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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2022
☐ 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
(State or other jurisdiction of
incorporation or organization)
9655 Maroon Circle, Englewood, CO
(Address of principal executive offices)
90-0275169
(IRS Employer
Identification No.)
80112
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant’s telephone number, including area code: (303) 703-4906
Title of each class
Common Stock, $0.001 par value per share
Ticker symbol(s)
ZYXI
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ☐ Yes ☒ No
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
Non-accelerated filer
☐ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to
previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive
officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2022, 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 Nasdaq Stock Market on such date was approximately $175.2 million.
As of March 13, 2023, 41,531,169 shares of common stock are issued and 36,634,459 shares are outstanding.
Documents incorporated by reference:
Portions of the Registrant’s definitive proxy statement relating to its 2023 annual meeting of stockholders (the “ Proxy Statement”) are incorporated by reference into Part III of this Annual Report
on Form 10-K where indicated. The Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
Table of Contents
TABLE OF CONTENTS
ZYNEX, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2022
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regrading Foreign Jurisdictions that Prevent Inspections
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
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., Kestrel Labs,
Inc., Zynex Europe ApS, 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 fluid monitoring system product as described below.
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ITEM 1. BUSINESS
History
PART I
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, is the parent company of six active and inactive subsidiaries. As of December 31, 2022,
the Company’s only active subsidiaries are Zynex Medical, Inc. (“ZMI,” a wholly-owned Colorado corporation) and Zynex Monitoring
Solutions, Inc. (“ZMS,” a wholly-owned Colorado corporation). The Company’s inactive subsidiaries include Kestrel Labs, Inc.
(“Kestrel,” a wholly-owned Colorado corporation), Zynex Europe (“ZEU,” a wholly-owned Colorado corporation), Zynex
NeuroDiagnostics, Inc. (“ZND,” a wholly-owned Colorado corporation), and Pharmazy, Inc. (“Pharmazy,” a wholly-owned Colorado
Corporation), which was incorporated in June 2015. 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 NiCO™ CO-Oximeter, a noninvasive multi-parameter pulse oximeter,
and HemeOx™, a noninvasive 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 our ZMS subsidiary. ZMS has
developed the CM-1500 monitoring system (“CM-1500”) which was granted 510(k) clearance in February 2020 by the FDA in the
United States of America. ZMS filed a 510(k) application for the CM-1600 in December 2021, its next generation wireless monitoring
system (“CM-1600”) and is continuing to work with the FDA on obtaining clearance. ZMS has achieved no revenues to date.
Substantially all of the Company’s consolidated revenue in 2022 and 2021 is attributable to ZMI. Our headquarters are located in
Englewood, Colorado.
Active Subsidiaries
Zynex Medical, Inc. (ZMI): ZMI 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 of 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 clearance. 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.
ZMI distributes complementary products such as lumbar support, cervical traction, knee bracing, and hot/cold therapy. These
complement our pain management products and are critical for physicians and therapists. These products require a prescription and are
covered by most insurance plans and Medicare.
ZMI 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 2022 or 2021.
ZMI also designs, manufactures, and markets the InWave product, an in-home electrical stimulation device used to treat female urinary
incontinence. The device requires a prescription and is covered by most insurance plans and Medicare. Zynex did not have material sales
of this product in 2022 or 2021.
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Zynex Monitoring Solutions (ZMS):
ZMS was formed in 2011 to develop and market medical devices for non-invasive patient monitoring beginning with our Zynex
Monitoring System. The monitor is a non-invasive medical device for monitoring relative fluid volume changes used in operating and
recovery rooms to detect fluid loss during surgery and internal bleeding during recovery. The CM-1500 received 510(k) clearance from
the FDA in February 2020.
The Zynex Monitoring System has been tested in several Institutional Review Board (“IRB”) approved clinical studies, both in well-
controlled healthy volunteer settings as well as in clinical use environments. In 2022, the clinical trials were expanded to include the next
generation CM-1600. Enrollment was completed in the apheresis blood donation study with Vitalant Research Institute (the research arm
of Vitalant, the nation’s largest independent, nonprofit blood services provider) to track changes in the device’s patented Relative Index
(“RI”) during apheresis blood donation procedures. Multiple studies were also completed at Yale University where volunteer study
subjects underwent simulated hemorrhage using a lower body negative pressure chamber while wearing the device. Finally, enrollment
was initiated in a large-scale multi-site study to measure the sensitivity and specificity of the CM-1600 at detecting minor blood loss,
which is anticipated to finish recruitment and data collection in the first half of 2023.
We have built a number of commercial devices in pilot-production and continue to refine the algorithms for the patented Relative Index.
We have received two U.S. utility patents for this unique application, the first in the fourth quarter of 2018 and the second in the first
quarter of 2021, and we believe this product could serve a currently unmet need in the market for safer surgeries and safer monitoring of
patients during recovery.
In addition to FDA clearance, we are pursuing European Union (“EU”) Certificate European (“CE”) Marking. CE Marking is a
certification that a product meets the standards established by the 27 nations of the EU and qualifies for sale in the EU and 4-nation
European Free Trade Association.
In early 2022, the integration of Kestrel and their pulse oximetry products into the ZMS organization was completed. Pulse oximetry is a
commonly used noninvasive monitoring method for estimation of oxygen saturation in arterial blood. The inaccuracies of traditional
Light Emitting Diode (“LED”)-based pulse oximeters have recently been highlighted specific to skin pigmentation bias and the inability
to accurately measure blood oxygen levels in the presence of other conditions such as in cases of carbon monoxide poisoning or
methemoglobinemia. ZMS’s investigational laser-based products are designed to address these inaccuracies and include the novel
NiCO™ CO-Oximeter, and HemeOx™, a total hemoglobin oximeter that is designed to enable continuous noninvasive arterial blood
monitoring. NiCO is anticipated to be submitted to the FDA for clearance in the third quarter of 2023.
As ZMS’ products are still in development, ZMS did not produce any revenue for the years ending December 31, 2022 and 2021.
In addition to the fluid volume monitor, ZMS filed for a provisional patent for a non-invasive sepsis monitor in December 2020 and an
updated utility patent filed in December 2021.
SALES AND GROWTH STRATEGIES
To date, ZMI accounts for substantially all of our revenue and profit. We are focused on expanding our sales force to address what we
believe is an untapped market for electrotherapy products for pain management which has become more attractive due to large
competitors exiting the market. As of December 31, 2022, we had approximately 450 field sales representatives on staff or in the hiring
process. We continue to hire field sales representatives at a rapid rate, focusing on the quality of each candidate with the goal of having
approximately 500-600 sales representatives in the U.S. by the end of 2023. We will be focused on increasing performance management
standards for our sales force.
In an effort to increase revenue and diversification in order to provide our prescribers and patients with diverse solutions for their pain
management needs, we are continually adding new complementary products to our ZMI sales channel, such as our hot/cold therapy,
cervical traction, knee braces and LSO back braces. In addition, in March 2020 we introduced a full catalog of over 3,300 physical
therapy products to promote in the clinics which we serve. We believe adding these complementary products will increase our market
share in the marketplace 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.
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Distribution and Revenue Streams:
Currently, substantially all of our revenue is generated through our ZMI subsidiary from our electrotherapy products.
We sell through a direct sales force in United States. Our field sales representatives are engaged to sell in predefined geographic markets
and are compensated with a base salary and incentives based on the type of product sold and insurance. Our efforts to date have been
focused on the United States market.
Our revenue is derived from several sources including patients with insurance plans held by commercial health insurance carriers or
government payers who pay on behalf of their insureds. The remaining portion of revenue is primarily received from workers’
compensation claims and 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 complementary products
from other domestic manufacturers. These products generally include patient consumables, such as electrodes and batteries plus cervical
traction, lumbar support, knee braces 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.
Products
We currently market and sell Zynex-manufactured products and distribute complementary products and private labeled supplies for
Zynex products, as indicated below:
Product Name
Description
Zynex Medical Products
NexWave
NeuroMove
InWave
E-Wave
Dual channel, multi-modality IFC, TENS, NMES device
Electromyography (EMG) — triggered electrical stimulation device
Electrical stimulation for treatment of female urinary incontinence
NMES device
Private Labeled Supplies
Electrodes
Batteries
Distributed Complementary Products
Supplies, re-usable for delivery of electrical current to the body
Supplies, for use in electrotherapy products
Comfortrac/Saunders
Cervical traction
JetStream
Hot/cold therapy
LSO Back Braces
Lumbar support
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Knee Braces
Knee support
Zynex Monitoring Solutions
Products (Products in Development, Not Yet
Available for Sale)
CM-1500
CM-1600
Zynex Fluid Monitoring System
Zynex Wireless Fluid Monitoring System – Submitted to the FDA, December 2021, not
yet FDA cleared.
NiCO CO-Oximeter
Laser-based Noninvasive CO-Oximeter (Not yet FDA cleared)
HemeOx tHb Oximeter
Laser-based Total Hemoglobin Pulse Oximeter (Not yet FDA cleared)
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. Our
primary electrotherapy 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 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.
Sales of NeuroMove did not generate material revenue for the years ended December 31, 2022 and 2021.
Hemodynamic Monitoring
Hemodynamic monitoring is the process of measuring the blood flow and pressure exerted in the heart, veins, and arteries. It provides an
assessment of a patient’s circulatory status and their ability to assure cardiac output and oxygen delivery to the body. Maintaining
effective circulating blood volume and pressure are key to assuring adequate oxygen saturation and perfusion.
Hemodynamic monitoring devices have been historically classified as, (a) invasive, using a central or pulmonary artery catheter, (b)
minimally invasive, with the placement of an arterial line, and (c) noninvasive, where no device is inserted into the body for clinical
assessment.
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The Zynex Fluid Monitoring System CM-1500 and the Zynex Wireless Fluid Monitoring System CM-1600 are noninvasive monitoring
devices designed to measure relative changes in fluid volume in adult patients. Fluid status is determined using Zynex’s proprietary
algorithm and expressed as the patented Relative Index™, a simple value designed to accurately trend patient vital signs and alert
clinicians for early intervention.
The CM-1500 was cleared by the FDA in 2020. The CM-1600 has been submitted to the FDA and is pending clearance.
Pulse Oximetry Monitoring
Pulse oximetry is a noninvasive method of measuring the oxygen saturation level (“SpO2”) of arterial blood. As one of the most
common medical devices used in and out of hospitals around the world, pulse oximeters have gained widespread clinical acceptance as
the standard of care for monitoring oxygen saturation. SpO2 has become the “fifth vital sign”, which, together with heart rate, blood
pressure, respiratory rate, and temperature, provides crucial clinical information about a person’s health status.
The NiCO™ Noninvasive CO-Oximeter, the first laser-based photoplethysmographic patient monitoring technology, is designed to
noninvasively measure and monitor four crucial species of hemoglobin with unprecedented accuracy.
The HemeOx™ Total Hemoglobin Pulse Oximeter is designed to noninvasively measure total hemoglobin and oxygen saturation, two
critical parameters that typically require invasive arterial blood sampling for measurement. Total hemoglobin is a very commonly
ordered blood test in healthcare, and HemeOx™ measures it with the continuous and noninvasive ease of a pulse oximeter at the patient
bedside.
The NiCO™ Noninvasive CO-Oximeter and the HemeOx™ Total Hemoglobin Pulse Oximeter have not yet been cleared by the FDA.
MARKETS
Zynex Medical (ZMI):
To date, the majority of our revenue has been generated by our ZMI electrotherapy products and private labeled supplies. Thus, we
primarily compete in the home electrotherapy market for pain management, 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 to $1
billion. During 2022 and 2021, we maintained our sales force of approximately 450 direct sales representatives to address what we
believe is an underserved 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 50 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 3 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 complementary products such as JetStream Hot/Cold Therapy, Knee bracing, LSO Back bracing and Comfortrac and
Saunders cervical and lumbar traction units, all products targeted at treating acute as well as chronic pain with minimal side-effects.
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Key characteristics of our electrotherapy market are:
● Collection cycles of initial payment from insurance carriers can range from less than 30 days to many months and considerably
longer for many attorney, personal injury, and workers’ 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 third-party payers.
● Prior to payment, third-party payers often make or take significant payment adjustments or discounts. This can also lead to
denials and billing disputes with third-party payers.
● 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 third-party payer 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 fluid monitoring system, the sepsis monitor and the pulse oximetry products acquired in its acquisition of Kestrel. We
believe our products, 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. ZMS has not
generated any revenue.
Competition
Since we are 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.
RESOURCES
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. We believe there is a large pool of
highly qualified contract manufacturers, domestically and internationally, 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.
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We utilize contract manufacturers located in the U.S. to manufacture components for our NexWave and NeuroMove units and for some
of our other products and 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.
Intellectual Property
Zynex is committed to aggressively protecting the intellectual property rights the Company has worked so hard to obtain and to expand
our intellectual property portfolio for advances to our existing products and for new products as they are developed.
Zynex has received two U.S. utility patents, as well as a utility patent in Europe, for our fluid monitoring system. The acquisition of
Kestrel Labs, Inc. by Zynex Inc. included an intellectual property portfolio surrounding the acquired laser-based photoplethysmographic
technology. This expands both the size and scope of Zynex’s intellectual property portfolio to include key aspects of the exciting pulse
oximetry market.
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.
GOVERNMENT REGULATION
US Food and Drug Administration (FDA)
All of 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 into commercial distribution. Section 510(k) of the Federal Food, Drug and Cosmetic Act, is
available in certain instances for Class II devices. It requires that before introducing most Class II devices into interstate commerce, the
sponsor 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 Quality System Regulation (QSR), which sets forth current Good Manufacturing Practice (GMP)
requirements for devices. 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 continues to explore opportunities to gain regulatory clearance for its devices in markets outside of the U.S.
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
applying for CE marking on several of its electrotherapy devices and its CM-1500 Zynex Fluid Monitoring System.
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.
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Zynex has received ISO13485: 2016 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 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.
Government Regulation
The delivery of health care services and products has become one of the most highly regulated 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.
Healthcare Regulation
Federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, also apply to our business.
If we fail to comply with those laws, we could face substantial penalties and our business, results of operations, financial condition and
prospects could be adversely affected. The laws that may affect our ability to operate include but are not limited to: the federal Anti-
Kickback Statute, which prohibits. among other things, soliciting, receiving, offering or paying remuneration, directly or indirectly, to
induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as
the Medicare and Medicaid programs; and federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit,
among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare,
Medicaid, or other third-party payers that are false or fraudulent. Additionally, we are subject to state law equivalents of each of the
above federal laws, which may be broader in scope and apply regardless of whether the payer is a federal healthcare program, and many
of which differ from each other in significant ways and may not have the same effect, further complicate compliance efforts.
Numerous federal and state laws, including state security breach notification laws, state health information privacy laws and federal and
state consumer protection laws, govern the collection, use and disclosure of personal information. In addition, most healthcare providers
who are expected to prescribe our products and from whom we obtain patient health information, are subject to privacy and security
requirements under the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology
and Clinical Health Act, or HIPAA. We could be subject to criminal penalties if we knowingly obtain individually
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identifiable health information from a HIPAA-covered entity, including healthcare providers, in a manner that is not authorized or
permitted by HIPAA. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an
increasing amount of focus on privacy and data protection issues with the potential to affect our business, including recently enacted laws
in a majority of states requiring security breach notification. These laws could create liability for us or increase our cost of doing
business.
In addition, the Physician Payments Sunshine Act, enacted as part of the Patient Protection and Affordable Care Act of 2010, or the
ACA, created a federal requirement under the federal Open Payments program, that requires certain manufacturers to track and report to
the Centers for Medicare and Medicaid Services, or CMS, annually certain payments and other transfers of value provided to physicians
and certain advanced non-physician health care practitioners and teaching hospitals made in the previous calendar year, as well as
ownership and investment interests held by physicians and their immediate family members. In addition, there are also an increasing
number of state laws that require manufacturers to make reports to states on pricing and marketing information. These laws may affect
our sales, marketing, and other promotional activities by imposing administrative and compliance burdens on us. In addition, given the
lack of clarity with respect to these laws and their implementation, our reporting actions could be subject to the penalty provisions of the
pertinent state and federal authorities.
