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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: September 30, 2023

OR

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

For the transition period from                      to

Commission file number 001-38804

Zynex, Inc.

(Exact name of registrant as specified in its charter)

NEVADA

    

90-0275169

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

9655 Maroon Cir.

Englewood, CO

80112

(Address of principal executive offices)

(Zip Code)

(303) 703-4906

(Registrant’s telephone number, including area code)

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

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

Title of each class

    

Trading Symbol

    

Name of each exchange on which registered

Common Stock, par value $0.001 per share

ZYXI

NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No  

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

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

Class

    

Shares Outstanding as of October 26, 2023

Common Stock, par value $0.001

33,903,777

ZYNEX, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

    

Page

PART I—FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022

3

Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022

4

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022

5

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022

6

Unaudited Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

PART II—OTHER INFORMATION

28

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

28

Item 3.

Defaults Upon Senior Securities

28

Item 4.

Mine Safety Disclosures

28

Item 5.

Other Information

28

Item 6.

Exhibits

29

SIGNATURES

30

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ZYNEX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)

September 30, 2023

December 31, 

    

(unaudited)

    

2022

    

ASSETS

Current assets:

 

  

 

  

 

Cash and cash equivalents

$

42,517

$

20,144

Short-term investments, net

9,924

Accounts receivable, net

 

33,288

 

35,063

Inventory, net

 

14,186

 

13,484

Prepaid expenses and other

 

3,008

 

868

Total current assets

 

102,923

 

69,559

Property and equipment, net

2,468

 

2,175

Operating lease asset

13,168

12,841

Finance lease asset

637

270

Deposits

409

 

591

Intangible assets, net of accumulated amortization

8,387

9,067

Goodwill

20,401

20,401

Deferred income taxes

3,036

 

1,562

Total assets

$

151,429

$

116,466

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable and accrued expenses

8,050

5,617

Operating lease liability

3,072

 

2,476

Finance lease liability

210

 

128

Income taxes payable

1,996

 

1,995

Current portion of debt

5,333

Accrued payroll and related taxes

6,515

 

5,537

Total current liabilities

19,843

21,086

Long-term liabilities:

 

  

Long-term portion of debt, less issuance costs

5,293

Convertible senior notes, less issuance costs

57,375

Contingent consideration

10,000

Operating lease liability

15,154

 

13,541

Finance lease liability

475

188

Total liabilities

92,847

 

50,108

Commitments and contingencies

 

 

Stockholders’ equity:

 

  

 

  

Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2023 and December 31, 2022

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 41,702,560 issued and 34,220,824 outstanding as of September 30, 2023 41,658,132 issued and 36,825,081 outstanding as of December 31, 2022

 

34

 

39

Additional paid-in capital

 

90,543

 

82,431

Treasury stock of 6,996,129 and 4,253,015 shares at September 30, 2023 and December 31, 2022, respectively, at cost

 

(57,560)

 

(33,160)

Retained earnings

 

25,565

 

17,048

Total stockholders’ equity

 

58,582

 

66,358

Total liabilities and stockholders’ equity

$

151,429

$

116,466

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

3

ZYNEX, INC.

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

(unaudited)

For the Three Months Ended September 30, 

For the Nine Months Ended September 30, 

    

2023

    

2022

    

2023

    

2022

    

NET REVENUE

 

  

 

  

  

 

  

Devices

$

16,855

$

11,349

$

42,542

$

27,579

Supplies

 

33,060

 

30,171

 

94,495

 

81,783

Total net revenue

 

49,915

 

41,520

 

137,037

 

109,362

COSTS OF REVENUE AND OPERATING EXPENSES

 

 

 

  

 

  

Costs of revenue - devices and supplies

 

9,553

 

8,391

 

28,094

 

22,617

Sales and marketing

 

22,146

 

17,212

 

64,982

 

47,950

General and administrative

12,731

9,359

35,479

25,967

Total costs of revenue and operating expenses

 

44,430

 

34,962

 

128,555

 

96,534

Income from operations

 

5,485

 

6,558

 

8,482

 

12,828

Other income (expense)

 

  

 

  

 

  

 

  

Gain on sale of fixed assets

37

39

Gain (loss) on change in fair value of contingent consideration

(245)

(100)

2,855

Interest expense, net

 

(327)

 

(106)

 

(728)

 

(345)

Other income (expense), net

 

(535)

 

(206)

 

2,166

 

(345)

Income from operations before income taxes

 

4,950

 

6,352

 

10,648

 

12,483

Income tax expense

 

