10-K 1 zynex10k123108_41509.htm ANNUAL REPORT zynex10k123108_41509.htm

 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934

For the year ended December 31, 2008
 
 
[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
        For the transition period from _____ to _____

Commission file number 33-26787-D
 
ZYNEX, INC.
(Name of small business issuer in its charter)
 
Nevada
90-0214497
(State or other jurisdiction of
incorporation or organization)
(IRS Employer Identification No.)
 
8022 Southpark Cir, Suite 100, Littleton, Colorado
80120
(Address of principal executive offices)
(Zip Code)

Issuer's telephone number: (303) 703-4906 

Securities registered under Section 12(b) of the Exchange Act:  None

Securities registered under Section 12(g) of the Exchange Act:  None 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  [  ] Yes          [X] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  [  ] Yes          [X] 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.   .  [X] Yes          [  ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [  ]           Accelerated filer [  ]               Non-accelerated filer [  ]               Smaller reporting company [X]

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

The aggregate market value of the 10,866,696 common shares held by non-affiliates of the registrant was $18,507,383 computed by reference to the closing price of such stock as listed on the OTC Bulletin Board on June 30, 2008. This computation is based on the number of issued and outstanding shares held by persons other than officers, directors and shareholders of 5% or more of the registrant's common shares

As of March 27, 2009, 29,971,041 shares of common stock are issued and outstanding.
 
Documents incorporated by reference: None.

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements in this annual report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to the need for external capital in order to grow our business, our dependence on reimbursement from insurance companies for products sold or rented to our customers, acceptance of our products by health insurance providers for reimbursement, acceptance of our products by hospitals and clinicians, larger competitors with greater financial resources, the need to keep pace with technological changes, our dependence on the reimbursement from insurance companies for products sold or rented to our customers, our dependence upon third party manufacturers to produce our goods on time and to our specifications, implementation of our sales strategy including a strong direct sales force, the uncertain outcome of pending material litigation and other risks described in this Report. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this annual report in its entirety, including the risks described in "Risk Factors." We undertake no obligation to update any forward-looking statements to reflect any future events or developments. These forward-looking statements speak only as of the date of this Report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

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 wholly-owned subsidiary, Zynex Medical, Inc.

 
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TABLE OF CONTENTS

FORM 10-K ANNUAL REPORT - FISCAL YEAR 2008
 
ZYNEX, INC.

   
PAGE
     
 
PART I
   
     
 Item 1.
Business
4
 Item 1A.
Risk Factors
11
 Item 1.B
Unresolved Staff Comments
19
 Item 2.
Properties
19
 Item 3. 
Legal Proceedings
19
 Item 4. 
Submission of Matters to a Vote of Security Holders
20
     
 
PART II
   
     
 Item 5. 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
20
 Item 6. 
Selected Financial Data
21
 Item 7. 
Management's Discussion and Analysis or Plan of Operation
21
 Item 7A. 
Quantitative and Qualitative Disclosures About Market Risk
44
 Item 8. 
Financial Statements and Supplementary Data
44
 Item 9. 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
44
 Item 9A. 
Controls and Procedures
44
 Item 9B. 
Other Information
45
     
 
PART III
   
     
 Item 10. 
Directors, Executive Officers and Corporate Governance
45
 Item 11. 
Executive Compensation
47
 Item 12. 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
51
 Item 13. 
Certain Relationships and Related Transactions, and Director Independence
52
 Item 14. 
Principal Accounting Fees and Services
54
     
 
PART IV
   
     
 Item 15. 
Exhibits
54
     
 Signatures  
59
 
 
 
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PART I
 
ITEM 1. BUSINESS

History

Zynex, Inc., formerly called Zynex Medical Holdings, Inc., was initially organized on December 26, 1991 as a Delaware corporation under the name of Life Medical Technologies, Inc. The Company engaged in the business of bringing new medical product technology to the health care market place. Between 1995 and 2003, the Company changed its corporate name and business several times. Zynex's corporate history prior to February 11, 2004 is detailed in the Company's December 31, 2004 10-KSB filed on April 15, 2005.

On February 11, 2004, the Company acquired 100% of the common stock of Zynex Medical, Inc., a privately held Colorado corporation ("Zynex Medical"), pursuant to an acquisition agreement by issuing 19,500,000 shares of common stock to Thomas Sandgaard the sole shareholder of Zynex Medical. Immediately after the transaction, the former shareholder of Zynex Medical owned approximately 88.5 percent of the Company's common stock.