Research and Development
During 2022 and 2021, we incurred approximately $7.1 million and $2.6 million in expenses, respectively, related to our ZMS
operations. During 2022, approximately $1.0 million of the expenses qualified for Section 174 - “Amortization of Research and
Experimental Expenditures” tax treatment. We expect our research and development expenses to increase in 2023 as our ZMS business
expands.
HUMAN CAPITAL
As of December 31, 2022, we employed approximately 900 full time employees.
Our employees are our most important assets and set the foundation for our ability to achieve our strategic objectives. All of our
employees contribute to our success and, in particular, our sales representatives are instrumental in our ability to reach more patients in
pain.
The success and growth of our business depends in large part on our ability to attract, retain and develop a diverse population of talented
and high-performing employees at all levels of our organization. To succeed in a competitive labor market, we have developed
recruitment and retention strategies, objectives and measures that we focus on as part of the overall management of our business. These
strategies, objectives and measures form our human capital management framework and are advanced through the following programs,
policies and initiatives:
● Competitive pay and benefits. Our compensation programs are designed to align the compensation of our employees with our
performance and to provide the proper incentives to attract, retain, and motivate employees to achieve superior results.
● Training and development. We invest in learning opportunities that foster a growth mindset. Our formal offerings include a
tuition reimbursement program, an e-learning program that all corporate employees have access to and in-house learning
opportunities through the Company’s Zynex Growth and Development program.
● Health and Wellness. We invest in the health and wellness of our employees by offering monthly benefits and offer programs
and support to assist our employees.
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ITEM 1A. RISK FACTORS
RISKS RELATED TO OUR
BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE
Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets,
including conditions that are outside of our control, such as the impact of health and safety concerns, including SARS-CoV-2 (severe
acute respiratory syndrome coronavirus 2) (“COVID-19”) pandemic and various variants, as well as the recent inflation in the United
States, foreign and domestic government sanctions imposed on Russia as a result of its recent invasion of Ukraine, and other disruptions
to global supply chains. Each of these events has caused or may continue to result in extreme volatility and disruptions in the capital and
credit markets. A severe or prolonged economic downturn, whether due to inflationary pressures or otherwise, could result in a variety of
risks to our business, including weakened demand for our products and our ability to raise additional capital when needed on acceptable
terms, if at all. A weak or declining economy could strain our suppliers, possibly resulting in supply disruption, or cause delays in
payments for our services by third-party payors or our collaborators. Any of the foregoing could harm our business and we cannot
anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business.
A pandemic, epidemic, or outbreak of an infectious disease, such as of COVID-19 and subsequent variants, may materially and
adversely affect our business and results of operations.
Public health crises such as pandemics or similar outbreaks could adversely impact our business. In 2019, COVID-19 surfaced in Wuhan,
China and has since spread worldwide. The COVID-19 pandemic is evolving, and to date has led to the implementation of various
responses, including government-imposed quarantines, travel restrictions and other public health safety measures. The effects of this
outbreak on our business have included and could continue to include temporary closures of our providers and clinics and suspensions of
elective surgical procedures. This has and could continue to impact our interactions and relationships with our customers.
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In addition to temporary closures of the providers and clinics that we serve, we could also experience temporary closures of the facilities
of our suppliers, contract manufacturers, or other vendors in our supply chain, which could impact our business, interactions and
relationships with our third-party suppliers and contractors, and results of operations. The extent to which COVID-19 will impact our
future business and the economy, will also depend on future developments, which are highly uncertain and cannot be predicted with
confidence, including the duration of the pandemic, adverse impacts of the Omicron COVID-19 variant or other COVID-19 variants,
new information that will emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among
others. Accordingly, we cannot predict the extent to which our financial condition, results of operations and value of our common stock
will be affected. The uncertainty surrounding the COVID-19 outbreak has caused the Company to increase its inventory in anticipation
of possible supply chain shortages related to the COVID-19 virus. While we did not incur significant disruptions to our operations during
2021 and 2022, we are unable at this time to predict with confidence the impact that COVID-19 will have on our business, financial
position and operating results in future periods due to numerous uncertainties.
Rapid technological change could cause our products to become obsolete and if we do not enhance our product offerings through our
research and development efforts, we may be unable to effectively compete.
The technologies underlying our products are subject to rapid and profound technological change. Competition intensifies as technical
advances in each field are made and become more widely known. We can give no assurance that others will not develop services,
products, or processes with significant advantages over the products, services, and processes that we offer or are seeking to develop. Any
such occurrence could have a material and adverse effect on our business, results of operations and financial condition.
We plan to enhance and broaden our product offerings in response to changing customer demands and competitive pressure and
technologies, but we may not be successful. The success of any new product offering or enhancement to an existing product will depend
on numerous factors, including our ability to:
● properly identify and anticipate physician and patient needs;
● develop and introduce new products or product enhancements in a timely manner;
● adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties;
● demonstrate the safety and efficacy of new products, including through the conduct of additional clinical trials;
● obtain the necessary regulatory clearances or approvals for new products or product enhancements; and
● achieve adequate coverage and reimbursement for our products.
If we do not develop and, when necessary, obtain regulatory clearance or approval for new products or product enhancements in time to
meet market demand, or if there is insufficient demand for these products or enhancements, our results of operations will suffer. Our
research and development efforts may require a substantial investment of time and resources before we are adequately able to determine
the commercial viability of a new product, technology, material or other innovation. In addition, even if we are able to successfully
develop enhancements or new generations of our products, these enhancements or new generations of products may not be covered or
reimbursed by government healthcare programs such as Medicare or private health plans, may not produce sales in excess of the costs of
development and/or may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of
products embodying new technologies or features.
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We are dependent on reimbursement from third-party payers, most of whom are larger than we are and have substantially more
employees and financial resources; changes in insurance reimbursement policies or application of them have resulted in decreased or
delayed revenues.
A large percentage of our revenues come from third-party payer reimbursement. Most of the third-party payers are large insurance
companies with substantially more resources than we have. Upon delivery of our products to our patients, we directly bill the patients’
private insurance companies or government payers for reimbursement. If the third-party payers 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 patients and invoice based on past practices and billing experiences only to have third-party
payers later deny coverage for such products.
In some cases, our delivered product may not be covered pursuant to a policy statement of a third-party payer, despite a payment history
with the third-party payer and benefits to the patients. A third-party payer may seek repayment of amounts previously paid for covered
products. We maintain an allowance for provider discounts and 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 which can accumulate to a significant amount. 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 refund claim reimbursements and offsets or the ultimate outcome of the refund requests.
We are dependent on our Medicare Supplier Number.
We are required to have a Medicare Supplier Number in order to have the ability to bill Medicare for services provided to Medicare
patients. Furthermore, all third-party and Medicaid contracts require us to have a Medicare Supplier Number. We are required to comply
with Medicare DMEPOS Supplier Standards in order to maintain such number. If we are unable to comply with the relevant standards,
we could lose our Medicare Supplier Number. Without such number, we would be unable to continue our various third-party and
Medicaid contracts. A significant portion of our revenues are dependent upon our Medicare Supplier Number, the loss of which would
materially and adversely affect our business, financial condition, results of operations and cash flows.
The Center for Medicare and Medicaid Services (“CMS”) requires that all Durable Medical Equipment providers must be accredited by a
CMS-approved accreditation organization. On February 1, 2013, we initially received accreditation from the Accreditation Commission
for Health Care (“ACHC”), and we have remained accredited to date. If we lost our accredited status, our business, financial condition,
revenues and results of operations would be materially and adversely affected.
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We face periodic reviews and billing audits from governmental and private payers, and these audits could have adverse results that
may negatively impact our business.
As a result of our participation in the Medicaid program and our registration in the Medicare program, we are subject to various
governmental reviews and audits to verify our compliance with these programs and applicable laws and regulations. We also are subject
to audits under various government programs in which third-party firms engaged by CMS conduct extensive reviews of claims data and
medical and other records to identify potential improper payments under the Medicare program. Private pay sources also reserve the right
to conduct audits. If billing errors are identified in the sample of reviewed claims, the billing error can be extrapolated to all claims filed
which could result in a larger overpayment than originally identified in the sample of reviewed claims. Our costs to respond to and
defend reviews and audits may be significant and could have a material adverse effect on our business, financial condition, results of
operations and cash flows. Moreover, an adverse review or audit could result in:
● required refunding or retroactive adjustment of amounts we have been paid by governmental or private payers;
● state or Federal agencies imposing fines, penalties and other sanctions on us;
● loss of our right to participate in the Medicare program, state programs, or one or more private payer networks; or
● damage to our business and reputation in various markets.
Any one of these results could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Failure to secure and maintain adequate coverage and reimbursement from third-party payers could adversely affect acceptance of
our products and reduce our revenues.
The majority of our revenues come from third-party payers, primarily insurance companies.
In the U.S., private payers cover the largest segment of the population, with the remainder either uninsured or covered by governmental
payers. The majority of the third-party payers outside the U.S. are government agencies, government sponsored entities or other payers
operating under significant regulatory requirements from national or regional governments.
Third-party payers may decline to cover and reimburse certain procedures, supplies or services. Additionally, some third-party payers
may decline to cover and reimburse our products for a particular patient even if the payer has a favorable coverage policy addressing our
products or previously approved reimbursement for our products. Additionally, private and government payers may consider the cost of a
treatment in approving coverage or in setting reimbursement for the treatment.
Private and government payers are increasingly challenging the prices charged for medical products and services. Additionally, the
containment of healthcare costs has become a priority of governments. Adoption of additional price controls and cost-containment
measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our revenues
and operating results. If third-party payers do not consider our products or the combination of our products with additional treatments to
be cost-justified under a required cost-testing model, they may not cover our products for their populations or, if they do, the level of
reimbursement may not be sufficient to allow us to sell our products on a profitable basis.
Reimbursement for the treatment of patients with medical devices is governed by complex mechanisms. These mechanisms vary widely
among countries, can be informal, somewhat unpredictable, and evolve constantly, reflecting the efforts of these countries to reduce
public spending on healthcare. As a result, obtaining and maintaining reimbursement for the treatment of patients with medical devices
has become more challenging. We cannot guarantee that the use of our products will receive reimbursement approvals and cannot
guarantee that our existing reimbursement approvals will be maintained in any country.
Our failure to secure or maintain adequate coverage or reimbursement for our products by third-party payers in the U.S. or in the other
jurisdictions in which we market our products could have a material adverse effect on our business, revenues and results of operations
and cause our stock price to decline.
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We may not be successful in maintaining the reimbursement codes necessary to facilitate accurate and timely billing for our products
or physician services attendant to our products.
Third-party payers, healthcare systems, government agencies or other groups often issue reimbursement codes to facilitate billing for
products and physician services used in the delivery of healthcare. If we are unable to maintain the Healthcare Common Procedure
Coding System codes (“HCPCS codes”) for physician services related to our products, our revenues and results may be affected by the
absence of such HCPCS codes, as physicians may be less likely to prescribe the therapy when there is no certainty that adequate
reimbursement will be available for the time, effort, skill, practice expense and malpractice costs required to provide the therapy to
patients.
Outside the U.S., we have not secured codes to describe our products or to document physician services related to the delivery of therapy
using our products. The failure to obtain and maintain these codes could affect the growth of our business.
We at times have concentrations of credit risk with third-party payers; failure to collect these and other billed receivables could
adversely affect our cash flows and results of operations.
The Company had receivables from one third-party payer at December 31, 2022 which made up approximately 14% of the accounts
receivable balance. The Company had receivables from one third-party payer at December 31, 2021, which made up approximately 22%
of the accounts receivable balance.
Future changes in coverage and reimbursement policies for our products or reductions in reimbursement rates for our products by
third party payers 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 payers such as private commercial insurance carriers, government payers and
others as appropriate and the third-party payer 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, and cash collections, have a significant impact on our operating results or lead to a restatement of our financial
results.
There are significant risks associated with the estimation of 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 payer 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, require complex, resource-intensive processes. Errors in determining the correct
coordination of benefits may result in refunds to payers. Revenues associated with government programs are also subject to estimating
risk related to the amounts not paid by the primary government payer 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 payer in estimating amounts expected to be collected on current billings, recent trends and current
changes in reimbursement practice, the overall healthcare environment, and other factors nonetheless 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.
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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 Tax Act and does not expect any significant changes related to the Tax Act at
this time.
The impact of healthcare reform legislation and other changes in the healthcare industry and in healthcare spending on us is
currently unknown, but may harm our business.
Our revenue is dependent on the healthcare industry and could be affected by changes in healthcare spending and policy. The healthcare
industry is subject to changing political, regulatory and other influences. The Patient Protection and Affordable Care Act, or PPACA,
made major changes in how health care is delivered and reimbursed, and increased access to health insurance benefits to the uninsured
and underinsured population of the United States.
The PPACA, among other things, increased the number of individuals with Medicaid and private insurance coverage, implemented
reimbursement policies that tie payment to quality, facilitated the creation of accountable care organizations that may use capitation and
other alternative payment methodologies, strengthened enforcement of fraud and abuse laws and encouraged the use of information
technology. Such changes in the regulatory environment may also result in changes to our payer mix that may affect our operations and
net revenue.
In addition, certain provisions of the PPACA authorize voluntary demonstration projects, which include the development of bundling
payments for acute, inpatient hospital services, physician services and post-acute services for episodes of hospital care. Further, the
PPACA may negatively impact payers by increasing medical costs generally, which could have an effect on the industry and potentially
impact our business and revenue as payers seek to offset these increases by reducing costs in other areas. The full impact of these
changes on us cannot be determined at this time.
We are also impacted by the Medicare Access and CHIP Reauthorization Act, under which physicians must choose to participate in one
of two payment formulas, Merit-Based Incentive Payment System, or MIPS, or Alternative Payment Models, or APMs. Beginning in
2019, MIPS allows eligible physicians to receive upward or downward adjustments to their Medicare Part B payments based on certain
quality and cost metrics, among other measures. As an alternative, physicians can choose to participate in an Advanced APM. Advanced
APMs are exempt from the MIPS requirements, and physicians who are meaningful participants in APMs will receive bonus payments
from Medicare pursuant to the law.
In addition, current and prior healthcare reform proposals have included the concept of creating a single payer or public option for health
insurance. If enacted, these proposals could have an extensive impact on the healthcare industry, including us. We are unable predict
whether such reforms may be enacted or their impact on our operations.
We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the
amounts that federal and state governments and other third-party payers will pay for healthcare services, which could harm our business,
financial condition and results of operations.]
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The Patient Protection and Affordable Care 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
payers. 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 in 2016 through
2022; 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.
The uncertainty of continuing healthcare changes and regulations may negatively affect our business.
There is some doubt on the continuation of the Affordable Care Act and the legislation that the current Congress will enact to replace it,
if any. Because we cannot be certain about the continuation of the Affordable Care Act or any changes or replacements thereto, even if
the Affordable Care Act remains the law of the land, there is also some doubt whether the President will support it or take regulatory
action to negatively impact its benefits. The amount of uncertainty creates 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.
We are subject, directly or indirectly, to United States federal and state healthcare fraud and abuse and false claims laws and
regulations. Prosecutions under such laws have increased in recent years and we may become subject to such litigation. If we are
unable to or have not fully complied with such laws, we could face substantial penalties.
Our operations are subject to various state and federal fraud and abuse laws, including, without limitation, the federal Anti-Kickback
Statute, the federal Stark Law and the federal False Claims Act. These laws may impact, among other things, our sales, marketing and
education programs.
The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing
remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a
good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs.
Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration
is to induce referrals of federal healthcare covered business, the statute has been violated. In addition, a person or entity does not need to
have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. The Anti-Kickback Statute is
broad and, despite a series of narrow safe harbors, prohibits many arrangements and practices that are lawful in businesses outside of the
healthcare industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as
fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have also
adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services
reimbursed by any source, not only the Medicare and Medicaid programs.