1,356

 

1,479

 

2,131

 

2,887

Net income

$

3,594

$

4,873

$

8,517

$

9,596

Net income per share:

 

 

 

 

Basic

$

0.10

$

0.13

$

0.24

$

0.25

Diluted

$

0.10

$

0.13

$

0.23

$

0.24

Weighted average basic shares outstanding

 

35,531

 

38,046

 

36,216

 

38,881

Weighted average diluted shares outstanding

 

36,103

 

38,865

 

36,866

 

39,729

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

4

ZYNEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

(unaudited)

For the Nine Months Ended September 30, 

    

2023

    

2022

    

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

 

Net income

$

8,517

$

9,596

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

 

 

  

Depreciation

1,984

1,590

Amortization

 

1,078

 

695

Non-cash reserve charges

(91)

65

Stock-based compensation

 

1,621

 

1,702

Non-cash lease expense

 

568

 

720

Benefit for deferred income taxes

(1,473)

(772)

Gain on change in fair value of contingent consideration

(2,855)

Gain on sale of fixed assets

(39)

Change in operating assets and liabilities:

 

 

Short-term investments

(114)

Accounts receivable

 

1,775

 

282

Prepaid and other assets

 

(826)

 

(446)

Accounts payable and other accrued expenses

 

3,312

 

364

Inventory

 

(2,071)

 

(4,801)

Deposits

 

182

 

(6)

Net cash provided by operating activities

 

11,568

 

8,989

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchase of property and equipment

(630)

(332)

Purchase of short-term investments

 

(9,810)

 

Proceeds on sale of fixed assets

50

Net cash used in investing activities

 

(10,390)

 

(332)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Payments on finance lease obligations

 

(95)

 

(87)

Cash dividends paid

 

(1)

 

(3,613)

Purchase of treasury stock

 

(24,402)

 

(19,811)

Proceeds from issuance of convertible senior notes, net of issuance costs

57,018

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

33

27

Principal payments on long-term debt

(10,667)

(4,000)

Taxes withheld and paid on employees’ equity awards

(691)

(253)

Net cash provided by (used in) financing activities

 

21,195

 

(27,737)

Net increase (decrease) in cash

 

22,373

 

(19,080)

Cash at beginning of period

 

20,144

 

42,612

Cash at end of period

$

42,517

$

23,532

Supplemental disclosure of cash flow information:

 

  

 

  

Cash received (paid) on interest, net

$

452

$

(317)

Cash paid for rent

$

(2,522)

$

(2,592)

Cash paid for income taxes

$

(3,541)

$

(5,028)

Supplemental disclosure of non-cash investing and financing activities:

 

 

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

$

4,214

$

211

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

$

464

$

Lease incentive

$

1,400

$

Vesting of restricted stock awards

$

(3)

$

Inventory transferred to property and equipment under lease

$

1,369

$

1,191

Capital expenditures not yet paid

$

101

$

56

Non-cash dividend adjustment

$

(1)

$

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

5

ZYNEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

(unaudited)

Additional

Total

Common Stock

Paid-in

Treasury

Retained

Stockholders’

    

Shares

    

Amount

    

Capital

    

Stock

    

Earnings

    

Equity

Balance at December 31, 2021

39,737,890

41

80,397

(6,513)

73,925

Exercised and vested stock-based awards

38,355

 

 

3

 

 

 

3

Stock-based compensation expense

 

 

589

 

 

 

589

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

(10,873)

(76)

(76)

Stock dividend adjustments

11,444

Net income

 

 

 

 

1,377

 

1,377

Balance at March 31, 2022

39,776,816

$

41

$

80,913

$

(6,513)

$

1,377

$

75,818

Exercised and vested stock-based awards

178,727

1

11

12

Stock-based compensation expense

535

535

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

(47,603)

(47)

(47)

Purchase of treasury stock

(1,504,374)

(2)

(10,653)

(10,655)

Net income

3,346

3,346

Balance at June 30, 2022

38,403,566

$

40

$

81,412

$

(17,166)

$

4,723

$

69,009

Exercised and vested stock-based awards, net of tax

68,060

$

13

$

$

13

Stock-based compensation expense

578

578

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

(16,681)

(130)

(130)

Purchase of treasury stock

(987,451)

(1)

(9,155)

(9,156)

Net income

4,873

4,873

Balance at September 30, 2022

37,467,494

$

39

$

81,873

$

(26,321)

$

9,596

$

65,187

Additional

Total

Common Stock

Paid-in

Treasury

Retained

Stockholders’

