Cautionary Notice Regarding Forward-Looking Statements
This quarterly report contains statements that are forward-looking, such as
statements relating to plans for future organic growth and other business
development activities, as well as the impact of reimbursement trends, other
capital spending and financing sources. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ from
those expressed in any forward-looking statements made by or on behalf of the
Company. These risks include the ability to engage effective sales
representatives, the need to obtain U.S. Food and Drug Administration ("FDA")
clearance and Certificate European ("CE") marking of new products, the
acceptance of new products as well as existing products by doctors and
hospitals, our dependence on the reimbursement from insurance companies for
products sold or leased to our customers, acceptance of our products by health
insurance providers for reimbursement, larger competitors with greater financial
resources, the need to keep pace with technological changes, our dependence on
third-party manufacturers to produce key components of our products on time and
to our specifications, implementation of our sales strategy including a strong
direct sales force, the impact of COVID-19 on our business, and other risks
described herein and in our Annual Report on Form 10-K for the year ended
December 31, 2019.
These interim financial statements and the information contained in this
Quarterly Report on Form 10-Q should be read in conjunction with the annual
audited consolidated financial statements, and notes to consolidated financial
statements, included in the Company's 2019 Annual Report on Form 10-K and
subsequently filed reports, which have previously been filed with the Securities
and Exchange Commission.
General
Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood,
Colorado. We operate one primary business segment, medical devices which include
Electrotherapy and Pain Management Products. As of March 31, 2020, the Company's
only active subsidiary is Zynex Medical, Inc. ("ZMI," a wholly-owned Colorado
corporation) through which the Company conducts most of its operations. One
other subsidiary, Zynex Europe, ApS ("ZEU," a wholly-owned Denmark corporation),
did not generate material revenues during the three months ended March 31, 2020
and 2019 from international sales and marketing. Zynex Monitoring Solutions,
Inc. ("ZMS," a wholly-owned Colorado corporation) has developed a blood volume
monitoring device which was approved by the U.S. Food and Drug Administration
("FDA") in February 2020 and is awaiting approval by the CE Marking in Europe,
therefore, ZMS has achieved no revenues to date.
RESULTS OF OPERATIONS
Summary
Net revenue was $15.2 million and $9.2 million for the three months ended March
31, 2020 and 2019, respectively. Net revenue increased 66% for the three-month
period ended March 31, 2020. Net income increased 25% to $2.9 million during the
three months ended March 31, 2020 from $2.4 million during the three months
ended March 31, 2019. We generated cash flows from operating activities of $0.6
million during the three months ended March 31, 2020. Working capital at March
31, 2020 was $19.9 million, an increase of 14% from $17.4 million as of December
31, 2019.
Net Revenue
Net revenues are comprised of device and supply sales, constrained by estimated
third-party payor reimbursement deductions and estimated uncollectible amounts.
Product device revenue is primarily comprised of sales and rentals of our
electrotherapy products and also includes our cervical traction, lumbar support
and hot/cold therapy products.
Supplies revenue is primarily comprised of sales of our consumable supplies to
patients using our electrotherapy products, consisting primarily of surface
electrodes and batteries.
Revenue related to both devices and supplies is reported net, after adjustments
for estimated third-party payor reimbursement deductions and estimated
uncollectible amounts. Estimates for third-party payor reimbursement deductions
and uncollectible accounts are adjusted on an ongoing basis in conjunction with
the processing of third-party payor insurance claims and other customer
collection history. Billing allowance adjustments are common in our industry
whereby third-party payors unilaterally reduce the amount they reimburse for our
products as compared to the sales price charged by us. These deductions from
gross revenue take into account the estimated denials, net of resubmitted
billings of claims for products placed with patients which may affect
collectability. See our Significant Accounting Policies in Note 1 to the
Consolidated Financial Statements for a more complete explanation of our revenue
recognition policies.
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We occasionally receive, and expect to continue to receive, refund requests from
insurance providers relating to specific patients and dates of service. Billing
and reimbursement disputes are very common in our industry. These requests are
sometimes related to a few patients and other times include a significant number
of refund claims in a single request. We review and evaluate these requests and
determine if any refund is appropriate. We also review claims that have been
resubmitted or where we are pursuing additional reimbursement from that
insurance provider. We frequently have significant offsets against such refund
requests which may result in amounts that are due to us in excess of the amounts
of refunds requested by the insurance providers. Therefore, at the time of
receipt of such refund requests we are generally unable to determine if a refund
request is valid.
Net revenue increased $6.0 million or 66% to $15.2 million for the three months
ended March 31, 2020, from $9.2 million for the same period in 2019. The growth
in net revenue is primarily related to the 126% growth in device orders which
led to an increased customer base and drove higher sales of consumable supplies.
Device Revenue
Device revenue is related to the sale or lease of our products. Device revenue
increased $1.4 million or 74% to $3.4 million for the three months ended March
31, 2020, from $2.0 million for the same period in 2019. The increase in device
revenue is primarily related to growth in orders which is attributable to our
increased sales force.
Supplies Revenue
Supplies revenue is related to the sale of supplies, primarily electrodes and
batteries, for our products. Supplies revenue increased $4.6 million or 63% to
$11.8 million for the three months ended March 31, 2020, from $7.2 million for
the same period in 2019. The increase in supplies revenue is primarily related
to an increased customer base from increased device sales in 2019 and 2020, plus
improvements in our billing and collection procedures.