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The federal Ethics in Patient Referrals Act of 1989, commonly known as the “Stark Law,” prohibits, subject to certain exceptions,
physician referrals of Medicare and, as applicable under state law, Medicaid patients to an entity providing certain “designated health
services” if the physician or an immediate family member has any financial relationship with the entity. The Stark Law also prohibits the
entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral. Various states have corollary
laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a healthcare provider
to their patients when referring patients to that provider. Both the scope and exceptions for such laws vary from state to state. The federal
False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements
to obtain payment from the federal government. The False Claims Act defines “knowingly” to include actual knowledge, acting in
deliberate ignorance of the truth or falsity of information, or acting in deliberate disregard of the truth or falsity of information. False
Claims Act liability includes liability for reverse false claims for avoiding or decreasing an obligation to pay or transmit money to the
government. This includes False Claims Act liability for failing to report and return overpayments within 60 days of the date on which
the overpayment is “identified.” Penalties under the False Claims Act can include exclusion from the Medicare program. In addition, the
government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes
a false or fraudulent claim for purposes of the False Claims Act. Suits filed under the False Claims Act, known as qui tam actions, can be
brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any
amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam actions has increased significantly in
recent years, causing greater numbers of medical device, pharmaceutical and healthcare companies to have to defend a False Claims Act
action. When an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual
damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled
after the federal False Claims Act.
HIPAA, and its implementing regulations, also created additional federal criminal statutes that prohibit knowingly and willfully
executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent
pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit
program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick
or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits,
items or services relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have
actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
From time to time, the Company has been and is involved in various governmental audits, investigations and reviews related to its
operations. Reviews and investigations can lead to government actions, resulting in the assessment of damages, civil or criminal fines or
penalties, or other sanctions, including restrictions or changes in the way we conduct business, loss of licensure or exclusion from
participation in Medicare, Medicaid or other government programs. Additionally, as a result of these investigations, healthcare providers
and entities may face litigation or have to agree to settlements that can include monetary penalties and onerous compliance and reporting
requirements as part of a consent decree or corporate integrity agreement, or Corporate Integrity Agreement (“CIA”). If we fail to
comply with applicable laws, regulations and rules, its financial condition and results of operations could be adversely affected.
Furthermore, becoming subject to these governmental investigations, audits and reviews may result in substantial costs and divert
management’s attention from the business as we cooperate with the government authorities, regardless of whether the particular
investigation, audit or review leads to the identification of underlying issues.
We are unable to predict whether we could be subject to actions under any of these laws, or the impact of such actions. If we are found to
be in violation of any of the laws described above or other applicable state and federal fraud and abuse laws, we may be subject to
penalties, including civil and criminal penalties, damages, fines, exclusion from Medicare, Medicaid and other government healthcare
reimbursement programs and the curtailment or restructuring of its operations.
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 patient acceptance include:
● If patients conclude that the costs of these products exceed the cost savings associated with the use of these products;
● If patients 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;
● If we lack adequate resources to provide sufficient education and training to our patients;
● If frequent product malfunctions occur, leading clinicians to believe that the products are unreliable;
● Uncertainty regarding or change in government or third-party payer reimbursement policies for our products; and
● If physicians or other health care providers believe that our products will not be reimbursed by insurers or decide to prescribe
competing products.
Because our sales are dependent on prescriptions from physicians, if any of these or other factors result in fewer prescriptions for our
products being written, we will have reduced revenues and may not be able to fully fund our operations. Although we experienced an
increase in orders for our ZMI products during 2021 and 2022 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 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.
Our business could be adversely affected by reliance on sole suppliers.
Notwithstanding our current multiple supplier approach, certain essential product components may be supplied in the future 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.
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A third-party manufacturer’s inability to produce our products’ components 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 patients 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 patients need and require
shipments of products from us are critical. Further, because quality is a leading factor when patients, 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 patient.
We could experience cost increases or disruptions in supply of raw materials or other components used in our products.
Our third-party manufacturers that assemble and manufacture components for our products expect to incur significant costs related to
procuring raw materials required to manufacture and assemble our product. The prices for these raw materials fluctuate depending on
factors beyond our control including market conditions and global demand for these materials and could adversely affect our business,
prospects, financial condition, results of operations, and cash flows. Further, any delays or disruptions in our supply chain could harm our
business. For example, COVID-19, including associated variants, could cause disruptions to and delays in our operations, including
shortages and delays in the supply of certain parts, including semiconductors, materials and equipment necessary for the production of
our products, and the internal designs and processes we or third-parties may adopt in an effort to remedy or mitigate impacts of such
disruptions and delays could result in higher costs. In addition, our business also depends on the continued supply of battery cells for our
products. We are exposed to multiple risks relating to availability and pricing of quality battery cells. These risks include:
● the inability or unwillingness of battery cell manufacturers to build or operate battery cell manufacturing plants to supply the
numbers of battery cells (including the applicable chemistries) required to support the growth of the electric or plug-in hybrid
vehicle industry as demand for such cells increases;
● disruption in the supply of battery cells due to quality issues or recalls by the battery cell manufacturers; and
● an increase in the cost, or decrease in the available supply of raw materials used in battery cells, such as lithium, nickel, and
cobalt.
Furthermore, currency fluctuations, tariffs or shortages in petroleum and other economic or political conditions may result in significant
increases in freight charges and raw material costs. Substantial increases in the prices for raw materials or components would increase
our operating costs and could reduce our margins.
We depend upon third parties to manufacture and to supply key semiconductor chip components necessary for our products. We do
not have long-term agreements with our semiconductor chip manufacturers and suppliers, and if these manufacturers or suppliers
become unwilling or unable to provide an adequate supply of semiconductor chips, with respect to which there is a global shortage,
we would not be able to find alternative sources in a timely manner and our business would be adversely impacted.
Semiconductor chips are a vital input component to the electrical architecture of our products, controlling wide aspects of the products’
operations. Many of the key semiconductor chips we use in our products come from limited or single sources of supply, and therefore a
disruption with any one manufacturer or supplier in our supply chain would have an adverse effect on our ability to effectively
manufacture and timely deliver our products. We do not have any long- term supply contracts with any suppliers and purchase chips on a
purchase order basis. Due to our reliance on these semiconductor chips, we are subject to the risk of shortages and long lead times in
their supply. We are in the process of identifying alternative manufacturers for semiconductor chips. We have in the past experienced,
and may in the future experience, semiconductor chip shortages, and the availability and cost of these components would be difficult to
predict. For example, our manufacturers may experience temporary or permanent disruptions in their manufacturing operations due to
equipment breakdowns, labor strikes or shortages, natural disasters, component or material shortages, cost increases, acquisitions,
insolvency, changes in legal or regulatory requirements, or other similar problems.
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In particular, increased demand for semiconductor chips in 2020, due in part to the COVID-19 pandemic and increased demand for
consumer electronics that use these chips, has resulted in a severe global shortage of chips in 2021 and 2022. As a result, our ability to
source semiconductor chips to be used in our products has been adversely affected. This shortage may result in increased chip delivery
lead times, delays in the production of our products, and increased costs to source available semiconductor chips. To the extent this
semiconductor chip shortage continues, and we are unable to mitigate the effects of this shortage, our ability to deliver sufficient
quantities of our products to fulfill our preorders and to support our growth through sales to new customers would be adversely affected.
In addition, we may be required to incur additional costs and expenses in managing ongoing chip shortages, including additional research
and development expenses, engineering design and development costs in the event that new suppliers must be onboarded on an expedited
basis. Further, ongoing delays in production and shipment of products due to a continuing shortage of semiconductor chips may harm our
reputation and discourage additional preorders and sales, and otherwise materially and adversely affect our business and operations.
If we need to replace manufacturers, our expenses and cost of goods 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 patients,
which could cause us to lose patients or lose revenue because of late shipments.
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.
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, Founder,
and beneficial owner of approximately 41% 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.
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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.
Although we do not manufacture the products we distribute, if one of the products distributed by us proves to be defective or is
misused by a health care practitioner or patient, we may be subject to liability that could adversely affect our financial condition and
results of operations.
Although we do not manufacture the products that we distribute, a defect in the design or manufacture of a product distributed or
serviced by us, or a failure of a product distributed by us to perform for the use specified, could have a material and adverse effect on our
reputation in the industry and subject us to claims of liability for injuries and otherwise. Misuse of the product distributed by us by a
practitioner or patient that results in injury could similarly subject us to liability. Any substantial underinsured loss could have a material
and adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, any impairment of our
reputation could have a material and adverse effect on our revenues and prospects for future business.
We depend upon obtaining regulatory clearance of new products and/or manufacturing operations we develop and maintain
clearances of current products; failure to obtain or maintain such regulatory clearances could result in increased costs, lost revenue,
penalties and fines.
Before marketing certain 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 clearance 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 sales 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 clearance process or to maintain regulatory compliance of
existing products.
We may not be able to obtain clearance of a 510(k) pre-market notification or grant of a de novo classification request or approval of
a 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) pre-market 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) pre-market notification for
the modification of the product may be required prior to marketing any modified device. 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 or requesting 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, injunctions, and civil and criminal penalties, any of which could have a material adverse
effect on our operating results and reputation.
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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
cause or 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 mandatory recalls to date.
We continue to incur 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. We expect to incur research and development, sales
and marketing, and general and administrative expenses. These amounts may increase, and recently have in connection with our efforts
to expand our sales force, 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.
Substantial costs could be incurred defending against claims of intellectual property infringement.
Other companies, including competitors, may obtain patents or other proprietary intellectual property rights that would limit, interfere
with, or otherwise circumscribe our 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:
● Cease selling, incorporating, or using products that incorporate the challenged intellectual property;
● Obtain a license from the holder of the infringed intellectual property right, which may not be available on reasonable terms, if
at all; and
● Re-design our products excluding the infringed intellectual property, which may not be possible.
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. We
obtained utility patents on the fluid monitoring system in 2021 and 2018 in the U.S. and in 2020 in Europe. 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.
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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.
Other federal and state laws restrict the use and protect the privacy and security of personally identifiable information are, in many cases,
are not preempted by HIPAA and may be subject to varying interpretations by the courts and government agencies. These varying
interpretations can create complex compliance issues for us and our partners and potentially expose us to additional expense, adverse
publicity and liability, any of which could adversely affect our business. There is ongoing concern from privacy advocates, regulators and
others regarding data privacy and security issues, and the number of jurisdictions with data privacy and security laws has been
increasing. Also, there are ongoing public policy discussions regarding whether the standards for de-identification, anonymization or
pseudonymization of health information are sufficient, and the risk of re-identification sufficiently small, to adequately protect patient
privacy. We expect that there will continue to be new proposed and amended laws, regulations and industry standards concerning
privacy, data protection and information security in the United States, such as the California Consumer Privacy Act (“CCPA”), as
amended by the California Privacy Rights Act (“CPRA”), which amendments went into effect on January 1, 2023, The CCPA creates
specific obligations with respect to processing and storing personal information, and the CPRA amendments created a new state agency
that is vested with authority to implement and enforce the CCPA. Additionally, a similar law went into effect in Virginia on January 1,
2023, and further US-state comprehensive privacy laws are set to go into effect throughout 2023, including laws in Colorado,
Connecticut, and Utah. These laws are substantially similar in scope and contain many of the same requirements and exceptions as the
CCPA, including a general exemption for clinical trial data and limited obligations for entities regulated by HIPAA. However, we cannot
yet determine the full impact these laws or other such future laws, regulations and standards may have on our current or future business.
Any of these laws may broaden their scope in the future, and similar laws have been proposed on both a federal level and in more than
half of the states in the U.S. A number of other states have proposed new privacy laws, some of which are similar to the above discussed
recently passed laws. Such proposed legislation, if enacted, may add additional complexity, variation in requirements, restrictions and
potential legal risk, require additional investment of resources in compliance programs, impact strategies and the availability of
previously useful data and could result in increased compliance costs and/or changes in business practices and policies. The existence of
comprehensive privacy laws in different states in the country would make our compliance obligations more complex and costly and may
increase the likelihood that we may be subject to enforcement actions or otherwise incur liability for noncompliance.
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. In addition to extracting sensitive information, such attacks could include the deployment of harmful
malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the
confidentiality, integrity and availability of information. The prevalent use of mobile devices also increases the risk of data security
incidents. If we 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. While we believe we have taken reasonable steps to protect such data, techniques used to gain
unauthorized access to data and systems, disable or degrade service, or sabotage systems, are constantly evolving, and we may be unable
to anticipate such techniques or implement adequate preventative measures to avoid unauthorized access or other adverse impacts to such
data or our systems. In addition, some of our third-party service providers and partners also collect and/or store our sensitive information
and our customers’ data on our behalf, and these service providers and partners are subject to similar threats of cyber-attacks and other
malicious internet-based activities, which could also expose us to risk of loss, litigation, and potential liability. 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. Additionally, actual, potential or
anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies,
train employees, and engage third-party experts and consultants. Specifically, as
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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. Additionally, although we maintain cybersecurity insurance coverage, we cannot be certain that such coverage
will be adequate for data security liabilities actually incurred, will cover any indemnification claims against us relating to any incident,
will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future
claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of
changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could
have a material adverse effect on our reputation, business, prospects, results of operations and financial condition.
We have identified a material weakness in our internal controls over financial reporting and may identify additional material
weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material
misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or
detected on a timely basis. We identified a material weakness in our internal controls over financial reporting as of December 31, 2022,
related to information technology general controls, or ITGCs, that were not designed and operating effectively to ensure (i) appropriate
segregation of duties was in place to perform program changes and (ii) the activities of individuals with access to modify data and make
program changes were appropriately monitored. Business process controls (automated and manual) that are dependent on the affected
ITGCs were also deemed ineffective because they could have been adversely impacted. Although the material weakness identified above
did not result in any material misstatements in our consolidated financial statements for the periods presented and there were no changes
to previously released financial results, our management concluded that these control weaknesses constitute a material weakness and that
our internal control was not effective as of December 31, 2022.
Our management is committed to take comprehensive actions to remediate the material weakness in internal control over financial
reporting. We are in the process of developing and implementing remediation plans to address the material weakness described above.
While we are committed to designing and implementing new controls and measures to remediate this material weakness, we cannot
assure you that the measures will be sufficient to remediate the material weakness or avoid the identification of additional material
weaknesses in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors
in our consolidated financial statements that could result in a restatement of our financial statements and could cause us to fail to meet
our periodic reporting obligations, any of which could diminish investor confidence in us and cause a decline in the price of our common
stock.
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:
● difficulties in managing foreign operations and attracting and retaining appropriate levels of senior management and staffing;
● longer cash collection cycles;
● proper compliance with local tax laws which can be complex and may result in unintended adverse tax consequences;
● 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;
● 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;
● the ability to efficiently repatriate cash to the United States and transfer cash between foreign jurisdictions; and
● changes in general economic conditions or political circumstances in countries where we operate.
Our acquisition of other companies could require significant management attention, disrupt our business, dilute stockholder value
and adversely affect our operating results.
As part of our business strategy, we have made and may in the future acquire or make investments in other companies, solutions or
technologies to, among other reasons, expand or enhance our product offerings. In the future, any significant acquisition would require
the consent of our lenders. Any failure to receive such consent could delay or prohibit us from acquiring companies that we believe could
enhance our business.
We may not ultimately strengthen our competitive position or achieve our goals from our recent or any future acquisition, and any
acquisitions we complete could be viewed negatively by users, customers, partners or investors. In addition, if we fail to integrate
successfully such acquisitions, or the technologies associated with such acquisitions, into our company, the revenues and operating
results of the combined company could be adversely affected. For example, in December 2021 we acquired Kestrel Labs, Inc. and we
must effectively integrate the personnel, products, technologies and customers and develop and motivate new employees. In addition, we
may not be able to successfully retain the customers and key personnel of such acquisitions over the longer term, which could also
adversely affect our business. The integration of our recently-acquired business or future-acquired business will require significant time
and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired
business and accurately forecast the financial impact of the acquisition, including accounting charges.