    

Shares

    

Amount

    

Capital

    

Stock

    

Earnings

    

Equity

Balance at December 31, 2022

36,825,081

39

82,431

(33,160)

17,048

66,358

Exercised and vested stock-based awards

66,045

27

27

Stock-based compensation expense

 

 

307

 

 

 

307

Warrants exercised

10,000

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

(22,387)

(422)

(422)

Purchase of treasury stock

(232,698)

(3,353)

(3,353)

Net income

 

 

 

 

1,569

 

1,569

Balance at March 31, 2023

36,646,041

$

39

$

82,343

$

(36,513)

$

18,617

$

64,486

Exercised and vested stock-based awards

45,626

9

9

Stock-based compensation expense

660

660

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

(11,224)

(3)

(124)

(127)

Purchase of treasury stock

(666,200)

(6,115)

(6,115)

Net income

 

 

 

 

3,354

 

3,354

Balance at June 30, 2023

36,014,243

$

36

$

82,888

$

(42,628)

$

21,971

$

62,267

Exercised and vested stock-based awards

69,915

1

1

Stock-based compensation expense

654

654

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

(19,118)

(145)

(145)

Purchase of treasury stock

(1,844,216)

(2)

(14,932)

(14,934)

Escrow share lock-up adjustment

7,145

7,145

Net income

3,594

3,594

Balance at September 30, 2023

34,220,824

$

34

90,543

$

(57,560)

$

25,565

$

58,582

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

6

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)   BASIS OF PRESENTATION

Organization

Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado. The term “the Company” refers to Zynex, Inc. and its active and inactive subsidiaries. The Company operates in one primary business segment, medical devices which include electrotherapy and pain management products. As of September 30, 2023, the Company’s only active subsidiaries are Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) through which the Company conducts most of its operations, and Zynex Monitoring Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation). ZMS has developed a fluid monitoring system which received approval by the U.S. Food and Drug Administration (“FDA”) during 2020 and is still awaiting CE Marking in Europe. ZMS has achieved no revenues to date. The Company’s inactive subsidiaries include Zynex Europe, Zynex NeuroDiagnostics, Inc. (“ZND,” a wholly-owned Colorado corporation) and Pharmazy, Inc. (“Pharmazy”, a wholly-owned Colorado Corporation). The Company’s compounding pharmacy operated as a division of ZMI dba as Pharmazy through January 2016.

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

Nature of Business

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

During the nine months ended September 30, 2023 and 2022, the Company generated all of its revenue in North America from sales and supplies of its devices to patients and healthcare providers.

Unaudited Condensed Consolidated Financial Statements

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the SEC in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Amounts as of December 31, 2022, are derived from those audited consolidated financial statements. These interim condensed consolidated financial statements should be read in conjunction with the annual audited financial statements, accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of September 30, 2023 and the results of its operations and its cash flows for the periods presented. The results of operations for the nine months ended September 30, 2023 are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(2)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Zynex, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The most significant management estimates used in the preparation of the accompanying condensed consolidated financial statements are associated with the allowance for billing adjustments and uncollectible accounts receivable, the reserve for obsolete and damaged inventory, stock-based compensation, assumptions related to the valuation of contingent consideration, and valuation of long-lived assets and realizability of deferred tax assets.

Cash, Cash Equivalents, and Short-Term Investments

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

Accounts Receivable, Net

The Company’s accounts receivable represent unconditional rights to consideration and are generated when a patient receives one of the Company’s devices, related supplies or complementary products. In conjunction with fulfilling the Company’s obligation to deliver a product, the Company invoices the patient’s third-party payer and/or the patient. Billing adjustments represent the difference between the list price and the reimbursement rates set by third-party payers, including Medicare, commercial payers and amounts billed directly to the patient. Specific amounts, if uncollected over a period of time, may be written-off after several appeals, which in some cases may take longer than twelve months. Substantially all of the Company’s receivables are due from patients with commercial or government health plans and workers compensation claims with a smaller portion related to private pay individuals, attorney, and auto claims. The Company maintains a constraint for third-party payer refund requests, deductions and adjustments. See Note 15 – Concentrations for discussion of significant customer accounts receivable balances.

