DEFERRED INSURANCE REIMBURSEMENT
During the first quarter of 2016, the Company collected $880,000
from a single insurance company for accounts receivable. The accounts receivable had been previously reduced to zero by the allowance
for billing adjustments. Subsequent to March 31, 2016, the insurance company verbally communicated to the Company that this payment
was made in error and requested it be refunded to the insurance company. The Company recorded this $880,000 insurance reimbursement
as a deferred insurance liability. However, the Company is disputing the refund request and has initiated an internal review of
the reimbursement to determine that the original sales arrangement was properly executed, the products had been delivered, the
price of the products and the reimbursement rate is determinable, and the Company’s ultimate claim to the reimbursement
is reasonably assured. The Company will record the appropriate amount as net revenue when such internal review is complete and
any refund obligation is deemed remote.
(10)
PRIVATE PLACEMENT MEMORANDUM
Commencing in November of 2016, the Company conducted a private
placement on a “best efforts, minimum-maximum” basis of 12% unsecured subordinated promissory notes, for a minimum
of $1,000,000 and a maximum of $1,500,000 pursuant to Sections 4(a) (2) and 4(a) (5) of the Securities Act of 1933, as amended
(the “1933 Act”) and Rule 506(b) of the 1933 Act. The offering was conducted through a FINRA registered broker, Newbridge
Securities Corporation (“Newbridge”). On February 28, 2017, the Company issued promissory notes totaling $1,035,000,
with a maturity date of June 28, 2018. The Company was obligated to make monthly repayments commencing on July 1, 2017, until
the senior lender had been paid in full, with a limitation on the funds available for repayment to the note holders to an amount
equal to 5% of the Company’s collections received by the senior lender during that month. Newbridge was compensated in connection
with sales made in the offering consisting of (i) a cash amount equaling 10% commissions; (ii) a 3% non-accountable expense allowance
(iii) expense reimbursement of $155,000 (iv) 776,250 shares of our common stock and (v) fees totaling $255,000. In connection
with the sale of the notes, the Company had an obligation to issue 776,250 shares of the common stock, six months after issuance
of the notes to the noteholders which had initially been recorded as a liability totaling $255,000. The shares were issued to
the note holders on August 28, 2017. In connection with the Offering, we also paid Triumph Bank, our senior secured lender, $342,000
as repayment of principal and interest on the outstanding obligations. The common stock issued to the note holders represents
additional interest expense and was initially recorded as a liability and was adjusted each reporting period based upon the fair
value of the underlying stock until issued on August 28, 2017. During the year ended December 31, 2018 and 2017, the Company recognized
$.2 million and $0.5 million, respectively in debt issuance costs and debt discount amortization expense included in interest
expense, respectively. Also, included in interest expense is the increase in value of the common shares to be issued to
the private placement noteholders from the date of issue of approximately $740,000 for the year ended December 31, 2017.
The table below summarizes the cash and
non-cash components of the private placement memorandum (in thousands):
|
|
December
31, 2018
|
|
Proceeds from unsecured subordinated promissory
notes
|
|
$
|
1,035
|
|
Less debt issuance costs and discount
|
|
|
|
|
Payment of commission and placement agent fees and
related expenses
|
|
|
(155
|
)
|
Principal payments on promissory notes
|
|
|
(1,035
|
)
|
|
|
|
|
|
Non-cash activity
|
|
|
|
|
Common stock issued to placement agent
|
|
|
(255
|
)
|
Obligation to issue common stock to private placement
noteholders
|
|
|
(255
|
)
|
Amortization of issuance costs
and debt discount
|
|
|
665
|
|
Unsecured subordinated promissory notes, net
of issuance and debt discount
|
|
|
-
|
|
|
|
|
|
|
Current portion of unsecured subordinated
promissory notes
|
|
|
-
|
|
Long-term portion of unsecured subordinated promissory
notes
|
|
$
|
-
|
|
(11)
COMMITMENTS AND CONTINGENCIES
(a) – Lease Commitments
We lease office and operating facilities and equipment under
non-cancelable operating leases. Current facility leases include our new headquarters in Englewood, Colorado and a small warehouse/office
in Denmark. Rent expense was $0.9 million and $0.5 million for the years ended December 31, 2018 and 2017, respectively.
On October 20, 2017 the Company entered into a sublease agreement
with CSG Systems Inc. for approximately 41,715 square feet at 9555 Maroon Circle, Englewood CO 80112. The term of the sublease
runs through June 30, 2023, with an option to extend for an additional two years through June 30, 2025. During the first year
of the sublease, the rent per square foot is $7.50, increasing to $19.75 during the second year of the sublease and each year
thereafter for the initial term increasing by an additional $1 per square foot. The Company accounts for the total rent expense
over the lease term on a straight-line basis and the additional payable as deferred rent. As of December 31, 2018 the Company
had $0.6 million in deferred rent. The Company is also obligated to pay its proportionate share of building operating expenses.
The sub-landlord agreed to contribute approximately $0.2 million toward tenant improvements which is accounted for in deferred
rent and subsequently treated as a reduction of expense over the term of the lease.
Our prior headquarters lease in Lone Tree, Colorado contained
a termination clause which allowed the Company to terminate the lease at any time with three months written notice. We provided
notice to the landlord at the end of October 2017.