We may have to pay cash, incur debt or issue equity securities to pay for any acquisition, each of which could affect our financial
condition or the value of our capital stock. For example, in connection with our acquisition of Kestrel Labs, Inc., we paid an approximate
value of $30.5 million, consisting of $16.1 million in cash which was financed through Bank of America N.A. and approximately $14.4
million in shares of our common stock, a portion of which is held in escrow until certain milestones are achieved. To fund any future
acquisition, we may issue equity, which would result in dilution to our stockholders, or incur more debt, which would result in increased
fixed obligations and could subject us to additional covenants or other restrictions that would impede our ability to manage our
operations.
If we are not able to integrate acquired businesses successfully, our business could be harmed.
Our inability to successfully integrate our recent and future acquisitions could impede us from realizing all of the benefits of those
acquisitions and could severely weaken our business operations. The integration process may disrupt our business and, if implemented
ineffectively, may preclude realization of the full benefits expected by us and could harm our results of operations. In addition, the
overall integration of the combining companies may result in unanticipated problems, expenses, liabilities, and competitive responses,
and may cause our stock price to decline. The difficulties of integrating an acquisition include, among others:
● unanticipated issues in integration of information, communications, and other systems;
● unanticipated incompatibility of logistics, marketing, and administration methods;
● maintaining employee morale and retaining key employees;
● integrating the business cultures of both companies;
● preserving important strategic client relationships;
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● consolidating corporate and administrative infrastructures and eliminating duplicative operations; and
● coordinating geographically separate organizations.
In addition, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition,
including the synergies, cost savings, or growth opportunities that we expect. These benefits may not be achieved within the anticipated
time frame, or at all. For example, the failure to get regulatory approval to sell certain products of an acquired business may significantly
reduce the anticipated benefits of the acquisition and could harm our results of operations, even if we have put in place contingencies for
the delivery of closing consideration, such as the escrowed shares held back in our acquisition of Kestrel Labs, Inc. Further, acquisitions
may also cause us to:
● issue securities that would dilute our current stockholders’ ownership percentage;
● use a substantial portion of our cash resources;
● increase our interest expense, leverage, and debt service requirements if we incur additional debt to pay for an acquisition;
● assume liabilities, including environmental liabilities, for which we do not have indemnification from the former owners or
have indemnification that may be subject to dispute or concerns regarding the creditworthiness of the former owners;
● record goodwill and non-amortizable intangible assets that are subject to impairment testing on a regular basis and potential
impairment charges;
● experience volatility in earnings due to changes in contingent consideration related to acquisition liability estimates;
● incur amortization expenses related to certain intangible assets;
● lose existing or potential contracts as a result of conflict of interest issues;
● incur large and immediate write-offs; or
● become subject to litigation.
Our failure to comply with the covenants contained in our loan agreement could result in an event of default that could adversely
affect our financial condition and ability to operate our business as planned.
We currently have an outstanding term loan and line of credit with Bank of America, N.A. under which we are obligated to pay monthly
amortization payments. Our loan agreement contains, and any agreements to refinance our debt likely will contain, financial and
restrictive covenants. Our failure to comply with these covenants in the future may result in an event of default, which if not cured or
waived, could result in the bank preventing us from accessing availability under our line of credit and requiring us to repay any
outstanding borrowings. There can be no assurance that we will be able to obtain waivers in the event of covenant violations or that such
waivers will be available on commercially acceptable terms.
In addition, the indebtedness under our loan agreement is secured by a security interest in substantially all of our tangible and intangible
assets, and therefore, if we are unable to repay such indebtedness the bank could foreclose on these assets and sell the pledged equity
interests, which would adversely affect our ability to operate our business. If any of these were to occur, we may not be able to continue
operations as planned, implement our planned growth strategy or react to opportunities for or downturns in our business.
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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 Financial Accounting Standards Board (“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 RELATED 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. 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 existing stockholders may experience dilution if we elect to raise equity capital
Due to our past liquidity issues, we have had to raise capital in the form of debt and/or equity to meet our working capital needs. We may
also choose to issue equity or debt securities in the future to meet our liquidity or other 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. 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. If we raise additional working capital, existing stockholders may experience
dilution.
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. In 2021, our
Board of Directors declared a special one-time dividend of $0.10 per share, which was paid in January 2022. 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. 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 our former corporate headquarters in Englewood, Colorado beginning in January 2018. In March
2019, we signed an amendment to this lease, which allowed the Company to expand its corporate offices. An additional amendment was
entered into on January 3, 2020, which expanded our former corporate offices to approximately 85,681 square feet. During 2021, we
moved our corporate headquarters to a new location, however, we continue to use the leased property for ZMS operations. The lease and
subsequent amendments continue through June 30, 2023 with an option for a two-year extension through June 2025.
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In addition to our corporate headquarters, we entered into a lease agreement for a warehouse and production facility with approximately
50,488 square feet in September 2020. The lease continues through June 2026 with an option for a five-year extension through June
2031.
In April 2021, we signed a sublease for a new corporate headquarters in Englewood, Colorado beginning in May 2021 for up to
approximately 110,754 square feet. This lease runs through April 2028.
During March 2022, we entered into a lease agreement for approximately 4,162 square feet of office space for the operations of ZMS in
Boulder, Colorado. The lease began on April 1, 2022 and will run through April 1, 2025.
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.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
On February 12, 2019, our common stock began trading on The Nasdaq Capital Market under the symbol “ZYXI”. Prior to uplisting to
the Nasdaq Capital Market, the Company’s common stock was quoted on the OTCQB (managed by OTC Markets, Inc) under the symbol
“ZYXI.”
As of March 13, 2023, there were 36,634,459 shares of common stock outstanding and approximately 154 record holders of our common
stock.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Issuer Purchases of Equity Securities
The following table sets forth a summary of the Company’s purchases of common stock during the fourth quarter of 2022 pursuant to
the Company’s authorized share repurchase program:
Period
October 1 - October 31, 2022
Share repurchase program (1)
November 1 - November, 2022
Share repurchase program (2)
December 1 – December 31, 2022
Share repurchase program (2)
Quarter Total
Share repurchase program (1)
Share repurchase program (2)
Total
Number of
Shares
Purchased
Average
Price
Paid Per
Share
Shares
Purchased as
Part of a
Publicly
Announced
Plan
(In Thousands)
Maximum Value
of Shares That
May Yet Be
Purchased
Under the
Plan
19,653
$
9.74
1,091,604
—
312,035
$ 13.16
312,035
5,893
183,103
$ 13.87
495,138
3,352
19,653
495,138
9.74
$
$ 13.43
1,091,604
495,138
—
3,352
(1) Shares were purchased through the Company’s publicly announced share repurchase program dated June 9, 2022. The program was
fully utilized during the Company’s fourth quarter.
(2) Shares were purchased through the Company’s publicly announced share repurchase program approved by the Company’s Board of
Directors on October 31, 2022. The program expires at the earlier of October 31, 2023 or reaching $10.0 million of repurchases.
Dividends
Our Board of Directors declared a special cash dividend of $0.10 per share and a 10% stock dividend during the fourth quarter of 2021,
which was paid out and issued in January 2022. There can be no guarantee that we will continue to pay dividends. Any future
determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial
condition, results of operations, capital requirements and such other factors as the Board deems relevant.
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ITEM 6. [RESERVED]
Not required.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Annual Report on Form 10-K 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 FDA clearance and 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, and other risks described herein and included in “Item 1A-Risk Factors.”
OVERVIEW
We operate in one primary business segment, electrotherapy and pain management products. As of December 31, 2022, the Company’s
only active subsidiary is ZMI, a wholly-owned Colorado corporation, through which the Company conducts its U.S. electrotherapy and
pain management operations. ZMS, a wholly-owned Colorado corporation, has developed a fluid monitoring system, which has received
two utility patents and FDA approval in the U.S. ZMS also acquired Kestrel during 2021, which had two pulse-oximeter products they
are developing and numerous patents. However, ZMS has achieved no revenues to date.
The following information should be read in conjunction with our Consolidated Financial Statements and related notes contained in this
Annual Report.
HIGHLIGHTS
During the year ended December 31, 2022, the Company achieved the following:
ZMI
● Achieved a 23% increase in order growth, 21% growth in revenue, and a 98% increase in operating cash flows compared to the
prior year;
● Recorded net income of $17.0 million and our 7th consecutive profitable year;
● Achieved higher sales representative productivity with increase revenue per sales representative;
● Due to strong results and related cash flow, we repurchased over $26 million worth of Company stock;
● Ranked 11th in Forbes list of “Americas Best Small Companies 2023”;
● Ranked 33rd in the Top 100 Healthcare Technology Companies of 2022 according to The Healthcare Technology Report;
● Included in the Deloitte Technology Fast 500 Fastest Growing Companies for a 4th consecutive year.
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ZMS
● Fully integrated Kestrel Labs, Inc. in Q1 2022.
● Completed multiple IRB-approved clinical studies including the apheresis blood donation study with Vitalant Research
Institute, and studies at Yale University where subjects underwent simulated hemorrhage using a lower body negative pressure
chamber.
● Applied to the U.S. Food and Drug Administration (“FDA”) in Q1 2023 for consideration through its Breakthrough Devices
Program for NiCO.
Inflation Reduction Act
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022, or IRA, into law, which among other things, (i) directs
the U.S. Department of Health and Human Services, or HHS, to negotiate the price of certain high-expenditure, single-source drugs and
biologics covered under Medicare, and subjects drug manufacturers to civil monetary penalties and a potential excise tax for offering a
price that is not equal to or less than the negotiated “maximum fair price” under the law; (ii) imposes rebates under Medicare Part B and
Medicare Part D to penalize drug price increases that outpace inflation; and (iii) redesigns the Medicare Part D program, increasing
manufacturer rebates within the catastrophic coverage phase. The IRA permits HHS to implement many of these provisions through
guidance, as opposed to regulation, for the initial years. These provisions will take effect progressively beginning in fiscal year 2023,
although they may be subject to legal challenges. It is currently unclear how the IRA will be effectuated but is likely to have a significant
impact on the pharmaceutical industry.
The IRA also includes various tax provisions, including an excise tax on stock repurchases, expanded tax credits for clean energy
incentives, and a corporate alternative minimum tax that generally applies to U.S. corporations with average adjusted financial statement
income over a three year period in excess of $1 billion. The Company does not expect these tax provision to materially impact its
financial statements.
SUMMARY
Net revenue increased 21% in 2022 to $158.2 million from $130.3 million in 2021. Net income was $17.0 million and $17.1 million for
the years ended December 31, 2022, and 2021, respectively.
Cash flows from operating activities increased 98% or $6.8 million to $13.7 million for the year ended December 31, 2022. Increased
orders for our devices and supplies and the related receivables and cash flows, which allowed us to repurchase $26.4 million of common
stock and maintain working capital of $48.5 million at December 31, 2022.
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RESULTS OF OPERATIONS
The following table presents our consolidated statements of operations in comparative format (in thousands).
NET REVENUE
Devices
Supplies
Total net revenue
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue – devices and supplies
Sales and marketing
General and administrative
Total costs of revenue and operating expenses
Income from operations
Other expense
Loss on change in fair value of contingent consideration
Interest expense
Other expense, net
Income from operations before income taxes
Income tax expense
Net income
Net income per share:
Basic
Diluted
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
33
For the Years Ended
December 31,
2022
2021
$
change
$
$
43,497
114,670
158,167
36,613
93,688
130,301
$
32,005
67,116
36,108
135,229
27,321
54,290
26,324
107,935
22,938
22,366
(300)
(440)
(740)
22,198
5,150
17,048
0.44
0.44
38,467
39,127
$
$
$
—
(95)
(95)
22,271
5,168
17,103
0.45
0.44
38,317
39,197
$
$
$
$
$
$
6,884
20,982
27,866
4,684
12,826
9,784
27,294
572
(300)
(345)
(645)
(73)
(18)
(55)
(0.00)
(0.00)
150
(70)
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The following table presents our consolidated statements of operations reflected as a percentage of total revenue:
NET REVENUE
Devices
Supplies
Total net revenue
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue – devices and supplies
Sales and marketing
General and administrative
Total costs of revenue and operating expenses
Income from operations
Other income/(expense)
Loss on change in fair value of contingent consideration
Interest expense
Other income/(expense), net
Income from operations before income taxes
Income tax expense
Net income
Net income per share:
Basic
Diluted
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
Net Revenue
For the Years Ended December 31,
2022
2021
28 %
72 %
100 %
20 %
42 %
23 %
85 %
15 %
0 %
0 %
0 %
14 %
3 %
12 %
28 %
72 %
100 %
21 %
42 %
20 %
83 %
17 %
0 %
0 %
0 %
17 %
4 %
13 %
0.44
0.44
38,467
39,127
0.45
0.44
38,317
39,197
Net revenues are comprised of device and supply sales, constrained by estimated third-party payer reimbursement deductions. The
reserve for billing allowance adjustments and allowance for uncollectible accounts are adjusted on an ongoing basis in conjunction with
the processing of third-party payer insurance claims and other customer collection history. Product device revenue is primarily comprised
of sales and rentals of our electrotherapy products and also includes complementary products such as 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 payer reimbursement deductions and estimated allowance for uncollectible accounts. The deductions are known throughout
the health care industry as billing adjustments whereby the healthcare insurers unilaterally reduce the amount they reimburse for our
products as compared to the sales prices charged by us. The deductions from gross revenue also 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 2 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 $27.9 million or 21% to $158.2 million for the year ended December 31, 2022, from $130.3 million for the year
ended December 31, 2021. The growth in net revenue is primarily related to the 23% 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 purchase or lease of our electrotherapy products as well as complementary products including cervical
traction, lumbar support, knee braces and hot/cold therapy products. Device revenue increased $6.9 million or 19% to $43.5 million for
the year ended December 31, 2022, from $36.6 million for the year ended December 31, 2021. The increase in device revenue is related
to the growth in our device and complementary product orders of 23% from 2021 to 2022 as a result of greater sales representative
productivity.
Supplies Revenue
Supplies revenue is related to the sale of supplies, typically electrodes and batteries, for our products. Supplies revenue increased $21.0
million or 22% to $114.7 million for the year ended December 31, 2022, from $93.7 million for the year ended December 31, 2021. The
increase in supplies revenue is primarily related to growth in our customer base from higher device sales in 2022 and prior years.
Operating Expenses
Costs of Revenue –Devices and Supplies
Costs of revenue – devices and supplies consist primarily of device and supplies costs, operations labor and overhead, shipping and
depreciation. Costs of revenue increased $4.7 million or 17% to $32.0 million for the year ended December 31, 2022, from $27.3 million
for the year ended December 31, 2021. The increase in costs of revenue is directly related to the increase in device and supplies orders.
As a percentage of revenue, cost of revenue –devices and supplies decreased to 20% for the year ended December 31, 2022 compared to
21% for the year ended December 31, 2021. The decrease in cost of revenue – devices and supplies as a percentage of revenue was due
to expanding our supplier portfolio mix and reducing supply costs.
Sales and Marketing Expense
Sales and marketing expense primarily consists of employee-related costs, including commissions and other direct costs associated with
these personnel including travel and marketing expenses. Sales and marketing expense for the year ended December 31, 2022 increased
24% to $67.1 million from $54.3 million for the year ended December 31, 2021. The increase in sales and marketing expense is
primarily due to increased salaries of sales personnel related to an expanded sales force, tightened job market and inflation. Increased
orders resulted in higher sales commissions as well as travel expenses. As a percentage of revenue, sales and marketing expense
remained flat at 42% for both years ended December 31, 2022 and 2021.
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General and Administrative Expense
General and administrative expense primarily consists of employee related costs, facilities expense, professional fees and depreciation
and amortization. General and administrative expense for the year ended December 31, 2022 increased 37% to $36.1 million from $26.3
million for the year ended December 31, 2021. The increase in general and administrative expense is primarily due to the following:
● an increase of $2.6 million and $2.5 million in compensation and benefits expense, including non-cash stock compensation
expense, related to headcount growth and inflationary salary increases for ZMI and ZMS, respectively;
● an increase of $3.3 million in other expenses, including professional fees, ZMS product development, and other general and
administrative costs associated with the increase in order volumes;
● an increase of $0.7 million in rent and facilities expenses due to a full year of expense, as we entered into a new corporate
headquarters lease during May 2021. Much of the increase in facilities was non-cash as we received 21 months of free rent on
the new corporate headquarters but for GAAP purposes the rent over the lease term is expensed on a straight-line basis; and
● an increase of $0.9 million in amortization expense related due to a full year of expense of the intangible assets acquired in
December 2021.
