Cautionary Notice Regarding Forward-Looking Statements
This quarterly report contains statements that are forward-looking, such as
statements relating to plans for future organic growth and other business
development activities, as well as the impact of reimbursement trends, other
capital spending and financing sources. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ from
those expressed in any forward-looking statements made by or on behalf of the
Company. These risks include the ability to engage effective sales
representatives, the need to obtain U.S. Food and Drug Administration ("FDA")
clearance and Certificate European ("CE") marking of new products, the
acceptance of new products as well as existing products by doctors and
hospitals, our dependence on the reimbursement from third-party payors for
products sold or leased to our patients, acceptance of our products by health
third-party payors for reimbursement, larger competitors with greater financial
resources, the need to keep pace with technological changes, our dependence on
third-party manufacturers to produce key components of our products on time and
to our specifications, implementation of our sales strategy including a strong
direct sales force, the impact of COVID-19 on our business, and other risks
described herein and in our Annual Report on Form 10-K for the year ended
December 31, 2019.
These interim financial statements and the information contained in this
Quarterly Report on Form 10-Q should be read in conjunction with the annual
audited consolidated financial statements, and notes to consolidated financial
statements, included in the Company's 2019 Annual Report on Form 10-K and
subsequently filed reports, which have previously been filed with the Securities
and Exchange Commission.
General
Zynex, Inc. (a Nevada corporation) has its headquarters in Englewood, Colorado.
We operate one primary business segment: medical devices which include
electrotherapy and pain management products. As of June 30, 2020, the Company's
only active subsidiary is Zynex Medical, Inc. ("ZMI," a wholly-owned Colorado
corporation) through which the Company conducts most of its operations. One
other subsidiary, Zynex Europe, ApS ("ZEU," a wholly-owned Denmark corporation),
did not generate material revenues during the three or six months ended June 30,
2020 and 2019 from international sales and marketing. Zynex Monitoring
Solutions, Inc. ("ZMS," a wholly-owned Colorado corporation) has developed a
blood volume monitoring device, which was approved by the U.S. Food and Drug
Administration ("FDA") in February 2020 and is awaiting CE Marking approval in
Europe. ZMS has achieved no revenues to date.
RESULTS OF OPERATIONS
Summary
Net revenue was $19.3 million and $10.3 million for the three months ended June
30, 2020 and 2019, respectively, and $34.5 million and $19.5 million for the six
months ended June 30, 2020 and 2019, respectively. Net revenue increased 87% and
77% for the three and six-month periods ended June 30, 2020, respectively. Net
income was $3.0 million for the three months ended June 30, 2020 compared with
$2.2 million during the same period in 2019. Net income was $6.0 million for the
six months ended June 30, 2020 compared with $4.5 million during the same period
in 2019. We generated cash flows from operating activities of $3.3 million
during the six months ended June 30, 2020. Working capital at June 30, 2020 was
$23.8 million, an increase of 37% from $17.4 million as of December 31, 2019.
Net Revenue
Net revenues are comprised of device and supply sales, constrained by estimated
third-party payor reimbursement deductions and estimated uncollectible amounts.
Device revenue is primarily comprised of sales and rentals of our electrotherapy
products and also includes our cervical traction, lumbar support and hot/cold
therapy products.
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Supplies revenue is primarily comprised of sales of our consumable supplies to
patients using our electrotherapy products, consisting primarily of surface
electrodes and batteries.
Revenue related to both devices and supplies is reported net, after adjustments
for estimated third-party payor reimbursement deductions and estimated
uncollectible amounts. Estimates for third-party payor reimbursement deductions
and uncollectible accounts are adjusted on an ongoing basis in conjunction with
the processing of third-party payor insurance claims and other customer
collection history. Billing allowance adjustments are common in our industry
whereby third-party payors unilaterally reduce the amount they reimburse for our
products as compared to the sales price charged by us. These deductions from
gross revenue take into account the estimated denials, net of resubmitted
billings of claims for products placed with patients which may affect
collectability. See our Significant Accounting Policies in Note 1 to the
Consolidated Financial Statements for a more complete explanation of our revenue
recognition policies.
We occasionally receive, and expect to continue to receive, refund requests from
insurance providers relating to specific patients and dates of service. Billing
and reimbursement disputes are very common in our industry. These requests are
sometimes related to a few patients and other times include a significant number
of refund claims in a single request. We review and evaluate these requests and
determine if any refund is appropriate. We also review claims that have been
resubmitted or where we are pursuing additional reimbursement from that
insurance provider. We frequently have significant offsets against such refund
requests which may result in amounts that are due to us in excess of the amounts
of refunds requested by the insurance providers. Therefore, at the time of
receipt of such refund requests we are generally unable to determine if a refund
request is valid.