Zynex is the parent company of Zynex Medical. Zynex Medical designs, manufactures and markets FDA cleared medical devices for the electrotherapy and stroke rehabilitation markets. The Company's headquarters are located in Littleton, Colorado.

Dan Med, Inc, (“DMI”) was incorporated by Mr. Sandgaard under the laws of the State of Colorado on October 31, 1996. Zynex Medical was incorporated by Mr. Sandgaard as Stroke Recovery Systems, Inc, ("SRSI") under the laws of the State of Colorado on March 3, 1998. On October 1, 2003, SRSI acquired by merger the assets and liabilities of DMI. Mr. Sandgaard operated SRSI as a privately-owned corporation from inception until the February 11, 2004 Zynex acquisition.

For accounting purposes, Zynex Medical was treated as the acquiring corporation, and financial statements for years prior to 2004 are those of Zynex Medical.

DMI's primary activity was importing and marketing European-made electrotherapy devices from its inception until 1999 when DMI began to develop, assemble and market its own line of electrotherapy products. Its own products constituted over 80% of DMI revenues at the time of its acquisition by SRSI.

Prior to acquiring DMI, SRSI's primary activities were to develop and market homecare electrotherapy devices for US stroke survivors suffering impaired mobility and loss of functionality. In early 2002, SRSI engaged its own sales force and began to market DMI's entire line of standard electrotherapy products. The DMI products accounted for over 75% of Zynex Medical's 2002 revenue.

Current Business

Zynex engineers, manufactures, markets and sells its own design of FDA cleared medical devices into two distinct markets (1) standard electrotherapy products for pain relief / pain management and (2) the NeuroMove(TM) for stroke and spinal cord injury ("SCI") rehabilitation.

All Zynex products are intended to be patient friendly and designed for home use. The products are cost effective when compared to traditional physical therapy, and often result in better mobility, less pain and increased potential for a patient to return to work and a fuller life significantly earlier than with traditional therapies alone. The NeuroMove has been the subject of nine successfully completed clinical trials and is currently being evaluated in four additional trials.

The U.S. Food and Drug Administration (the "FDA") has cleared all of our products to market in the United States (the "U.S.") and our products require a physician's prescription, authorization or order before they can be dispensed in the U.S. Our primary business model considers the physician's prescription as an "order", and it is on this basis we provide the product to the patient and either bill the patient directly or the patient's private or government insurer (Medicare or Medicaid) for payment.

 
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We believe our products assist those suffering from pain and, in the case of NeuroMove, in improving the quality of life for patients suffering with impaired mobility from stroke or SCI.
 
Our Zynex produced electrotherapy products, the IF8000, IF8100, TruWave and E-Wave, are marketed through physicians and therapists primarily by our independent contractor sales representatives, some of whom receive additional compensation to serve as Regional Sales Managers. We also employ inside sales personnel for the NeuroMove. The NeuroMove is marketed directly to end-user patients and physicians who specialize in stroke and SCI rehabilitation.

To increase revenues, we added experienced sales representatives in 2006, 2007 and 2008.  At this time the Company is controlling its costs in order to improve its cash flow.

To expand our international sales, we have obtained representation commitments from well established local medical device distributors.  We obtained in the second half of 2008 European Union CE Marking for the following products:  TruWave; IF 8000; IF 8100; and NM 900 (which products are described below).  CE Marking will also enhance our entry into other developed countries.  We plan to engage local distributors in Europe during the second half of 2009 and/or 2010.  See “Regulatory Approval and Process” below.

Products
 
We currently market and sell five Zynex-produced products and resell seven products purchased from others, all as indicated below:
 
Product Name
Description
 
Our Products
 
   
IF 8000
Combination Interferential and Muscle Stimulation device.
   
IF 8100
An easier to use, fixed program version of the IF8000.
   