As a percentage of revenue, general and administrative expense increased to 23% for the year ended December 31, 2022 from 20% for
the year ended December 31, 2021. The increase as a percentage of revenue is primarily due to the aforementioned increase in expenses,
partially offset by increased revenue during the year ended December 31, 2022.
The Company expects that general and administrative expenses will continue to increase through 2023 as the Company continues to
expand its corporate headcount to accommodate continued order growth and continued research and development activities at ZMS.
Other Income (Expense)
Other expense was $0.7 million for the year ended December 31, 2022, of which $0.4 million was related to interest on debt obtained in
December 2021, and a $0.3 million loss on the change in fair value of contingent consideration acquired in December 2021. Other
expense was $0.1 million for the year ended December 31, 2021.
Income Tax Expense
We recorded income tax expense of $5.2 million and $5.2 million for the years ended December 31, 2022 and 2021, respectively. The
effective income tax rate for the years ended December 31, 2022 and 2021 was 23% and 24%, respectively. The decrease in the effective
rate during 2022 is primarily due to research and development credits.
FINANCIAL CONDITION
As of December 31, 2022, we had working capital of $48.5 million, compared to $59.8 million as of December 31, 2021. The decrease in
working capital is primarily due to decreases in cash due to the Company’s repurchase of $26.6 million of Company stock, a cash
dividend of $3.6 million which was paid in January 2022, and principal payments on our long-term loan of $5.3 million during 2022. We
generated $13.7 million and $6.9 million in operating cash flows during the years ended December 31, 2022 and 2021, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations through cash flows from operations, debt and equity transactions. As of December 31, 2022,
our principal source of liquidity was $20.1 million in cash, $35.1 million in accounts receivables, and our working capital balance of
$48.5 million.
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Upon closing on the Kestrel acquisition in December 2021, we entered into a loan and credit facility agreement with Bank of America,
N.A. The credit facility includes a line of credit in the amount of $4.0 million available until December 1, 2024, which the Company has
not drawn from since inception of the agreement. The loan is a fixed rate term loan in the amount of $16.0 million and has an interest
rate equal to 2.8% per year. The term loan is payable in equal principal installments of $0.4 million per month through December 1, 2024
plus interest on the first day of each month beginning January 1, 2022. (See Note 7).
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 years ended December 31, 2022 and 2021 was $13.7 million and $6.9 million,
respectively. The increase in cash provided by operating activities for the year ended December 31, 2022 was primarily due to increased
collections in 2022, and an increase in non-cash amortization and stock compensation expenses. Cash provided by operating activities for
the year ended December 31, 2021 was primarily due to profitability, which was offset by increased accounts receivable due to revenue
growth.
Net cash used in investing activities for the years ended December 31, 2022 and 2021 was $0.4 million and $16.6 million, respectively.
Cash used in investing activities for the year ended December 31, 2022 was primarily related to the purchase of computer, office and
warehouse equipment. Cash used in investing activities for the year ended December 31, 2021 was primarily related to the acquisition of
Kestrel and the purchase of computer, office and warehouse equipment.
Net cash used in financing activities for the year ended December 31, 2022 was $35.8 million compared with net cash provided by
financing activities of $13.1 million for the year ended December 31, 2021. The cash used in financing activities of $35.8 million for the
year ended December 31, 2022 was primarily due to the repurchase of Company stock totaling $26.4 million, principal payments made
on our term loan totaling $5.3 million and the payment of cash dividends in January 2022 totaling $3.6 million.
The cash provided by financing activities of $13.1 million for the year ended December 31, 2021 was primarily due to net proceeds from
debt assumed in the Kestrel acquisition of $16.0 million, which is slightly offset by the purchase of treasury stock totaling $2.7 million.
We believe our cash, 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 balance at December 31, 2022 of $20.1 million;
● Our working capital balance of $48.5 million;
● Our accounts receivable balance of $35.1 million;
● Our increasing profitability over the last 7 years; and
● Our planned capital expenditures of approximately $2.0 million during 2023.
Contractual Obligations
The following table summarizes the future cash disbursements to which we are contractually committed as of December 31, 2022 (in
thousands).
Operating leases
Finance leases
Total
17,788
359
2023
3,055
152
2024
3,571
116
2025
3,586
76
2026
3,362
15
$ 18,147
$
3,207
$
3,687
$
3,662
$
3,377
$
3,150
2027
3,150
—
Thereafter
1,064
—
1,064
$
We lease office and warehouse facilities under non-cancelable operating leases. The current office facility leases include our current and
former corporate headquarters and a production warehouse, all located in Englewood, Colorado and a lease in Boulder, Colorado
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for the operations of ZMS Boulder. We also rent a small office in Denmark. Rent expense was $4.5 million and $3.5 million for the years
ended December 31, 2022 and 2021, respectively. A portion of the increase in facilities was non-cash as we received 21 months of free
rent on the new corporate headquarters but for GAAP purposes, the rent is expensed over the lease term on a straight-line basis.
The Company also leases office equipment for its corporate and warehouse facilities under non-cancelable finance lease agreements.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
In preparing our consolidated financial statements in accordance with GAAP, we are required to make estimates and assumptions that
affect the amounts of assets, liabilities, revenue, costs and expenses, and disclosure of contingent liabilities that are reported in the
consolidated financial statements and accompanying disclosures. We believe that the estimates, assumptions and judgments involved in
the accounting policies described below have the greatest potential impact on our financial statements because they involve the most
difficult, subjective or complex judgments about the effect of matters that are inherently uncertain. Therefore, we consider these to be our
critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ
from these estimates and assumptions. See Note 2 to the Consolidated Financial Statements of this Annual Report on Form 10-K for
information about these critical accounting policies, as well as a description our other accounting policies.
Revenue Recognition and Accounts Receivable
Revenue is generated primarily from sales and leases of our electrotherapy devices and related supplies and complementary products.
Sales are primarily made with, and shipped, direct 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 contract 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.
Device Sales
Device sales can be in the form of a purchase or a lease.
Revenue for purchased devices is recognized in accordance with Accounting Standards Codification (“ASC”) 606 – “Revenue from
Contracts with Customers” (ASC 606) when the device is delivered to the patient and all performance obligations are fulfilled.
Revenue related to devices out on lease is recognized in accordance with ASC 842, Leases. Using the guidance in ASC 842, 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.
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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 our 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.
Supplies
Supplies revenue is recognized once supplies are delivered to the patient. 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.
Variable Consideration
A significant portion of the Company’s revenues are derived, and the related receivables are due, from patients with commercial or
government health insurance plans. Revenues are estimated using the portfolio approach by third party payer type based upon historical
rates of collection, the aging of receivables, trends in the 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 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. Due to continuing changes in the health care industry and third-party
payer reimbursement, 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 Company monitors the variability and uncertain timing over third-party payer types in our portfolios. If there is a change in our
third-party payer 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 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.
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.
Income Taxes
Significant judgment is required in determining our provision for income taxes. We assess the likelihood that our deferred tax asset will
be recovered from future taxable income, and to the extent we believe that recovery is not likely, we establish a valuation allowance. We
consider future taxable income projections, historical results and ongoing tax planning strategies in assessing the recoverability of
deferred tax assets. However, adjustments could be required in the future if we determine that the amount to be realized is less or greater
than the amount that we recorded. Such adjustments, if any, could have a material impact on our results of our operations.
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.
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Acquisition Method of Accounting for Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values. The excess of the purchase price over these fair values is recorded as goodwill. We engage independent third-party
valuation specialists to assist us in determining the fair values of certain assets acquired and liabilities assumed. Such valuation require
management to make significant estimates and assumptions, especially with respect to intangible assets. Different valuations approaches
are used to value different types of intangible assets. Under the income approach, the relief from royalty method is a valuation technique
which is used to estimate the value of certain intangible assets. This method utilizes projected financial information and hypothetical
royalty rates to estimate the cost savings associated with asset ownership. The estimated cost savings are discounted for risk and the time
value of money to estimate an intangible asset’s fair value. Management’s estimates of fair value are based upon assumptions believed to
be reasonable, but which are inherently uncertain and unpredictable. If we do not achieve the results reflected in the assumptions and
estimates, our goodwill impairment evaluations could be adversely affected, and we may impair a portion or all of our intangible assets,
which would adversely affect our operating results in the period of impairment.
Impairment of Long-lived Assets, Including Goodwill
We assess impairment of goodwill annually and other long-lived assets when events or changes in circumstances indicates that their
carrying value amount may not be recoverable. Long-lived assets consist of property and equipment, net and goodwill and intangible
assets. Circumstances which could trigger a review include, but are not limited to: (i) significant decreases in 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.
Contingent Considerations
We classify contingent consideration liabilities related to business acquisitions within Level 3 as factors used to develop the estimated
fair value are unobservable inputs that are not supported by market activity. We estimate the fair value of contingent consideration
liabilities using a Monte Carlo simulation which is based on equity volatility, the risk-free rate, the normal variate, projected milestone
dates, discount rates, and probabilities of payment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “Smaller Reporting Company”, this Item and the related disclosure is not required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, the notes thereto, and the report thereon of Marcum LLP, are filed as part of this report starting on
page F-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
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ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as amended, or the
Exchange Act, as of December 31, 2022. Based on management’s review, with participation of our Chief Executive Officer and Chief
Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended December 31,
2022, our disclosure controls and procedures were not effective due to the material weakness in internal control over financial reporting
as described below.
Management’s report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(e) of the Exchange Act). Management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has assessed the effectiveness of internal control over financial reporting as of December 31, 2022, based upon the framework in
Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or
detected on a timely basis. Based upon this evaluation and the material weakness identified below, our management concluded that our
internal control over financial reporting was not effective as of December 31, 2022.
Material Weakness in Internal Control
We identified a material weakness related to Information Technology General Controls (ITGCs) that were not designed and operating
effectively to ensure (i) appropriate segregation of duties was in place to perform program changes and (ii) the activities of individuals
with access to modify data and make program changes were appropriately monitored. Business process controls (automated and manual)
that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.
The material weakness identified above did not result in any material misstatements in our financial statements or disclosures, and there
were no changes to previously released financial results. Our management concluded that the consolidated financial statements included
in this Annual Report on Form 10-K, present fairly, in all material respects, our financial position, results of operations, and cash flows
for the periods presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP.
The effectiveness of our internal control over financial reporting as of December 31, 2022, has been audited by Marcum LLP as stated in
their report, which is included in Item 8 of this Annual Report on Form 10-K.
Remediation Plan
Our management is committed to maintaining a strong internal control environment. In response to the identified material weakness
above, management will take comprehensive actions to remediate the material weakness in internal control over financial reporting. We
are in the process of developing and implementing remediation plans to address the material weakness described above.
Changes in Internal Control over Financial Reporting
Except for the items referred to above, there were no changes in our internal control over financial reporting identified in connection with
the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2022
that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Inherent Limitation on the Effectiveness of Internal Control
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and
procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Further,
the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people or by
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management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with
policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and not be detected.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be included in the Proxy Statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year ended December 31, 2022 in connection with the solicitation of
proxies for the Company’s 2023 annual meeting of stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Proxy Statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year ended December 31, 2022 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2022 regarding shares of common stock available for issuance under our
equity incentive plans (in thousands except exercise price):
Plan Category
2005 Stock Option Plan (1) (2)
Warrants
2017 Stock Option Plan (3)
Total
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)
211
99
1,005
1,315
$
$
0.20
2.40
2.07
1.79
—
—
3,836
3,836
(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 stockholders on June 1, 2017.
The additional information required by this item will be included in the Proxy Statement, which will be filed with the Securities and
Exchange Commission not later than 120 days after the end of our fiscal year ended December 31, 2022 and is incorporated herein by
reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be included in the Proxy Statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year ended December 31, 2022 and is incorporated herein by reference.
The Board of Directors has determined that Messrs. Cress, Disbrow and Michaels who together comprise the Audit Committee, are all
“independent directors” within the meaning of Rule 5605 of the NASDAQ Listing Rules.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be included in the Proxy Statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year ended December 31, 2022 and is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm (Marcum LLP, New York, NY PCAOB firm ID 688)
Report of Independent Registered Public Accounting Firm (Plante & Moran, PLLC, Denver, CO PCAOB firm ID 166)
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Income for the years ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2022 and 2021
Notes to Consolidated Financial Statements
F-1
F-3
F-5
F-6
F-7
F-8
F-9
F-10
Exhibits:
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
10.1†
10.2†
10.3†
10.4
10.5
10.6
Description
Asset Purchase Agreement, dated March 9, 2012, among Zynex NeuroDiagnostics, Inc., NeuroDyne Medical Corp. and
the shareholders listed on Schedule A thereto (incorporated by reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K filed on March 13, 2012)
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K filed on October 7, 2008)
Amended and Restated Bylaws (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-
K filed on October 7, 2008)
Zynex, Inc 2017 Stock Incentive Plan (incorporated by reference to Exhibit 4.1 to the Company’s Report on form S-8
filed on September 6, 2017)
Description of registrant’s securities registered pursuant to Section 12 of the Securities Exchange Act of 1934
(incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K filed on March 22, 2022)
2005 Stock Option Plan (incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-KSB
for the year ended December 31, 2004)
Form of Indemnification Agreement for directors and executive officers (incorporated by reference to Exhibit 10.3 of the
Company’s Current Report on Form 8-K filed on October 7, 2008)
Employment agreement for Daniel J. Moorhead dated June 5, 2017 (incorporated by reference of Exhibit 10.1 to the
Company’s Report on Form 8K filed on June 8, 2017)
Office Lease, effective October 20, 2017, between CSG Systems, Inc. and Zynex Medical, Inc. (incorporated by
reference to Exhibit 10.1 of the Company’s Report on Form 8-K filed on October 26, 2017).
Zynex, Inc. Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s
Report on Form 8-K filed on January 11, 2018)
Equity Distribution Agreement, dated October 29, 2019 between Zynex, Inc. and Piper Jaffray & Co. (incorporated by
reference to Exhibit 1.1 of the Company’s Current Report on Form 8-K filed on October 29, 2019)
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Exhibit
Number
10.7
10.8
10.9
10.10
10.11
10.12
Amendment to Sublease Agreement, effective January 3, 2020, between CSG Systems, Inc. and Zynex, Inc.
(incorporated by reference to Exhibit 10.1 of the Company’s Report on Form 8-K filed on January 7, 2020
Description
Underwriting Agreement dated July 14, 2020, among certain selling stockholders, Piper Sandler & Co., and Zynex, Inc.
(incorporated by reference to Exhibit 10.1 of the Company’s Report on Form 8-K filed on July 17, 2020)
Lease Agreement, effective September 30, 2020, between GIG CW Compark, LLC and Zynex, Inc. (incorporated by
reference to Exhibit 10.1 of the Company’s Report on Form 8-K filed on October 6, 2020).
Sublease Agreement between Zynex, Inc. and Cognizant Trizetto Software Group, Inc. dated April 8, 2021 (incorporated
by reference to Exhibit 10.1 of the Company’s Report on Form 8-K filed on April 9, 2021)
Stock Purchase Agreement by and among Kestrel Labs, Inc., Zynex Monitoring Solutions Inc., Zynex, Inc. and Selling
Shareholders named herein dated as of December 22, 2021 (incorporated by reference to Exhibit 10.1 of the Company’s
Report on Form 8-K filed on December 23, 2021)
The Loan Agreement and accompanying documents dated December 22, 2021 among Bank of America N.A., Zynex
Medical, Inc., and Zynex Monitoring Solutions (incorporated by reference to Exhibit 10.1 of the Company’s Report on
Form 8-K filed on December 30, 2021)
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Exhibit
Number
21*
Subsidiaries of the Company
Description
23.1*
Consent of Marcum LLP, Independent Registered Public Accounting Firm (Filed herewith)
23.2*
Consent of Plante & Moran, PLLC, Independent Registered Public Accounting Firm (Filed herewith)
31.1*
31.2*
32.1*
32.2*
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Calculation Linkbase Document
101.LAB*
XBRL Taxonomy Label Linkbase Document
101.PRE*
XBRL Presentation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Filed herewith
*
† Denotes management contract or compensatory plan or arrangement
ITEM 16. FORM 10-K SUMMARY
None.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 13, 2023
ZYNEX, INC.