Net revenue increased $9.0 million or 87% to $19.3 million for the three months
ended June 30, 2020, from $10.3 million for the same period in 2019. Net revenue
increased $15.0 million or 77% to $34.5 million for the six months ended June
30, 2020, from $19.5 million for the same period in 2019. For both the three and
six-month periods ended June 30, 2020, the growth in net revenue from the same
periods in 2019 is primarily related to a 37% and 76% growth in device orders,
respectively, which led to an increased customer base and drove higher sales of
consumable supplies.
Device Revenue
Device revenue is related to the sale or lease of our electrotherapy and
complimentary products. Device revenue increased $2.0 million or 87% to $4.3
million for the three months ended June 30, 2020, from $2.3 million for the same
period in 2019.
Device revenue increased $3.5 million or 81% to $7.7 million for the six months
ended June 30, 2020, from $4.3 million for the same period in 2019.
The increase in device revenue is primarily related to growth in orders which is
attributable our sales force expansion.
Supplies Revenue
Supplies revenue is related to the sale of supplies, primarily electrodes and
batteries, for our electrotherapy products. Supplies revenue increased $7.0
million or 87% to $15.0 million for the three months ended June 30, 2020, from
$8.0 million for the same period in 2019.
Supplies revenue increased $11.6 million or 76% to $26.8 million for the six
months ended June 30, 2020, from $15.2 million for the same period in 2019.
The increase in supplies revenue is primarily related to an increased customer
base from increased device sales in 2019 and 2020, plus improvements in our
billing and collection procedures.
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Operating Expenses
Cost of Revenue - Device and Supply
Cost of Revenue - device and supply consist primarily of device and supply
costs, operations labor and overhead, shipping and depreciation. Cost of revenue
for the three months ended June 30, 2020 increased 108% to $4.1 million from
$1.9 million for the same period in 2019. As a percentage of revenue, cost of
revenue - device and supply increased to 21% for the three months ended June 30,
2020 from 19% for the same period in 2019. The increase in cost of revenue is
primarily due to an increase in overhead and freight costs, as well as an
increase of 37% in device orders from the three months ended June 30, 2019.
Cost of revenue for the six months ended June 30, 2020 increased 100% to $7.5
million from $3.7 million for the same period in 2019. As a percentage of
revenue, cost of revenue - device and supply increased to 22% for the six months
ended June 30, 2020 from 19% for the same period in 2019. The increase in cost
of revenue is primarily due to an increase in overhead and freight costs, as
well as an increase of 76% in device orders from the six months ended June 30,
2019.
Sales and Marketing Expense
Sales and marketing expenses primarily consist of employee related costs,
including commissions and other direct costs associated with these personnel
including travel expenses and marketing campaign and related expenses.
Sales and marketing expense for the three months ended June 30, 2020 increased
106% to $6.3 million from $3.1 million for the same period in 2019. Sales and
marketing expense for the six months ended June 30, 2020 increased 108% to $11.5
million from $5.6 million for the same period in 2019.
The increase in sales and marketing expense for both the three and six months
ended June 30, 2020 is primarily due to the expansion of our sales force
including adding 185 net additional sales representatives over the past 12
months, of which 135 were added during the six months ended June 30, 2020. As a
percentage of revenue, sales and marketing expense increased to 33% for both the
three and six months ended June 30, 2020, respectively, from 30% and 28% for the
same periods in 2019. The increase as a percentage of revenue is primarily due
to the increase in costs associated with the increase in headcount as well as
expenses for marketing materials that aid in distance selling during clinic
shutdowns related to COVID-19, partially offset by the increase in revenue
during the period.
General and Administrative Expense
General and administrative expenses primarily consist of employee-related costs,
and other direct costs associated with these personnel including facilities and
travel expenses and professional fees, depreciation and amortization. General
and administrative expense for the three months ended June 30, 2020 increased
78% to $4.8 million from $2.7 million for the same period in 2019. The increase
in general and administrative expense for the three months is primarily due to
increased occupancy expense as a result of corporate office expansion and
increased compensation and benefit expense related to headcount growth. As a
percentage of revenue, general and administrative expense decreased to 25% for
the three months ended June 30, 2020 from 26% for the same period in 2019. The
decrease as a percentage of revenue is primarily due to the increase in revenue
during the period, partially offset by costs associated with increased headcount
from the prior year.
General and administrative expense for the six months ended June 30, 2020
increased 67% to $8.9 million from $5.4 million for the same period in 2019. The
increase in general and administrative expense for the six months is primarily
due to increased compensation and benefit expense related to headcount growth.