E-Wave
Dual Channel NMES Device
   
TruWave
Dual Channel TENS Device
   
NM 900
NeuroMove. Electromyography (EMG) triggered Electrical Stimulation Device
   
  
Resale Products
 
   
Conti4000
Electrical Stimulation Device for Incontinence Treatment
   
ValuTENS
Dual Channel TENS Device
   
DCHT
Cervical Traction Device
   
LHT
Lumbar Traction Device
   
Electrodes
Supplies, re-usable for delivery of electrical current to the body

The Company received most of its revenue in 2008 from the sale and rental of transcutaneous electrical nerve stimulation (“TENS”), interferential and muscle stimulation devices and electrode supplies.  Revenue from the sale and rental of the NeuroMove is a small part of our total revenue.


 
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Pain Management and Control

Standard electrotherapy is a clinically proven and medically accepted alternative modality 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 in the transcutaneous electrical nerve stimulation (“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 may assist in the treatments mentioned above.

Numerous clinical studies have been published over several decades showing the effectiveness of TENS for pain relief. Zynex has developed three products in the TENS category that have been cleared by the FDA: the TruWave, a digital TENS device, and the IF8000 and upgraded IF8100 interferential stimulators which provide deeper stimulation. The TruWave is a "traditional" TENS type unit that delivers pain-alleviating electrotherapy, whereas the IF8000 is a more sophisticated unit with deeper pain alleviating and neuromuscular training settings.

Stroke and Spinal Cord Injury Rehabilitation

Our proprietary NeuroMove is a Class II medical device that has been cleared by the FDA for stroke and spinal cord injury ("SCI") rehabilitation and is only dispensed with a physician's prescription. The NeuroMove was introduced to the market in late 2003. Stroke and SCI usually affect a survivor's mobility, functionality, speech, and memory, and the NeuroMove helps the survivor regain movement and functionality.

According to information published by the American Heart Association in 2009, there is an estimated 6.5 million stroke survivors in the U.S., a population that is estimated to be growing by about 8% or 500,000 per year.  Stroke is a leading cause of serious, long term disability in the United States according to a survey of the US Bureau of the Census.

Because there has not been an overall SCI incidence study since the 1970s and many cases are unreported as such, definitive statistics are not available. However, the National Spinal Cord Injury Association reports that in 2007, living U.S. victims range between 250,000 and 400,000 and the SCI Injury Information Network estimate 7,800 new survivors each year.
 
In most cases, the survivors and their caregivers for both stroke and SCI victims believe they must live with the disability for the rest of their lives, and this inability to move one or more extremities has, we believe, a substantial negative psychological impact on the survivor's recovery potential. By using the NeuroMove as recommended, we believe the patient has a viable opportunity to achieve improvement beyond their current physical plateau and that such positive results will be a major contributor to the recovery process. The NeuroMove has also been proven in clinical studies to show beneficial effects when combined with physical therapy.

By conscientiously using the NeuroMove for three to twelve months, the majority of Neuromove patients can reestablish the connection between the brain and impaired muscle and thus regain movement and functionality.  When movement and functionality are restored, the patient may experience increased mobility, increased productivity, an improved outlook, and a reduced risk of accidents, and may be able to engage in activities they were precluded from before using the NeuroMove.


 
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NeuroMove Clinical Review

The NeuroMove utilizes the relatively new science of "neuroplasticity", the process by which healthy parts of the brain learn to compensate and assume functions previously carried out by the damaged areas. To accomplish this task, the extraordinarily sensitive NeuroMove technology monitors muscle activity and detects brain signals that indicate-- even without any visible movement-- the brain's effort to move a specific muscle or area of the body. Once the effort is detected, the NeuroMove induces actual movement through electrical stimulation, thus providing effective feedback to initiate relearning in the healthy part of the brain.

We believe the NeuroMove is unique because its built-in microprocessor can recognize low-level attempts by muscles to contract and then "reward" such detection with electrical stimulation. We do not believe there are similar products in the stroke rehabilitation market.

Because the NeuroMove increases the likelihood and reduces the time required for noticeable physical improvement as compared to traditional therapies used without the NeuroMove, we believe it can have positive effect in reducing society's annual stroke and SCI victim cost. The American Heart Association estimated that in 2007 alone, stroke costs would total more than $62 billion dollars. Similar data for SCI victims has not been compiled but the Spinal Cord Injury Network estimates lifetime per victim costs range from $0.5 million to $2.9 million depending on age and the type of injury. NeuroMove related cost savings will come from reduced physical therapy, less medication, fewer post stroke accidents, less hospitalization and rehabilitation, more motivated patients, less support personnel and equipment, and reduced productivity loss.