By : /s/ Thomas Sandgaard
Thomas Sandgaard
Chairman, President, Chief Executive Officer and Principal
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Date
Name and Title
Signature
March 13, 2023
March 13, 2023
March 13, 2023
March 13, 2023
March 13, 2023
Thomas Sandgaard,
Chairman, President, Chief Executive Officer and Principal Executive Officer
/s/ Thomas Sandgaard
Daniel Moorhead
Chief Financial Officer and Principal Financial Officer
Barry D. Michaels
Director
Michael Cress
Director
Joshua R. Disbrow
Director
48
/s/ Daniel Moorhead
/s/ Barry D. Michaels
/s/ Michael Cress
/s/ Joshua R. Disbrow
Table of Contents
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
To the Shareholders and Board of Directors of
Zynex, Inc.
Adverse Opinion on Internal Control over Financial Reporting
We have audited Zynex, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2022, based on criteria
established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. In our opinion, because of the effect of the material weaknesses described in the following paragraph on the achievement of the
objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31 2022,
based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected
on a timely basis. The following material weaknesses have been identified and included in “Management’s Annual Report on Internal
Control Over Financial Reporting”:
IT General Controls (“ITGC”), deficiencies were identified
Information technology general controls (ITGCs) were not designed and operating effectively to ensure (i) that appropriate segregation of
duties was in place to perform program changes and (ii) that the activities of individuals with access to modify data and make program
changes were appropriately monitored. Business process controls (automated and manual) that are dependent on the affected ITGCs were
also deemed ineffective because they could have been adversely impacted
This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the fiscal December
31, 2022 consolidated financial statements, and this report does not affect our report dated March 13, 2023 on those financial statements.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the consolidated balance sheets as of December 31, 2022 and the related consolidated statements of income, shareholders’ equity, and
cash flows for the December 31, 2022 of the Company and our report dated March 13, 2023 expressed an unqualified opinion on those
financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying “Management Annual Report on Internal Control
Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
F-1
Table of Contents
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that degree of compliance with the policies or procedures may deteriorate.
Marcum LLP
New York
March 13, 2023
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Zynex Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Zynex Medical, Inc. (the “Company”) as of December 31, 2022, the
related consolidated statements of income, stockholders’ equity and cash flows for the one year in the period ended December 31, 2022,
and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for
each of the year in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States
of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the Company’s internal control over financial reporting as of December 31, 2022, based on the criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our
report dated March 13, 2023, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial
reporting because of the existence of material weaknesses.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit
provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the
critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they
relate.
Estimation of Transaction Price and Variable Consideration for Revenue Recognition including related Valuation of Accounts Receivable
Critical Audit Matter Description
The Company’s revenue is derived from sales and leases of electrotherapy devices and sales of related supplies and complementary
products. The Company recognizes revenue when control of the product has been transferred to the patient, in the amount that reflects
the consideration the Company expects to receive. The Company estimates revenues using the portfolio approach based upon historical
rates of collection, aging of receivables, product mix, trends in historical reimbursement rates by third-party payer types, and current
relationships and experience with the third-party payers, which includes estimated variable consideration and relevant constraints for
third-party payer refund requests, deductions and adjustments.
F-3
Table of Contents
We identified the Company’s estimation of transaction price related to variable consideration for revenue recognition, including the
related valuation of accounts receivable, as a critical audit matter. Auditing the Company's determination of variable consideration and
the related constraint for revenue recognition including the recorded value for accounts receivable was challenging and complex due to
the high degree of subjectivity involved in evaluating management’s estimates. This required a high degree of auditor judgment and
increased extent of effort to audit and evaluate management’s key judgments.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to revenue recognition and accounts receivable include the following, among others:
· We gained an understanding of the design of the controls over the Company’s contracts with customers including those controls
over the processes to develop key management estimates.
· We performed testing throughout the year on a sample of contracts to test the validity of sales transactions and cash receipts
application.
· We evaluated the significant assumptions and the accuracy and completeness of the underlying data used in management’s
calculations, including evaluating management’s estimate of historical reimbursement experience as well as expected future
payment behavior through a combination of underlying data validation by inspection of source documents, independent
recalculation of management’s analysis, review of correspondence with third-party payers, inquiries with management and
evaluation of trends in collection rates and refund requests.
· We performed independent sensitivity analyses over the Company's significant assumptions embodied within their key
estimates including evaluation of subsequent payment activity compared with management’s estimate of expected collection
rates.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2022.
New York, NY
March 13, 2023
F-4
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Zynex, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Zynex, Inc. (the “Company”) as of December 31, 2021 and the related
consolidated statements of income, stockholders' equity, and cash flow for the year ended December 31, 2021, and the related notes
(collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for
the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s
financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The
Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of
our audit, we were required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing
an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit
provides a reasonable basis for our opinion.
/s/ Plante & Moran, PLLC
We served as the Company’s auditor from 2016-2022.
Denver, Colorado
March 21, 2022
F-5
Table of Contents
ZYNEX, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
December 31,
2022
December 31,
2021
Current assets:
Cash
Accounts receivable, net
Inventory, net
Prepaid expenses and other
Total current assets
Property and equipment, net
Operating lease asset
Finance lease asset
Deposits
Intangible assets, net of accumulated amortization
Goodwill
Deferred income taxes
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses
Cash dividends payable
Operating lease liability
Finance lease liability
Income taxes payable
Current portion of debt
Accrued payroll and related taxes
Total current liabilities
Long-term liabilities:
Long-term portion of debt, less issuance costs
Contingent consideration
Operating lease liability
Finance lease liability
Total liabilities
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of December 31, 2022
and December 31, 2021
Common stock, $0.001 par value; 100,000,000 shares authorized; 41,658,132 issued and 36,825,081 outstanding as of
December 31, 2022 41,400,834 issued and 39,737,890 outstanding as of December 31, 2021 (including 3,606,970 shares
declared as a stock dividend on November 9, 2021 and issued on January 21, 2022)
Additional paid-in capital
Treasury stock of 4,253,015 and 1,246,399 shares, at December 31, 2022 and 2021, respectively, at cost
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
F-6
$
$
$
$
$
20,144
35,063
13,484
868
69,559
2,175
12,841
270
591
9,067
20,401
1,562
116,466
5,601
16
2,476
128
1,995
5,333
5,537
21,086
5,293
10,000
13,541
188
50,108
42,612
28,632
10,756
689
82,689
2,186
16,338
389
585
9,975
20,401
711
133,274
4,739
3,629
2,859
118
2,296
5,333
3,897
22,871
10,605
9,700
15,856
317
59,349
—
—
39
82,431
(33,160)
17,048
66,358
116,466
$
41
80,397
(6,513)
—
73,925
133,274
Table of Contents
NET REVENUE
Devices
Supplies
Total net revenue
ZYNEX, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 2022 AND 2021
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue - devices and supplies
Sales and marketing
General and administrative
Total costs of revenue and operating expenses
Income from operations
Other expense
Loss on change in fair value of contingent consideration
Interest expense
Other expense, net
Income from operations before income taxes
Income tax expense
Net income
Net income per share:
Basic
Diluted
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
See accompanying notes to consolidated financial statements.
F-7
For the Years Ended December 31,
2022
2021
$
$
43,497
114,670
158,167
32,005
67,116
36,108
135,229
36,613
93,688
130,301
27,321
54,290
26,324
107,935
22,938
22,366
(300)
(440)
(740)
22,198
5,150
17,048
0.44
0.44
38,467
39,127
$
$
$
—
(95)
(95)
22,271
5,168
17,103
0.45
0.44
38,317
39,197
$
$
$
Table of Contents
ZYNEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2022 AND 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization
Non-cash reserve charges
Stock-based compensation
Non-cash lease expense
Loss on change in fair value of contingent consideration
Benefit for deferred income taxes
Change in operating assets and liabilities, net of the effects of acquisitions:
Accounts receivable
Prepaid and other assets
Accounts payable and other accrued expenses
Inventory
Deposits
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Business acquisition, net of cash acquired
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on finance lease obligations
Cash dividends paid
Purchase of treasury stock
Debt issuance costs
Proceeds from the issuance of common stock on stock-based awards
Proceeds from debt
Principal payments on long-term debt
Taxes withheld and paid on employees' equity awards
Net cash (used in) provided by financing activities
Net increase (decrease) in cash
Cash at beginning of period
Cash at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for rent
Cash paid for income taxes
Supplemental disclosure of non-cash investing and financing activities:
Right-of-use assets obtained in exchange for new operating lease liabilities
Right-of-use assets obtained in exchange for new finance lease liabilities
Inventory transferred to property and equipment under lease
Capital expenditures not yet paid
Treasury stock not yet paid
Accrual for cash dividend payable
Contingent consideration related to acqusition
Stock issued for acquisition
Stock dividend
See accompanying notes to consolidated financial statements.
F-8
For the Years Ended December 31,
2022
2021
$
17,048
$
17,103
2,197
930
82
2,342
800
300
(851)
(6,430)
(180)
1,834
(4,320)
(6)
13,746
(418)
—
(418)
(118)
(3,613)
(26,426)
—
46
—
(5,333)
(352)
(35,796)
(22,468)
42,612
20,144
(391)
(3,622)
(6,294)
$
$
$
$
211
$
— $
$
1,592
$
138
224
$
— $
— $
— $
— $
2,261
25
(107)
1,630
1,398
—
(146)
(14,781)
690
2,889
(3,776)
(237)
6,949
(609)
(15,997)
(16,606)
(98)
(1)
(2,667)
(16)
161
15,953
—
(236)
13,096
3,439
39,173
42,612
(82)
(2,109)
(3,305)
13,240
175
1,587
47
—
3,622
9,700
(4,701)
(36,911)
$
$
$
$
$
$
$
$
$
$
$
$
$
Table of Contents
ZYNEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2022 AND 2021
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock
Shares
Balance at December 31, 2020
Exercised and vested stock-based awards
Warrants exercised
Stock-based compensation expense
Shares of common stock withheld to pay taxes on employees’ equity awards
Purchase of treasury stock
Stock issued for acquisition
Escrow shares issued for acquisition
Cash dividends declared ($0.10 per share)
Stock dividends declared
Net income
Balance at December 31, 2021
Exercised and vested stock-based awards
Stock-based compensation expense
Shares of common stock withheld to pay taxes on employees’ equity awards
Purchase of treasury stock
Escrow shares adjustment
Stock dividend adjustments
Net income
Balance at December 31, 2022
38,244,310
234,388
11,000
—
(44,414)
(175,179)
489,262
978,523
—
—
—
39,737,890
322,237
—
(83,201)
(3,006,616)
(156,673)
11,444
—
36,825,081
$
Additional
Paid-in
Amount Capital
$ 37,235
160
—
1,630
(236)
—
4,701
—
—
36,907
—
$ 80,397
45
2,342
(353)
$
36
1
—
—
—
—
—
—
—
4
—
41
1
—
—
(3)
—
—
—
39
$
Treasury
Stock
Retained
Earnings
$ (3,846) $ 23,430
—
—
—
—
—
—
—
—
(2,667)
—
—
—
—
—
(3,622)
—
— (36,911)
17,103
—
$ (6,513) $
—
—
—
— (26,647)
—
—
—
—
—
—
$ 82,431
— $
—
—
—
—
—
—
17,048
$(33,160) $ 17,048
$
$
Total
Stockholders’
Equity
56,855
161
—
1,630
(236)
(2,667)
4,701
—
(3,622)
—
17,103
73,925
46
2,342
(353)
(26,650)
—
—
17,048
66,358
See accompanying notes to consolidated financial statements.
F-9
Table of Contents
ZYNEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2022 AND 2021
(1) ORGANIZATION, NATURE OF BUSINESS
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 December 31, 2022, 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 Kestrel Labs, Inc. (“Kestrel,” a wholly-owned Colorado corporation), Zynex Europe, Zynex
NeuroDiagnostics, Inc. (“ZND,” a wholly-owned Colorado corporation) and Pharmazy, Inc. (“Pharmazy”, a wholly-owned Colorado
Corporation), which was incorporated in June 2015. 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 NiCO™ CO-Oximeter, a multi-parameter pulse oximeter, and
HemeOx™, a total hemoglobin oximeter that enables continuous arterial blood monitoring. Both NiCO and HemeOx are yet to be
presented to the U.S. Food and Drug Administration (“FDA”) for market clearance. All activities related to Kestrel flow through our
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 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 of 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, 2022, and 2021, the Company generated all of its revenue in North America from sales and
supplies of its devices to patients and health care providers.
The Company declared a 10% stock dividend on November 9, 2021, which was effective on January 21, 2022. Except as otherwise
indicated, all related amounts reported in the consolidated financial statements, including common share quantities, earnings per share
amounts and exercise prices of options, have been retroactively adjusted for the effect of this stock dividend.
(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.
F-10
Table of Contents
Use of Estimates
Preparation of financial statements in conformity with generally accepted accounting principles in the United States of America
(“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 expected net collectable value of its accounts
receivable and related revenue, inventory reserves, the life of its leased unit devices, stock-based compensation, valuation of long-lived
assets acquired in business combinations, valuation of contingent consideration and realizability of deferred tax assets.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, accounts receivable, accounts payable and accrued liabilities. The carrying amounts
of financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to
their short maturities. The Company measures its long-term debt at fair value which approximates book value as the long-term debt bears
market rates of interest.
The Company classifies contingent consideration liabilities related to business acquisitions within Level 3 as factors used to develop the
estimated fair value are unobservable inputs that are not supported by market activity. The Company estimates the fair value of
contingent consideration liabilities using a Monte Carlo simulation. Changes in the fair value of contingent liabilities in subsequent
periods are recorded as a loss (gain) in the statements of operations.
Cash
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.
Accounts Receivable, Net
The Company’s accounts receivables 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 bills the patient’s third-party payer or the patient. Billing adjustments represent the difference between the list
prices 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. Primarily all of the Company’s receivables are due from patients with commercial or government health
plans and workers compensation claims with a small portion related to private pay individuals, attorney and auto claims.
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. Following are the components of inventory as of December 31, 2022 and 2021:
Raw materials
Work-in-process
Finished goods
Inventory in transit
Less: reserve
F-11
$
$
December 31, 2022 December 31, 2021
4,471
345
4,468
1,624
10,908
(152)
10,756
3,506
1,205
7,750
1,291
13,752
(268)
13,484
$
$
$
$
Table of Contents
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.
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
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:
Patents
Estimated
Useful Lives
in years
11
Property and equipment is recorded at cost. Repairs and maintenance expenditures are charged to expense as incurred. We compute
depreciation expense on a straight-line basis over the estimated useful lives of the assets as follows:
Classification
Office furniture and equipment
Assembly equipment
Vehicles
Leasehold improvements
Leased devices
Leases
Estimated Useful Life
5 to 7 years
7 years
5 years
Shorter of useful life
or term of lease
9 months
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 our finance leases, the Company uses the implicit rate
to determine the present value of future lease payments. For our 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 our Consolidated Balance Sheets. For
additional information on our leases where the Company is the lessee, see Note 11- Leases.
F-12
Table of Contents
A significant portion of our device revenue is derived from patients who obtain our devices under month-to-month lease arrangements
where the Company is the lessor. Revenue related to devices on lease is recognized in accordance with Accounting Standards
Codification (“ASC”) 842, Leases. Using the guidance in ASC 842, we concluded our transactions should be accounted for as operating
leases based on the following criteria:
● 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 our 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.
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 control of 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 control is deemed to have
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.