We entered into a month-to-month lease at our Lone Tree, Colorado
location for warehouse and production space to cover the periods January – April 2018. In April we transitioned all warehouse
and production facilities to our new Englewood, Colorado location. The lease was for 12,494 rentable square feet at $26.50 per
square foot and could be terminated at any time with thirty days’ notice. Termination notice was given on April 3, 2018.
The company entered into a two-year, non-cancelable operating
lease agreement for business equipment during the third quarter of 2018 for an annual expense of $4,500.
Future minimum commitments under non-cancelable operating leases
and capital leases as of December 31, 2018 are as follows (in thousands):
|
|
Operating
Leases
|
|
2019
|
|
$
|
836
|
|
2020
|
|
|
876
|
|
2021
|
|
|
914
|
|
2022
|
|
|
956
|
|
2023
|
|
|
495
|
|
Thereafter
|
|
|
-
|
|
Total minimum lease payments
|
|
$
|
4,077
|
|
(b) - Litigation
From time to time, the Company may become party to litigation
and other claims in the ordinary course of business. To the extent that such claims and litigation arise, management would provide
for them if losses are determined to be both probable and estimable.
The Company is currently not a party to any material pending
legal proceedings.
(12)
CONCENTRATIONS
The Company’s is exposed to concentration of credit risk
related primarily to its cash balances. The Company maintains its cash at major financial institutions. The Company has not experienced
any realized losses in such accounts and believes it is not exposed to any significant credit risk related to its cash.
The Company has one major vendor from which is sourced approximately 49% of supplies and components for its
electrotherapy products for the year ended December 31, 2018. The same vendor provided approximately 45% of supplies and
components for the year ended December 31, 2017. Management believes that its relationships with its suppliers are very good; The
Company has established credit terms with many vendors after several years of delayed and extended payments for cash flow reasons.
If the relationships were to be replaced, there may be a short-term disruption to operations, a period of time in which products
may not be available and additional expenses may be incurred.
The Company had receivables from a private health insurance
carrier at December 31, 2018 and 2017, which made up approximately 23% and 24%, respectively, of the net accounts receivable balance.
(13)
RETIREMENT PLAN
In 2012, the Company established a defined contribution retirement plan for our employees under section
401(k) of the Internal Revenue Code (the “401(k) Plan”) that is available to all employees 18 years of age
or older with three months of service. All employee contributions are fully vested immediately and employer contributions vest
over a period of four years. The Company has a discretionary employee match program and currently matches 35% of first
6% of an employee’s contributions.
During 2018 and 2017, The Company recorded an expense of $0.4
million and $0, under the aforementioned plan, respectively, related to the Company match.
(14)
RELATED PARTY TRANSACTIONS
The Company employs Mr. Martin Sandgaard and Mr. Joachim
Sandgaard, both sons of Thomas Sandgaard. Compensation for 2018 and 2017 totaled $0.2 million each year. To meet Mr.
Sandgaard’s obligation to his former wife under a settlement agreement, the Company, during the fourth quarter of 2015,
entered into three year employment arrangement totaling $0.1 million per year with Mr. Joachim Sandgaard. This arrangement
concluded at the end of 2018.
(15)
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information is as follows (in thousands,
except per share data):
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
3,436
|
|
|
$
|
5,042
|
|
|
$
|
6,820
|
|
|
$
|
8,134
|
|
Less: cost
of revenue and operating expenses
|
|
|
2,953
|
|
|
|
3,108
|
|
|
|
3,885
|
|
|
|
4,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
483
|
|
|
|
1,934
|
|
|
|
2,935
|
|
|
|
3,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
362
|
|
|
|
1,540
|
|
|
|
2,244
|
|
|
|
3,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
353
|
|
|
$
|
1,504
|
|
|
$
|
2,200
|
|
|
$
|
3,308
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Basic income per common share -
net income
|
|
$
|
0.01
|
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
|
$
|
0.10
|
|
*Diluted income per common share
- net income
|
|
$
|
0.01
|
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
6,876
|
|
|
$
|
7,573
|
|
|
$
|
8,131
|
|
|
$
|
9,337
|
|
Less: cost
of revenue and operating expenses
|
|
|
4,921
|
|
|
|
4,858
|
|
|
|
5,311
|
|
|
|
6,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,955
|
|
|
|
2,715
|
|
|
|
2,820
|
|
|
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,840
|
|
|
|
2,678
|
|
|
|
2,819
|
|
|
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,921
|
|
|
$
|
2,418
|
|
|
$
|
2,591
|
|
|
$
|
2,622
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Basic income per common share -
net income
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
*Diluted income per common share
- net income
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
$
|
0.08
|
|
* Sum of quarterly amounts may not equal year-to-date amounts
due to rounding.
(16)
SUBSEQUENT EVENTS
On January 18, 2019 the Company paid out a one-time special
dividend of $0.07 per share to stockholders of record as of January 2, 2019. The dividend was declared by the Board of Directors
in the fourth quarter of 2018.
On February 12, 2019, the Company began trading on The Nasdaq
Capital Market. At December 31, 2018 Zynex stock was quoted on the OTCQB.