Several independent NeuroMove clinical studies have been published in peer-reviewed journals. Abstracts from the studies can be reviewed at www.NeuroMove.com and the full studies can be obtained directly from the Company.

Muscle related problems.

Neuromuscular Electrical Stimulation ("NMES") increases the electrical intensity to cause muscle contraction and is otherwise applied in the same manner as with TENS units. We have developed the E-Wave, a specific digital device, for this application. Additionally, the IF8000 and IF8100 can be programmed for NMES applications. The FDA has cleared the IF8000, IF8100 and the E-Wave for this purpose.

A built-in timer in our E-Wave and IF8000 products assures that the muscles do not fatigue too easily. Many pain relief and “NMES” devices for use in a patient's home can replace therapeutic treatments usually performed with regular physical therapy. Common applications can prevent disuse atrophy, increase strength, increase range-of-motion, and increase local blood circulation. NMES is commonly considered complementary treatment with physical therapy to improve overall patient outcomes.

Post-op recovery.

Electrical stimulation is also effective in preventing deep venous thrombosis immediately after orthopedic and others surgery, as well as for postoperative pain relief, to improve local blood circulation and for reducing edema. We believe the IF8000 is the most effective of our products for these applications.


Our Markets:
 
Based on the latest public information, including filings with the Securities and Exchange Commission, of the largest product manufacturers in our industry, we estimate the annual domestic market for standard electrotherapy products at approximately $450 - $500 million and growing an estimated 5% a year.

The domestic and international markets for stroke and SCI rehabilitation technology are in the initial stages of development. According to information of the American Stroke Association published December 15, 2008, with approximately 6.5 million stroke survivors, growing approximately 8% a year, and approximately 250,000- 400,000 SCI survivors, growing approximately 7,800 per year, in the U.S. alone there is a significant need for medically proven and effective stroke and SCI rehabilitative equipment. We believe these markets offer significant opportunity for profitable growth.

 
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Key characteristics of our markets are:

-
Often, time for collection of initial payment from insurance carriers can range from 30 days to many months and considerably longer for many attorney, personal injury and worker's compensation cases. Such delayed payment impacts the Company's cash flow and can slow its growth.  Collections are also impacted by whether effective contacts are made by our billing and collections department with the insurance carriers.

-
Prior to payment, the third party payers often make significant payment "adjustments or discounts".

-
Some insurance companies do not as a matter of policy cover some of our products, which can result in the denial of payment or a demand for refund.

-
For marketing reasons, we typically do not require any payments from patients and instead look only to insurers.

-
The stroke and SCI markets have demonstrated that many patients and their caregivers will privately pay for the NeuroMove.

Market Strategies
 
We plan to use our core technology to grow in the standard electrotherapy, stroke and SCI markets in the U.S. and to expand internationally.

In the U.S., we market our products through commissioned, independent sales representatives who call on doctors and therapists. We also market the NeuroMove directly to end users with advertisements and articles in relevant publications and on the Internet.

Our long-term plan is to increase our penetration of the standard electrotherapy market by further expanding our sales organization and broadening our product offering.  We currently produce relatively high gross margins for our products.  See Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.  The high margins are possible in part because the products use a common technology platform with different software configurations and some products are refurbished to original condition after being returned to the Company.

Product Assembly and Processing
 
Our product assembly strategy consists of the following elements:

-
At all times, comply with relevant regulatory requirements and regulations.

-
Use contract manufacturers as much as possible, thereby allowing us to quickly respond to changes in volume and avoid large capital investments for assembly and manufacturing equipment. Domestically and internationally, there is a large pool of highly qualified contract manufacturers for the type of devices we assemble.

-
Test all units 100% in a real-life, in-house environment to help ensure the highest possible quality, patient safety, and reduce the cost of warranty repairs.

Vendors located in the United States and Europe currently manufacture our products. We do not have contracts with these vendors for our standard electrotherapy products and utilize purchase orders for our ongoing needs. We currently contract with a vendor to manufacture the NeuroMove. We believe there are numerous suppliers that can manufacture our products, and pricing, quality and service will continue to determine which manufacturers we use.

Our significant suppliers as of February 2009 are:

        Axelgaard Manufacturing Co., LTD, Fallbrook, CA, US
        Battery Warehouse Direct, Barrington, IL US
        Byers Peak, Wheat Ridge, CO, US
        Spectramed, Mount Vernon, OH, US

 
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Our employees develop the software used in our products.
 