The following table provides a breakdown of net revenue related to devices accounted for as purchases subject to Accounting Standards
Codification (“ASC”) 606 – “Revenue from Contracts with Customers” (“ASC 606”) and leases subject to ASC 842 (in thousands):
Device revenue
Purchased
Leased
Total device revenue
Supplies revenue
Total revenue
For the Years Ended December 31,
2022
2021
$
$
14,393
29,104
43,497
114,670
158,167
$
$
9,240
27,373
36,613
93,688
130,301
F-13
Table of Contents
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.
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 in the future. The Company tests goodwill at least annually
for impairment. 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.
Debt Issuance Costs
Debt issuance costs are costs incurred to obtain new debt financing. Debt issuance costs are presented in the accompanying consolidated
balance sheets as a reduction in the carrying value of the debt and are accreted to interest expense using the effective interest method.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. Advertising and marketing costs are included in Sales and marketing expense
in the Company's Consolidated Statements of Income.
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.
F-14
Table of Contents
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.
Earnings Per Share
The Company calculates basic earnings per share on the basis of the weighted-average number of shares of common stock outstanding
during the period. Diluted earnings per share is calculated using the weighted-average number of shares of common stock outstanding for
the period plus the effect of potential dilutive common shares during the period using the treasury stock method. Potential shares of
common stock outstanding include unvested restricted stock awards, shares held in escrow, vested and unvested unexercised stock
options and common stock purchase warrants.
Research and Development
Research and development costs are expensed when incurred. During 2022 and 2021, we incurred research and development expenses of
approximately $7.1 million and $2.6 million, respectively, related to our ZMS operations. During 2022, approximately $1.0 million of
the expenses qualified for Section 174 - “Amortization of Research and Experimental Expenditures” tax treatment. Research and
development, which includes salaries related to research and development and raw materials, are included in general and administrative
expenses on the consolidated statements of comprehensive income.
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.
Recently Issued Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt —
Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic
815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that
require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope
exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional
disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06
amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments.
ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with
early adoption permitted. The Company adopted ASU 2020-06 effective as of January 1, 2022. The adoption of ASU 2020-06 did not
have an impact on the Company’s consolidated financial statements.
F-15
Table of Contents
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), Measurement of Credit
Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and
certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss”
approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will
be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment
model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual
periods beginning after December 15, 2022, and interim periods therein for smaller reporting companies. Early adoption is permitted for
annual periods beginning after December 15, 2018, and interim periods therein. The Company adopted this standard during the quarter
ended June 30, 2022. The primary instrument that needed to be evaluated was the Company’s trade receivables and the impact was not
material.
Management has evaluated other recently issued accounting pronouncements and does not believe that those pronouncements will have a
material impact on the Company’s consolidated financial statements.
(3) BUSINESS COMBINATIONS
On December 22, 2021, the Company and its wholly-owned subsidiary Zynex Monitoring Solutions, Inc., entered into a Stock Purchase
Agreement (the “Agreement”) with Kestrel Labs, Inc. (“Kestrel”) and each of the shareholders of Kestrel (collectively, the “Selling
Shareholders”). Under the Agreement, the Selling Shareholders agreed to sell all of the outstanding common stock of Kestrel (the
“Kestrel Shares”) to ZMS. The consideration for the Kestrel Shares consisted of $16.1 million cash and 1,467,785, (as adjusted pursuant
to the stock dividend, see note 1) shares of the Company’s common stock (the “Zynex Shares”). All of the Zynex Shares are subject to a
lockup agreement for a period of one year from the closing date under the Agreement (the “Closing Date”). The Agreement provides the
Selling Shareholders with piggyback registration rights. 978,524 of the Zynex Shares were deposited in escrow (the “Escrow Shares”).
The number of Escrow Shares is subject to adjustment on the one-year anniversary of the Closing Date based on the number of shares
equal to $10 million divided by a 30-day volume weighted average closing price of the Zynex common stock. The Escrow Shares were
adjusted on the anniversary date, which resulted in the cancellation of 156,673 Escrow Shares. Half of the Escrow Shares will be
released on submission of a dossier on a laser-based photoplethysmographic device (the “Device”) to the Food and Drug Administration
(the “FDA”) for permission to market and sell the Device in the United States. The other half of the Escrow Shares will be released upon
notification from the FDA finding the Device can be marketed and sold in the United States. The amount of escrow shares were
recalculated at December 31, 2021, and are included in the calculation of diluted earnings per share for December 31, 2021. No
additional calculation was required for the Escrow Shares at December 31, 2022, as the Escrow Share number was finalized on the
anniversary date, and the shares are included in the Company’s calculation of basic earnings per share. The maximum amount of Zynex
shares that may be released are limited to 19.9% of the total number of common shares and total voting power of common shares.
The acquisition of Kestrel has been accounted for as a business combination under ASC 805. Under ASC 805, assets acquired, and
liabilities assumed in a business combination must be recorded at their fair values as of the acquisition date.
Summary of Purchase Consideration
Presented below is a summary of the total purchase consideration for the Kestrel business combinations (in thousands except share data):
Closing date cash
Working capital distribution
Total cash paid
Closing date equity
Issued shares
Escrow shares
Total equity
Total consideration
Shares(1)
Fair Value Cash
Total
— $
—
— $
— $ 16,000
78
—
— $ 16,078
$ 16,000
78
$ 16,078
444,784
889,566
1,334,350
1,334,350
4,701
9,700
$ 14,401
$ 14,401
4,701
—
9,700
—
— $ 14,401
$ 30,479
$
$ 16,078
F-16
Table of Contents
(1) The amount of shares issued and included in escrow were not retroactively adjusted in the table above for the 10% stock dividend
declared on November 9, 2021 and issued on January 21, 2022. The issued and escrow shares after retroactive adjustment for the
10% stock dividend were 489,262 and 978,523 shares, respectively, as shown in the Consolidated Statements of Stockholders’
Equity.
Purchase Price Allocations
Presented below is a summary of the purchase price allocations for the Kestrel business combinations on the acquisition date (in
thousands):
Current assets:
Cash
Accounts receivable
Prepaid expenses and other
Total current assets
Long-term assets:
Identifiable intangible assets
Total assets acquired
Less liabilities assumed:
Accounts payable
Net identifiable assets acquired
Goodwill
Net assets acquired
Purchase
Price
Allocation
80
15
1
96
10,000
10,096
(18)
10,078
20,401
30,479
$
$
$
$
The fair value of the identifiable intangibles assets is primarily related to patents which will be amortized over a useful life of 11 years.
The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. The goodwill is attributable to
the benefits the Company expects to realize by enhancing its product offering and addressable markets, thereby contributing to an
expanded revenue base.
(4) PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
Property and equipment
Office furniture and equipment
Assembly equipment
Vehicles
Leasehold improvements
Leased devices
Less accumulated depreciation
December 31, 2022 December 31, 2021
$
$
$
2,819
110
203
1,173
1,162
5,467
(3,292)
2,175
$
$
$
2,391
100
203
1,054
1,080
4,828
(2,642)
2,186
The Company monitors devices out on lease for potential loss and places an estimated reserve on the net book value based on an analysis
of the number of units of which are still with patients for which the Company cannot determine the current status.
Total depreciation expense related to our purchased property and equipment was $0.7 million and $0.9 million for the years ended
December 31, 2022 and 2021, respectively.
F-17
Table of Contents
Total depreciation expense related to devices out on lease was $1.5 million and $1.4 million for the years ended December 31, 2022 and
2021, respectively. Depreciation on leased units is reflected on the income statement as cost of revenue.
(5) GOODWILL AND OTHER INTANGIBLES
During the year ended December 31, 2021 the Company completed the acquisition of Kestrel, which resulted in goodwill of $20.4
million (see Note 3).
As of December 31, 2022, there was no impairment indicators of the Company’s net asset value.
The following table provides the summary of the Company’s intangible assets as of December 31, 2022.
Acquired patents
$
10,000
$
(933) $
9,067
10.0
The following table summarizes the estimated future amortization expense to be recognized over the next years and periods thereafter:
Gross
Carrying
Amount
Accumulated Net Carrying
Amortization
Amount
Weighted-
Average
Remaining
Life (in
years)
2023
2024
2025
2026
2027
Thereafter
Total future amortization expense
(6) EARNINGS PER SHARE
December 31,
(In thousands)
908
911
908
908
908
4,524
9,067
$
$
The calculation of basic and diluted earnings per share for the years ended December 31, 2022 and 2021 are as follows (in thousands,
except per share data):
Basic earnings per share
Net income available to common stockholders
Basic weighted-average shares outstanding
Basic earnings per share
Diluted earnings per share
Net income available to common stockholders
Weighted-average shares outstanding
Effect of dilutive securities - options and restricted stock
Diluted weighted-average shares outstanding
Diluted earnings per share
F-18
For the Years Ended December 31,
2022
2021
$
$
$
$
17,048
38,467
$
17,103
38,317
0.44
$
0.45
$
17,048
38,467
660
39,127
17,103
38,317
880
39,197
0.44
$
0.44
Table of Contents
For the years ended December 31, 2022 and 2021, 0.1 million and 0.4 million shares of common stock were excluded from the dilutive
stock calculation because their effect would have been anti-dilutive. The basic and diluted weighted-average shares outstanding for
December 31, 2021 has been updated to include the retroactive impact of the 10% common stock dividend declared on November 11,
2021.
(7) NOTES PAYABLE
The Company entered into a loan agreement (the “Loan Agreement”) with Bank of America, N.A. (the “Bank”). Under this Loan
Agreement, the Bank is extending two facilities to the Borrowers. Specified assets have been pledged as collateral. One facility is a line
of credit in the amount of $4.0 million available until December 1, 2024 (“Facility 1”). The Borrower pays interest on Facility 1 on the
first day of each month beginning January 1, 2022. The interest rate is an annual rate equal to the sum of (i) the greater of the Bloomberg
Short-term Bank Yield Index (“BSBY”) Daily Floating Rate or (ii) the Index Floor (as defined in the Loan Agreement), plus 2.00%. As
of December 31, 2022, the Company has not utilized this facility and has no balance outstanding.
The other facility being extended by the Bank to the Borrower is a fixed rate term loan in the amount of $16.0 million (“Facility 2”)
bearing interest at 2.8% per year. The Borrower pays interest on the first day of each month beginning January 1, 2022 and the Borrower
repays the principal amount in equal installments of $0.4 million per month through December 1, 2024. Facility 2 was entered into in
conjunction with the purchase of Kestrel Labs.
The following table summarizes future principal payments on long-term debt as of December 31, 2022:
2023
2024
Future principal payments
Less current portion
Less debt issuance costs
Long-term debt, net of debt issuance costs
(8) STOCK-BASED COMPENSATION PLANS
Zynex, Inc. 2017 Stock Incentive Plan
December 31,
(In thousands)
5,333
5,334
10,667
(5,333)
(41)
5,293
$
The Company currently has one active long-term incentive plan. The Company’s 2017 Stock Incentive Plan (the “2017 Stock Plan”) is
the Company’s equity compensation plan and provides for grants of stock-based awards to employees, directors and other individuals
providing services to the Company. Awards issued under the 2017 Stock Plan are at the discretion of the Board of Directors. The 2017
Stock Plan mandates a maximum award term of 10 years and stipulates that stock options be granted with prices not less than fair market
value on the date of grant. Stock option awards generally vest over four years. Restricted stock awards typically vest quarterly over three
years for grants issued to members of our Board of Directors and quarterly or annually over two to four years for grants issued to
employees. For stock option awards, all awards granted under the 2017 Stock Plan are stock-settled with common stock issued upon
exercise. For restricted stock awards, shares are issued to the recipient upon grant with a restrictive legend and are not included in the
calculation of outstanding shares until vesting occurs. At December 31, 2022, there were 3.8 million shares available for future grants
under the 2017 Stock Plan.
Zynex, Inc. 2005 Stock Option Plan
The 2005 Stock Option 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 Plan.
F-19
Table of Contents
As of December 31, 2022, the Company had the following stock options outstanding and exercisable:
Plan Category
2005 Stock Option Plan
2017 Stock Option Plan
Total
Outstanding Number of Options Exercisable Number of Options
(in thousands)
(in thousands)
211
582
793
211
346
557
The Company received $0.1 million cash proceeds related to option exercises during the year ended December 31, 2022. The Company
received cash proceeds of $0.2 million related to option exercises during the year ended December 31, 2021.
During the year ended December 31, 2022, 0.2 million performance based stock option awards were granted under the 2017 Stock Plan.
During the year ended December 31, 2021, no stock option awards were granted under the 2017 Stock Plan. The Company used the
Black Scholes option pricing model to determine the fair value of stock option grants, using the following assumptions during the year
ended December 31, 2022.
Weighted average expected term
Weighted average volatility
Weighted average risk-free interest rate
Dividend yield
3 years
73 %
2.81 %
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.
The following table summarizes stock-based compensation expenses recorded in the condensed consolidated statements of operations (in
thousands):
Cost of Revenue
Sales and marketing expense
General, and administrative
Total stock based compensation expense
For the Years Ended December 31,
2022
2021
$
$
47
2,104
191
2,342
$
$
56
155
1,419
1,630
The excess tax benefit associated with our stock-based compensation plans for the years ended December 31, 2022 and 2021, was
approximately $0.0 million and $0.2 million, respectively.
F-20
Table of Contents
A combined summary of stock option activity for all plans for the years ended December 31, 2022 and 2021 is presented below:
Outstanding at December 31, 2020
Granted
Exercised
Forfeited
Outstanding at December 31, 2021
Granted
Exercised
Forfeited
Outstanding at December 31, 2022
Exercisable at December 31, 2022
Number of
Shares
(in thousands)
Weighted
Average
Strike
Price
Weighted
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
(in thousands)
1,107
$
— $
(116) $
(226) $
$
765
$
200
(157) $
(15) $
$
793
$
557
2.76
—
4.87
6.45
1.36
6.23
0.66
4.18
2.67
1.31
4.68
$
5.03
3.40
$
$
Range
$0 to $2.00
$2.01 to $4.00
$4.01 to $10.00
Outstanding Weighted average
Number of
Options
(in thousands)
Remaining
Contractual
Life (years)
Weighted Average Exercisable Number of
Remaining Exercisable
Strike Price
Options (in thousands) Contractual Life (years)
Weighted Average
Exercisable
Strike Price
354
217
222
793
2.31
5.56
8.86
5.03
$
$
$
$
0.30
2.69
6.45
2.67
354
187
15
557
2.31
5.48
3.23
3.40
$
$
$
$
0.30
2.65
8.33
1.31
A summary of our unvested stock options as of December 31, 2022 and 2021 and related activity is presented below:
Non-vested at December 31, 2020
Granted
Vested
Forfeited
Non-vested at December 31, 2021
Granted
Vested
Forfeited
Non-vested at December 31, 2022
F-21
Non-vested
Weighted
Shares
Average
Under
Grant Date
Option
Fair Value
(in thousands)
4.35
474
$
—
—
1.93
6.48
3.85
6.23
4.12
5.49
5.90
(167)
(212)
95
200
(49)
(9)
237
$
$
Table of Contents
A summary of restricted stock award activity under the 2017 Stock Plan for the years ended December 2022 and 2021 are presented
below:
Number of Shares Weighted Average
Outstanding at December 31, 2020
Granted
Vested
Forfeited
Outstanding at December 31, 2021
Granted
Vested
Forfeited
Outstanding at December 31, 2022
(in thousands)
Grant Date Fair Value
11.53
14.15
10.92
12.40
13.69
8.52
12.90
10.60
11.94
$
295
$
381
(119) $
(103) $
$
454
$
186
(165) $
(52) $
$
423
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 the Restricted Stock Awards typically occurs quarterly over three years for the Board of Directors and
quarterly or annually over two to four years for employees. As of December 31, 2022, there was approximately $4.3 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 2.3 years.
The total intrinsic value of stock option exercises for the years ended December 31, 2022 and 2021 was $1.1 million and $1.0 million,
respectively. The total fair value of restricted stock awards vested during the years ended December 31, 2022 and 2021 was $1.4 million
and $1.3 million, respectively.