Inventory, Net

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

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

Long-lived Assets

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

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

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Estimated

Useful Lives

    

in years

Patents

 

11

Goodwill

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

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

Revenue Recognition

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

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

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table provides a breakdown of disaggregated net revenues for the three and nine months ended September 30, 2023 and 2022 related to devices accounted for as purchases subject to Accounting Standards Codification (“ASC”) 606 – “Revenue from Contracts with Customers” (“ASC 606”), leases subject to ASC 842 – “Leases” (“ASC 842”), and supplies (in thousands):

For the Three Months Ended September 30, 

For the Nine Months Ended September 30, 

    

2023

    

2022

    

2023

    

2022

    

Device revenue

 

  

 

  

  

 

  

Purchased

$

7,022

$

2,900

$

16,444

$

7,357

Leased

 

9,833

 

8,449

 

26,098

 

20,222

Total device revenue

$

16,855

$

11,349

$

42,542

$

27,579

Supplies revenue

33,060

30,171

94,495

81,783

Total revenue

$

49,915

$

41,520

$

137,037

$

109,362

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

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

Leases

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

The Company recognizes finance and operating lease right-of-use assets and liabilities at the lease commencement date based on the estimated present value of the remaining lease payments over the lease term. For the finance leases, the Company uses the implicit rate to determine the present value of future lease payments. For operating leases that do not provide an implicit rate, the Company uses incremental borrowing rates to determine the present value of future lease payments. The Company includes options to extend or terminate a lease in the lease term when it is reasonably certain to exercise such options. The Company recognizes leases with an initial term of 12 months or less as lease expense over the lease term and those leases are not recorded on the Company’s condensed consolidated balance sheets. For additional information on the leases where the Company is the lessee, see Note 14 - Leases.

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Debt Issuance Costs

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

Stock-based Compensation

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

Segment Information

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

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

Income Taxes

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

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

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Table of Contents

ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Inflation Reduction Act (“IRA”) was enacted into law on August 16, 2022. Included in the IRA was a provision to implement a 15% corporate alternative minimum tax on corporations whose average annual adjusted financial statement income during the most recently completed three year period exceeds $1 billion. This provision is effective for tax years beginning after December 31, 2022. We are in the process of evaluating the provisions of the IRA, but we do not currently believe the IRA will have a material impact on our reported results, cash flows or financial position when it becomes effective.

Recent Accounting Pronouncements

On October 9, 2023, the Financial Accounting Standards Board (“FASB”) issued ASU (“Accounting Standards Update”) 2023-06 which amends the disclosure or presentation requirements related to various subtopics in the FASB ASC. The amendments in ASU 2023-06 modify the disclosure or presentation requirements of a variety of Topics in the ASC. Certain of the amendments represent clarifications to or technical corrections of the current requirements. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. For all entities, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the Codification and will not become effective for any entity. Management is evaluating the impacts of the recently issued ASU.

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

(3)   FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 820, Fair Value Measurements (“ASC 820”) states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tiered fair value hierarchy, which prioritizes which inputs should be used in measuring fair value, is comprised of: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than quoted prices in active markets that are observable either directly or indirectly and (Level III) unobservable inputs for which there is little or no market data. The fair value hierarchy requires the use of observable market data when available in determining fair value.

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

During the year ended December 31, 2022 the Company did not have any cash equivalents or short-term investments. The following table shows the Company’s cash, cash equivalents and short-term investments by significant investment category as of September 30, 2023 (in thousands):

September 30, 2023

Cash and

Short

Investment

Fair

Cash

Term

Cost

Gains

Value

Equivalents

Investments

Cash (1)

12,579

-

12,579

12,579

-

U.S. Treasury Securities (2)

39,446

416

39,862

29,938

9,924

Total

52,025

416

52,441

42,517

9,924

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ZYNEX, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)Level I fair value estimates are based on observable inputs such as quoted prices in active markets.
(2)Level II fair value estimates are based on 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.

The fair value of acquisition-related contingent consideration was based on a Monte Carlo model prior to September 30, 2023 which was included in Level III of the fair value hierarchy. See Note 6 - Business Combinations for additional details on the removal of contingent consideration during the quarter ended September 30, 2023. The following table sets forth a summary of changes in the contingent consideration for the nine months ended September 30, 2023 (in thousands):

    

Contingent Consideration

Balance as of December 31, 2022

$

10,000

Change in fair value of contingent consideration

 

(2,855)

Escrow share adjustment

(7,145)

Balance as of September 30, 2023

 

$

(4)   INVENTORY

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

    

September 30, 2023

    

December 31, 2022

Raw materials

$

3,408

$

3,506

Work-in-process

 

1,419

 

1,205

Finished goods

8,573

7,750

Inventory in transit

 

1,054

 

1,291

$

14,454

$

13,752

Less: reserve

(268)

(268)

$