Revenue:
 
Our products may be purchased or rented on a monthly basis.  Renters and purchasers are primarily patients, health care providers and dealers. If the patient is covered by health insurance, the third party payer typically determines whether the patient will rent or purchase a unit depending on the anticipated time period for its use. If a rental continues until an amount equal to the purchase price is paid, we transfer ownership of the product to the patient and cease rental charges. When a rental unit is returned, it is refurbished, tested and made available for additional rentals.

More than a majority of our revenue is derived from private health insurance carriers with insurance plans, typically known as HMO or PPO, on behalf of their insureds.  The balance of the revenue is received from Medicare and Medicaid, worker's compensation agencies, attorneys representing injured patients, hospitals, U.S. and international distributors.

More than a majority of our revenue depends upon recurring revenue.  Recurring revenue results from renting our products typically for two to five months.  In terms of sales of products, our primary source of recurring revenue is the sale of surface electrodes sent to existing patients each month. The electrodes transmit the electrical charge from the device to the patient and are an essential component of the treatment modality.

Our employees work with the commercial insurance and government third party payers, patients and commercial clients to collect product rental and purchase payments.


Products Purchased For Resale
 
In addition to our own products, we distribute a number of products from other domestic and international manufacturers in order to complement our products. These products include electrical stimulation devices and patient supplies, such as electrodes. Customarily, there are no formal contracts between vendors in the durable medical equipment industry. Replacement products and components are easily found, either from our own products or other manufacturers, and purchases are made by purchase order.

Intellectual Property
 
We believe that our products contain certain proprietary software that protects them from being copied. In the future, we may seek patents for advances to our existing products and for new products as they are developed.  A patent application for NeuroMove technology has been withdrawn during 2008, and we currently own no patents.

We hold registered trademarks for NeuroMove in the U.S. and the European Union. Zynex and Zynex Medical are trademarked in the U.S.

We utilize non-disclosure and trade secret agreements with employees and third parties to protect our proprietary information.
 
Regulatory Approval And Process
 
All our products are classified as Class II (Medium Risk) devices by the Food and Drug Administration (FDA), and clinical studies with our products are considered to be NSR (Non-Significant Risk Studies). Our business is governed by the FDA, and all products typically require 510(k) market clearance before they can be put in commercial distribution. Section 510(k) of the Federal Food, Drug and Cosmetics Act, is available in certain instances for Class II (Medium Risk) products. It requires that before introducing most Class II devices into interstate commerce, the company introducing the product must first submit information to the FDA demonstrating that the device is substantially equivalent in terms of safety and effectiveness to a device legally marketed prior to March 1976. 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 cGMP and QSR division (Quality Systems Regulation), which is similar to the ISO9000 and the European EN46000 quality control regulations. All our products currently produced for us or resold by us are cleared for marketing in the United States under FDA's 510(k) regulations.

 
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In 2008, Zynex received European Union ("EU") CE Marking approval for several products. CE Marking is certification that a product meets the standards established by the 25 nations EU and qualifies for sale in the EU and 4-nation European Free Trade Association.  See “Current Business” above.

The Far East, Middle East, Eastern Europe, and Latin American markets have different regulatory requirements. We intend to comply with applicable requirements if and when we decide to enter those markets.

In March 2008, Zynex received its ISO13485 : 2003 certification for its compliance with international standards in quality assurance for design, development, manufacturing and distribution of medical devices. This certification is not only important as an assurance that we have the appropriate quality systems in place but is also crucial to our efforts international expansion around the world as many countries require this certification as part of their regulatory approval. Zynex was audited by a corporation authorized by the International Organization for Standardization (ISO).

Healthcare Regulation
 
The delivery of health care services and products has become one of the most highly regulated of professional and business endeavors in the United States. Both the federal government and individual state governments are responsible for overseeing the activities of individuals and businesses engaged in the delivery of health care services and products. Federal law and regulations are based primarily upon the Medicare and Medicaid programs. Each program is financed, at least in part, with federal funds. State jurisdiction is based upon the state's interest in regulating the quality of health care in the state, regardless of the source of payment. We believe we are materially complying with applicable laws concerning our products; however, we have not received or applied for a legal opinion from counsel or from any federal or state judicial or regulatory authority. Additionally, many aspects of our business have not been the subject of state or federal regulatory interpretation. The laws applicable to us are subject to evolving interpretations. If our operations are reviewed by a government authority, we may receive a determination that could be adverse to us. Furthermore, laws that are applicable to us may be amended in a manner that could adversely affect us.