(9) STOCKHOLDERS’ EQUITY
Common Stock Dividend
The Company’s Board of Directors declared a cash dividend of $0.10 per share and a stock dividend of 10% per share on November 9,
2021. The cash dividend of $3.6 million was paid out on January 21, 2022 to stockholders of record as of January 6, 2022. The 10%
stock dividend declaration resulted in the issuance of an additional 3.6 million shares on January 21, 2022 to stockholders of record as of
January 6, 2022.
Treasury Stock
On March 8, 2021, our Board of Directors approved a program to repurchase up to $10.0 million of our common stock at prevailing
market prices either in the open market or through privately negotiated transactions through September 8, 2021. From the inception of
the plan through September 8, 2021, the Company purchased 175,179 shares of our common stock for $2.7 million or an average price of
$15.22 per share.
On April 11, 2022, the Company’s Board of Directors approved a program to repurchase up to $10.0 million of its common stock at
prevailing market prices either in the open market or through privately negotiated transactions through April 11, 2023. From the
inception of the plan through May 31, 2022 the Company purchased 1,419,874 shares of its common stock for $10.0 million or an
average price of $7.04 per share which completed this program.
On June 9, 2022, the Company’s Board of Directors approved a program to repurchase up to $10.0 million of the Company’s common
stock at prevailing market prices either in the open market or through privately negotiated transactions through June 9, 2023. From the
inception of the plan through October 4, 2022, the Company purchased 1,091,604 shares of its common stock for $10.0 million for an
average price of $9.06 per share which completed this program.
F-22
Table of Contents
On October 31, 2022, the Company’s Board of Directors approved a program to repurchase up to $10.0 million of the Company’s
common stock at prevailing market prices either in the open market or through privately negotiated transactions through October 31,
2023. From the inception of the plan through December 31, 2022, the Company purchased 495,138 shares of its common stock for $6.6
million or an average price of $13.43 per share. Subsequent to December 31, 2022, the Company purchased 232,698 shares of its
common stock for an average price of $14.41 per share which completed this program.
Warrants
A summary of stock warrant activity for the years ended December 31, 2022 and 2021 are presented below:
Outstanding at December 31, 2020
Granted
Exercised
Forfeited(1)
Outstanding and exercisable at December 31, 2021
Granted
Exercised
Forfeited
Outstanding and exercisable at December 31, 2022
Number of
Warrants
(in thousands)
110
$
— $
(10) $
(1) $
99
$
— $
— $
— $
$
99
Weighted
Average
Exercise
Price
2.39
Weighted
Average
Remaining
Contractual
Aggregate
Intrinsic
Value
Life (Years) (in thousands)
1,084
3.76 $
—
2.27
2.27
2.39
—
—
—
2.39
2.76
2.76
2.76
$
—
—
$
1.76
192
25
660
—
—
1,140
(1) Warrants were exercised under a net exercise provision in the warrant agreement. As a result, approximately 1,000 warrants were
forfeited in lieu of cash payment for shares during 2021.
(10) INCOME TAXES
The pre-tax income from continuing operations on which the provision for income taxes was computed is as follows (in thousands)
United States
Foreign
Total
2022
$ 22,220
(22)
22,198
2021
$ 22,295
(24)
22,271
Income tax expense consists of the following for the years ended December 31, 2022 and 2021 (in thousands):
Current tax expense:
Federal
State
Total tax expense:
Deferred tax expense/(benefit)
Federal
State
Total deferred tax expense/(benefit)
Total
F-23
2022
2021
$
$
$
$
4,891
1,110
6,001
(730)
(121)
(851) $
$
5,150
4,289
1,025
5,314
(135)
(11)
(146)
5,168
Table of Contents
A reconciliation of income tax computed at the U.S. statutory rate of 21% to the effective income tax rate is as follows:
Statutory rate
State taxes
Stock based compensation
Research and development credit
Effective rate
2022
2021
21 %
3 %
0 %
(1)%
23 %
21 %
4 %
(1)%
0 %
24 %
The tax effects of temporary differences that give rise to deferred tax assets (liabilities) at December 31, 2022 and 2021 are as follows (in
thousands):
Deferred tax assets:
Accrued expenses
Lease liability
Accounts receivable
Inventory
Stock based compensation
Right of use asset
Amortization
Section 174 costs
Deferred tax assets
Deferred tax liabilities:
Property and equipment
Finance lease
Prepaid expenses
Right-of-use asset
Amortization
Deferred tax liabilities
Net deferred tax assets
$
2022
2021
$
31
3,955
18
198
253
—
—
991
5,446
26
4,620
18
484
271
8
90
—
5,517
$
5,446
$
5,517
(519)
(67)
(116)
(3,170)
(12)
(3,884)
1,562
$
$
$
$
(599)
(96)
(77)
(4,034)
—
(4,806)
711
As of December 31, 2022, the Company has no net operating loss. The Company had no recorded valuation allowances at December 31,
2022 and 2021.
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 interest and penalties. As of December 31, 2022 and 2021, 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. Penalties and
interest are included within general and administrative expenses on the consolidated statements of income.
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 2017 through the current period.
F-24
Table of Contents
(11) LEASES
The Company categorize leases at their inception as either operating or financing leases. Leases include various office and warehouse
facilities which have been categorized as operating leases while certain equipment is leased under financing leases.
During March 2022, the Company entered into a lease agreement for approximately 4,162 square feet of office space for the operations
of ZMS in Boulder, Colorado. The lease began on April 1, 2022 and will run through April 1, 2025. The rent and common area
maintenance charges are equal to $17.00 per square foot with annual increases of 3%. Upon lease commencement, the Company
recorded an operating lease liability and corresponding right-of-use asset for $0.2 million each.
The Company’s operating leases do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the
discount rate when measuring the lease liability. The incremental borrowing rate represents an estimate of the interest rate the Company
would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease.
The Company’s weighted average borrowing rate was determined to be 4.03% for its operating lease liabilities. The Company’s
equipment lease agreements have a weighted average rate of 9.39% which was used to measure its finance lease liability.
As of December 31, 2022, the Company’s operating and financing leases have a weighted average remaining term of 4.76 years and 2.63
years respectively.
The table below reconciles the undiscounted future minimum lease payments under the Company’s operating and finance leases to the
total operating and capital lease liabilities recognized on the consolidated balance sheets as of December 31, 2022 (in thousands):
2023
2024
2025
2026
2027
2028
Total undiscounted future minimum lease payments
Less: Difference between undiscounted lease payments and
discounted lease liabilities
Total lease liabilities
Operating Lease Liability Finance Lease Liability
152
116
76
15
—
—
359
3,055
3,571
3,586
3,362
3,150
1,064
17,788 $
$
$
(1,771)
16,017
$
(43)
316
Operating and finance lease costs were $4.6 million and $3.7 million for years ended December 31, 2022 and 2021, which were included
in the consolidated statement of income under the following headings (in thousands):
Operating Lease expense
Costs of revenue - devices and supplies
Sales and marketing expense
General and administrative
Total operating lease expense
Finance Lease expense
Amortization of right-of-use asset:
Sales and marketing expense
General and administrative
Total amortization of right-of-use asset
Interest expense and other
Total finance lease expense
For the years ended December 31,
2021
2022
$
$
$
$
359
1,456
2,643
4,458
117
2
119
36
155
$
$
$
$
399
1,186
1,964
3,549
104
1
104
41
145
Prior year amounts for Financing Lease expense have been reclassified for consistency with the current year presentation. These
reclassifications had no effect on the reported results of operations.
F-25
Table of Contents
(12) FAIR VALUE CONSIDERATION
The Company’s asset and liability classified financial instruments include cash, accounts receivable, accounts payable, accrued liabilities,
and contingent consideration. The carrying amounts of financial instruments, including cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value due to their short maturities. The Company measures its long-term debt at fair value which
approximates book value as the long-term debt bears market rates of interest. The fair value of acquisition-related contingent
consideration is based on a Monte Carlo models. The valuation policies are determined by management, and the Company’s Board of
Directors is informed of any policy change.
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in
an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability
developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the
Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information
available in the circumstances. The hierarchy is broken down into three levels based on reliability of the inputs as follows:
Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to Zynex for identical assets or liabilities;
Level 2: Inputs include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or
liability either directly or indirectly; and
Level 3: Unobservable inputs that are supported by little or no market activity.
The Company’s assets and liabilities which are measured at fair value on a recurring basis are classified in their entirety based on the
lowest level of input that is significant to their fair value measurement. The Company’s policy is to recognize transfers in and/or out of
fair value hierarchy as of the date in which the event or change in circumstances caused the transfer. The Company has consistently
applied the valuation techniques discussed below in all periods presented.
The following table presents Company’s financial liabilities that were accounted for at fair value on a recurring basis as of December 31,
2022, by level within the fair value hierarchy:
Fair Value Measurements at December 31, 2022
Quoted
Priced in
Active
Markets
for
Identical
Assets
(Level 1)
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
(In thousands)
— $
— $
10,000
— $
— $
10,000
Fair Value at
December 31,
2022
$
$
10,000
10,000
$
$
Contingent consideration
Total
Contingent Consideration.
The Company classifies its contingent consideration liability in connection with the acquisition of Kestrel Labs within Level 3 as factors
used to develop the estimated fair value are unobservable inputs that are not supported by market activity.
F-26
Table of Contents
The contingent consideration related to Kestrel was valued at $9.7 million using a Monte Carlo simulation as of December 22, 2021. As
of December 31, 2022, the contingent consideration was estimated at $10.0 million, the adjustment of $0.3 million was recorded as a loss
on change in fair value of contingent consideration in the Company’s Consolidated Statements of Income. The Company’s policy is to
value contingent consideration liabilities using a Monte Carlo model.
(13) COMMITMENTS AND CONTINGENCIES
See Note 11 for details regarding commitments under the Company’s long-term leases.
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 provides for them if losses are determined to be both probable and estimable. On occasion,
the Company engages outside counsel related to a broad range of topics including employment law, third-party payer matters, intellectual
property and regulatory and compliance matters.
The Company is currently not a party to any material pending legal proceedings that would give rise to potential loss contingencies.
(14) CONCENTRATIONS
The Company is exposed to concentration of credit risk related primarily to its cash balances. The Company maintains its cash balances
in major financial institutions that exceed amounts insured by the FDIC (up to $250,000, per financial institution as of December 31,
2022). 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 had two major vendors from which it sourced approximately 28% and two major vendors from which it sourced
approximately 34%, respectively, of supplies for its electrotherapy products for the years ended December 31, 2022 and 2021.
Management believes that its relationships with its suppliers are good. If the relationships were to be replaced, there may be a short-term
disruption for a period of time in which products may not be available and additional expenses may be incurred as the Company locates
additional or replacement suppliers.
The Company had receivables from one third-party payer at December 31, 2022 which made up approximately 14% of the accounts
receivable balance. The Company had receivables from one third-party payer at December 31, 2021, which made up approximately 22%
of the accounts receivable balance.
(15) RETIREMENT PLAN
In 2012, the Company established a defined contribution retirement plan for its 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 at least 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 the years ended December 31, 2022 and 2021, the Company recorded an expense of $0.7 million and $0.5 million, respectively,
under the aforementioned plan, related to the Company match.
F-27
Table of Contents
(16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information is as follows (in thousands, except per share data):
Total Revenue
Less: cost of revenue and operating expenses
Income from operations
Income before income taxes
Net income
Net income per common share:
Basic income per share - net income
Diluted income per share - net income
Total Revenue
Less: cost of revenue and operating expenses
Income from operations
Income before income taxes
Net income
Net income per common share:
Basic income per share - net income
Diluted income per share - net income
(17) SUBSEQUENT EVENTS
2022
First Quarter
31,083
$
29,177
Second Quarter
36,759
$
32,395
Third Quarter
41,520
$
34,962
Fourth Quarter
48,805
$
38,695
1,906
1,982
1,377
0.03
0.03
$
$
$
$
$
$
4,364
4,149
3,346
0.09
0.08
$
$
$
2021
6,558
6,352
4,873
0.13
0.13
$
$
$
10,110
9,715
7,452
0.20
0.20
First Quarter Second Quarter Third Quarter Fourth Quarter
40,367
28,780
24,127
25,207
34,785
26,739
31,022
27,209
$
$
$
$
(1,080)
(1,087)
$
$
$
(706)
(0.02)
(0.02)
$
$
$
3,813
3,768
2,808
0.07
0.07
$
$
$
8,046
8,028
6,107
0.16
0.16
$
$
$
11,587
11,562
8,894
0.24
0.23
During February 2023, the Company entered into a lease agreement for approximately 41,427 square feet of office space for the
operations of ZMS in Englewood, CO. The lease commences on July 1, 2023 and runs through December 31,2028. At the expiration of
the lease term the Company has the option to renew the lease for one additional five year period. The Company is entitled to rent
abatements for the first six months of the lease. Payments based on the initial rate of $24.75 per square foot begin in January 2024. The
price per square foot increases by an additional $0.50 during each subsequent twelve-month period of the lease after the abatement
period.
(18) COVID-19
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 2020 and 2021, 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 year ended December 31, 2022 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.
F-28
Name
Zynex Medical, Inc.
Zynex Monitoring Solutions, Inc.
Zynex NeuroDiagnostics, Inc.
Zynex Europe, ApS
Kestrel Labs, Inc.
SUBSIDIARIES OF ZYNEX, INC.
Jurisdiction
Colorado
Colorado
Colorado
Denmark
Colorado
Exhibit 21
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statement of Zynex, Inc. on Form S-3 (file Nos. 333-230128 and 333-
232367) and Form S-8 (File No. 333-220366) of our report dated March 13, 2023, with respect to our audit of the consolidated financial
statements of Zynex, Inc. as of December 31, 2022 and for the year ended December 31, 2022 and our report dated March 13, 2023,
which includes an adverse opinion because of the existence of a material weakness, with respect to our audit of internal control over
financial reporting of Zynex, Inc. as of December 31, 2022, which reports are included in this Annual Report on Form 10-K of Zynex,
Inc. for the year ended December 31, 2022.
Exhibit 23.1
/s/ Marcum LLP
Marcum LLP
New York, NY
March 13, 2023
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Zynex, Inc.’s Registration Statements on Form S-3 (File Nos. 333-230128 and 333-
232367) and on Form S-8 (File No. 333-220366) of our report dated March 21, 2022, relating to the December 31, 2021 consolidated
financial statements which appears in Zynex, Inc.’s Form 10-K for the year ended December 31, 2022.
Exhibit 23.2
/s/ Plante & Moran, PLLC
March 13, 2023
Denver, Colorado
Exhibit 31.1
I, Thomas Sandgaard, certify that:
1. I have reviewed this annual report on Form 10-K of Zynex, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated: March 13, 2023
/s/ THOMAS SANDGAARD
Thomas Sandgaard
Chairman, President, Chief Executive Officer and Principal
Executive Officer
Exhibit 31.2
I, Daniel Moorhead, certify that:
1. I have reviewed this annual report on Form 10-K of Zynex, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated: March 13, 2023
/s/ DANIEL MOORHEAD
Daniel Moorhead
Chief Financial Officer and Principal Financial and Accounting
Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Each of the undersigned hereby certifies, for the purposes of Section 1350 of Chapter 63 of Title 18 of the United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Zynex, Inc. (“Zynex”), that to his
knowledge:
1. This Annual Report on Form 10-K for the year ended December 31, 2022 (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of
Zynex for the period covered by this Report.
This Certification is executed as of March 13, 2023
/s/ THOMAS SANDGAARD
Thomas Sandgaard
Chairman, President, Chief Executive Officer and Principal
Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
Each of the undersigned hereby certifies, for the purposes of Section 1350 of Chapter 63 of Title 18 of the United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Zynex, Inc. (“Zynex”), that to his
knowledge:
1. This Annual Report on Form 10-K for the year ended December 31, 2022 (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of
Zynex for the period covered by this Report.
This Certification is executed as of March 13, 2023
/s/ DANIEL MOORHEAD
Daniel Moorhead
Chief Financial Officer and Principal Financial and Accounting
Officer