As a percentage of revenue, general and administrative expense decreased to 26%
for the three and six months ended June 30, 2020 from 28% for the same period in
2019. The decrease as a percentage of revenue is primarily due to the increase
in revenue during the period, partially offset by the aforementioned expenses.
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Income Taxes
The provision for income taxes is recorded at the end of each interim period
based on the Company's best estimate of its effective income tax rate expected
to be applicable for the full fiscal year. The Company's effective income tax
rate was 26% and 9% for the three and six months ended June 30, 2020,
respectively. Discrete items, primarily related to excess tax benefits related
to stock option exercises, of $0.1 million and $1.2 million for the three and
six months ended June 30, 2020, respectively, are recognized as a benefit
against income tax expense. For the three and six months ended June 30, 2020 the
Company has an income tax expense of approximately $1.1 million and $0.6
million, respectively. The Company recorded income tax expense of $0.4 million
and $1.2 million for the three and six months ended June 30, 2019.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations through cash flows from operations,
debt and equity transactions. At June 30, 2020, our principal source of
liquidity was $16.9 million in cash and $7.3 million in accounts receivables.
Our anticipated uses of cash in the future will be to fund the expansion of our
business.
Net cash provided by operating activities for the six months ended June 30, 2020
and 2019 was $3.3 million and $2.4 million, respectively. The increase in cash
provided by operating activities for the six months ended June 30, 2020 was
primarily due to an increase in our net income.
Net cash used in investing activities for the six months ended June 30, 2020 and
2019 was $0.7 million and $0.1 million, respectively. Cash used in investing
activities for the six months ended June 30, 2020 was primarily related to the
purchase of office equipment, IT infrastructure, and leasehold improvements
related to our expansion into the second floor at our corporate headquarters.
Cash used in investing activities for the six months ended June 30, 2019 was
primarily related to leasehold improvements at our new corporate headquarters.
Net cash provided by financing activities for the six-months ended June 30, 2020
was $0.2 million, compared with net cash used in financing activities of $2.3
million for the same period in 2019. Net cash provided by financing activities
for the six months ended June 30, 2020 was primarily due to proceeds from
employee stock option purchases.Net cash used in financing activities for the
six months ended June 30, 2019 was primarily due to the payment of a dividend of
$2.3 million to stockholders of record on January 2, 2019 and re-purchases of
our common stock of $0.2 million, which was partially offset by cash received
upon the exercise of stock options of $0.1 million.
We believe our cash and cash equivalents, together with anticipated cash flow
from operations will be sufficient to meet our working capital, and capital
expenditure requirements for at least the next twelve months. In making this
assessment, we considered the following:
? Our cash and cash equivalents balance at June 30, 2020 of $16.9 million;
? Our working capital balance of $23.8 million;
? Our profitability during the last 16 quarters; and
? Our projected income and cash flows for the next 12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
Please refer to the "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and Note 2 to the Consolidated Financial Statements
located within our Annual Report on Form 10-K for the year ended December 31,
2019, filed with the Securities and Exchange Commission on February 27, 2020.
OFF BALANCE SHEET ARRANGEMENTS
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The Company had no significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to our
stockholders.
RISKS AND UNCERTAINTIES
In December 2019, a novel Coronavirus disease ("COVID-19") was reported and on
March 11, 2020, the World Health Organization characterized COVID-19 as a
pandemic. During the second quarter, the Company's operations were impacted by
closures of clinics and reductions in elective surgeries which decreased
availability of physicians to prescribe our products. Additionally, the Company
had to navigate the impacts it had on employee and supply chain issues. While
the Company did not see a significant impact on its operating results or
financial position during the six months ended June 30, 2020 from COVID-19, it
is unable at this time to predict the impact that COVID-19 will have on its
business, financial position and operating results in future periods due to
numerous uncertainties. The Company has been and continues to closely monitor
the impact of the pandemic on all aspects of its business. See also the risk
factor relating to COVID-19 disclosed in Item 1A of Part II, below.
SUBSEQUENT EVENT
On July 14, 2020, the Company announced commencement of an underwritten public
offering of an aggregate of 2,500,000 shares of common stock at a public
offering price of $22.00 per share. In the offering, 1,250,000 shares of common
stock were sold by the Company and 1,250,000 shares of common stock were sold by
a selling stockholder. The selling stockholder was Sandgaard Holdings, LLC.,
which is 100% controlled by Thomas Sandgaard, CEO and chairman of the board. In
addition, the Company and the selling stockholder have each granted the
underwriters a 30-day option to purchase up to an additional 187,500 shares of
common stock, respectively, at the public offering price, less the underwriting
discounts and commissions. The offering closed on July 17, 2020.
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ZYNEX, INC. 