Operating Expenses
Cost of Revenue - Device and Supply
Cost of Revenue - device and supply consist primarily of device and supply
costs, operations labor and overhead, shipping and depreciation. Cost of revenue
for the three months ended March 31, 2020 increased 91% to $3.4 million from
$1.8 million for the three months ended March 31, 2019. The increase in cost of
revenue is primarily due to an increase of 126% in device orders. As a
percentage of revenue, cost of revenue -device and supply increased to 22% for
the three months ended March 31, 2020 from 19% for the same period in 2019. The
increase as a percentage of revenue is due to lower collections from certain
commercial insurance payors.
Sales and Marketing Expense
Sales and marketing expenses primarily consist of employee related costs,
including commissions and other direct costs associated with these personnel
including travel expenses and marketing campaign and related expenses. Sales and
marketing expense for the three months ended March 31, 2020 increased 111% to
$5.2 million from $2.5 million for the three months ended March 31, 2019. The
increase in sales and marketing expense is primarily due to the expansion of our
sales force including adding 117 new sales representatives and the related costs
associated with increased headcount. As a percentage of revenue, sales and
marketing expense increased to 34% for the three months ended March 31, 2020
from 27% for the same period in 2019. The increase as a percentage of revenue is
primarily due to the increase aforementioned expenses, partially offset by the
increase in revenue during the period.
General and Administrative Expense
General and administrative expenses primarily consist of employee related costs,
and other direct costs associated with these personnel including facilities and
travel expenses and professional fees, depreciation and amortization. General
and administrative expense for the three months ended March 31, 2020 increased
55% to $4.2 million from $2.7 million for the three months ended March 31, 2019.
The increase in general and administrative expense is primarily due to increased
compensation and benefit expense related to headcount growth, an increase in
non-cash stock-based compensation expense as a result of several key hires
during the second half of 2019 and increases in rent and facilities expense as
we expanded our corporate headquarters during June 2019 and March 2020. As a
percentage of revenue, general and administrative expense decreased to 27% for
the three months ended March 31, 2020 from 29% for the same period in 2019. The
decrease as a percentage of revenue is primarily due to the increase in revenue
during the period, partially offset by the aforementioned expenses.
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Income Taxes
The provision for income taxes is recorded at the end of each interim period
based on the Company's best estimate of its effective income tax rate expected
to be applicable for the full fiscal year. The Company's effective income tax
rate was (19)% for the three months ended March 31, 2020. Discrete items,
primarily related to excess tax benefits on stock option exercises, of $1.1
million and $18,000 were recognized as a benefit against income tax expense for
the three months ended March 31, 2020 and 2019, respectively. For the three
months ended March 31, 2020 the company has an income tax benefit of
approximately $0.5 million. For the three months ended March 31, 2019 the
company had an income tax expense of approximately $0.8 million.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations through cash flows from operations,
debt and equity transactions. At March 31, 2020, our principal source of
liquidity was $14.6 million in cash and $6.5 million in accounts receivable.
Net cash provided by operating activities for the three months ended March 31,
2020 and 2019 was $0.6 million and $1.8 million, respectively. The decrease in
cash provided by operating activities for the three months ended March 31, 2020
was primarily due to the significant increase in inventory in 2020. The increase
in inventory is related to our order growth plus excess stockpiles in
anticipation of possible supply chain shortages related to the COVID-19 virus.
Net cash used in investing activities for the three months ended March 31, 2020
and 2019 was $0.3 million and $46,000, respectively. Cash used in investing
activities for both the three months ended March 31, 2020 and 2019 was primarily
related to office furniture and equipment and leasehold improvements at our
corporate headquarters.
Net cash provided by financing activities for the three months ended March 31,
2020 was $0.2 million compared with net cash used in financing activities of
$2.4 million for the same period in 2019. The cash provided by financing
activities for the three months ended March 31, 2020 was primarily due to
proceeds from the issuance of common stock upon exercises of stock options. Cash
used in financing activities for the three months ended March 31, 2019 was
primarily due to the payment of a dividend of $2.3 million to stockholders of
record on January 2, 2019 and re-purchases of our common stock of $0.2 million.
We believe our cash and cash equivalents, together with anticipated cash flow
from operations will be sufficient to meet our working capital, and capital
expenditure requirements for at least the next twelve months. In making this
assessment, we considered the following:
· Our cash and cash equivalents balance at March 31, 2020 of $14.6 million;
· Our working capital balance of $19.9 million;
· Our profitability during the last 15 quarters; and
· Our projected income and cash flows for the next 12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
Please refer to the "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and Note 2 to the Consolidated Financial Statements
located within our Annual Report on Form 10-K for the year ended December 31,
2019, filed with the Securities and Exchange Commission on February 27, 2020.
OFF BALANCE SHEET ARRANGEMENTS
The Company had no significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to our
stockholders.
RISKS AND UNCERTAINTIES
In December 2019, a novel Coronavirus disease ("COVID-19") was reported and on
March 11, 2020, the World Health Organization characterized COVID-19 as a
pandemic. While the Company did not incur significant disruptions to its
operations during the first quarter of 2020 from COVID-19, it is unable at this
time to predict the impact that COVID-19 will have on its business, financial
position and operating results in future periods due to numerous uncertainties.
The Company has been and continues to closely monitor the impact of the pandemic
on all aspects of its business. See also the risk factor relating to COVID-19
disclosed in Item 1A of Part II, below.
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ZYNEX, INC. 