Federal health care laws apply to us when we submit a claim to Medicare, Medicaid or any other federally funded health care program. 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 Medicare, Medicaid or other 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 Medicare, Medicaid and other federally-funded health care programs; or

-
The purchasing, leasing, ordering, or arranging for any goods, facility, items or service reimbursable under those programs.

Employees
 
As of December 31, 2008, we employed 76 full time employees (an increase from 45 as of December 31, 2007). We also engage a number of independent contractors, commission-only sales representatives. We believe our relations with all of our employees and independent contractors are good. We are subject to the minimum wage and hour laws and provide usual and customary employee benefits such as vacation, sick leave and health and dental insurance.
 
 
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Executive Officers of the Registrant
 
The following table sets forth information as to the name, age and office held by the two executive officers of the Company as of December 31, 2008:

        Name
Age
                     Position
     
Thomas Sandgaard
50
President, Chief Executive Officer and Director.
   
Set forth below is a biographical description of
   
Mr. Sandgaard based on information supplied by him
     
Fritz G. Allison
49
Chief Financial Officer.
   
Set forth below is a biographical description of
   
Mr. Allison based on information supplied by him.


Mr. Sandgaard founded the Company in 1996 after a successful European based career in the semiconductor, telecommunications and medical equipment industries with ITT, Siemens and Philips Telecom. Mr. Sandgaard held middle and senior management positions in the areas of international sales and distribution, technology transfers, mergers and acquisitions and marketing. Mr. Sandgaard holds a degree in electronics engineering from Odense Teknikum, Denmark and an MBA from the Copenhagen Business School.

Mr. Allison was elected as Chief Financial Officer of Zynex, effective February 19, 2007. Prior to joining Zynex, Mr. Allison served as a Financial Consultant for MSS Technologies, a Phoenix-based provider of business application solutions, since 2004. From December 2000 until March 2004, Mr. Allison was the Vice-President, Controller and Chief Financial Officer of Orange Glo International, Inc, a manufacturer of cleaning products in the consumer package goods industry. Previous positions include Manager of Corporate Accounting for J.D. Edwards & Co., Controller at Powercom-2000 and International Controller for CH2M Hill International. Mr. Allison holds a B.A. in Business Administration from the University of Southern California and was a Certified Public Accountant.
 

ITEM 1A. RISK FACTORS

RISKS RELATED TO OUR BUSINESS

WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL REQUIRED TO GROW OUR BUSINESS. WE MAY HAVE TO CURTAIL OUR BUSINESS IF WE CANNOT FIND ADEQUATE FUNDING.

Our ability to grow depends significantly on our ability to expand our operations through internal growth and by acquiring other companies or assets. This will require significant capital resources. We may need to seek additional capital from public or private equity or debt sources to fund our operating plans and respond to other contingencies such as:

-
shortfalls in anticipated revenues or increases in expenses;

-
the development of new products; or

-
the expansion of our operations, including the recruitment of additional sales personnel.

We cannot be certain that we will be able to raise additional capital in the future on terms acceptable to us or at all. If alternative sources of financing are insufficient or unavailable, we may be required to modify our growth and operating plans in accordance with the extent of available financing.  Any additional equity financing may involve substantial dilution to our then existing stockholders.  Any debt financing would require the approval of Marquette, which is the lender under our line of credit.


 
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WE HAVE LIMITED LIQUIDITY BECAUSE OUR CASH REQUIREMENTS INCREASE AS OUR OPERATIONS EXPAND

Our limited liquidity is primarily a result of (a) the required high levels of consignment inventory that are standard in the electrotherapy industry, (b) the payment of commissions to salespersons based on sales or rentals prior to payments for the corresponding product by insurers and whether or not there is a denial of any payment by an insurer, (c) the high level of outstanding accounts receivable because of deferred payment practices of third-party health payers, (d) the need for improvements to the Company’s internal billing processes, and (e) the delayed cost recovery inherent in rental transactions.

OUR POTENTIAL COMPETITORS 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.

Competitors to our products may have substantially greater financial, technical, marketing, and other resources. Competition could result in price reductions, fewer orders, reduced gross margins, and loss of market share. Our products are regulated by the U.S. Food and Drug Administration. 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. If overall demand for our products should decrease it could have a materially adverse affect on our operating results.  Substantial competition may be expected in the future in the area of stroke rehabilitation that may directly compete with our NeuroMove product.  These companies 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.

FAILURE TO KEEP PACE WITH THE LATEST TECHNOLOGICAL CHANGES COULD RESULT IN DECREASED REVENUES.

The market for 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 creating 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.

WE ARE DEPENDENT ON REIMBURSEMENT FROM INSURANCE COMPANIES AND GOVERNMENT (MEDICARE AND MEDICAID) AGENCIES; CHANGES IN INSURANCE REIMBURSEMENT POLICIES OR APPLICATION OF THEM TO OUR PRODUCTS COULD RESULT IN DECREASED OR DELAYED REVENUES

A large percentage of our revenues comes from insurance company and government agency reimbursement. Upon delivery of our products to our customers, we directly bill the customers' private insurance company or government payer for reimbursement. If the billed payers do not pay their bills on a timely basis or if they change their policies to exclude coverage for our products, we would experience a decline in our revenue as well as cash flow issues.  In addition, we may deliver products to customers based on past practices and billing experiences with health insurance companies and have a health insurance company later deny coverage for such products. In some cases our delivered product may not be covered pursuant to a policy statement of a health insurance provider, despite a payment history of the insurance provider and benefits to the patients. In November 2008, we settled a refund claim by Anthem Blue Cross Blue Shield for payments made by Anthem for certain medical devices which were rented or sold to insureds of Anthem and which were disallowed under an Anthem policy.
 
A MANUFACTURER'S INABILITY TO PRODUCE OUR GOODS ON TIME AND TO OUR SPECIFICATIONS COULD RESULT IN LOST REVENUE.

Third-party manufacturers assemble and manufacture to our specifications most of our products. The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse affect on our revenues.

 
- 12 -

 

Because of the timing and seriousness of our business, and the medical device industry in particular, the dates on which customers need and require shipments of products from us are critical. Further, because quality is a leading factor when customers, doctors, health insurance providers and distributors accept or reject goods, any decline in quality by our third-party manufacturers could be detrimental not only to a particular order, but also to our future relationship with that particular customer.

IF WE NEED TO REPLACE MANUFACTURERS, OUR EXPENSES COULD INCREASE RESULTING IN SMALLER PROFIT MARGINS.

We compete with other companies for the production capacity of our manufacturers and import quota capacity. Some of these competitors have greater financial and other resources than we have, and thus may 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 produces our products exclusively.

Should we be forced to replace one or more of our manufacturers, we may experience increased costs or an adverse operational impact due to delays in distribution and delivery of our products to our customers, which could cause us to lose customers or lose revenue because of late shipments.

IF WE ARE UNABLE TO RETAIN THE SERVICES OF MR. SANDGAARD OR IF WE ARE UNABLE TO SUCCESSFULLY RECRUIT QUALIFIED MANAGERIAL AND SALES PERSONNEL HAVING EXPERIENCE IN OUR BUSINESS, 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. Loss of the services of Mr. Sandgaard could have a material adverse effect on our growth, revenues, and prospective business. 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 having experience in business. Competition for qualified individuals is intense. Various factors, such as marketability of our products, our reputation and our liquidity, can affect our ability to find, attract or retain sales personnel. There can be no assurance that we will be able to find, attract and retain qualified new employees and sales representatives and retain existing employees and sales representatives.

HOSPITALS AND CLINICIANS MAY NOT BUY, PRESCRIBE OR USE OUR PRODUCTS IN SUFFICIENT NUMBERS, WHICH COULD RESULT IN DECREASED REVENUES.

Hospitals and clinicians may not accept the IF8000, IF8100, TruWave, E-Wave or NeuroMove NM900 products as effective, reliable, and cost-effective. Factors that could prevent such institutional customer acceptance include:

-
If customers conclude that the costs of these products exceed the cost savings associated with the use of these products;

-
If customers are financially unable to purchase these products;

-
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 Zynex's customers; and

-
If frequent product malfunctions occur, leading clinicians to believe that the products are unreliable.

If any of these or other factors results in the non-use or non-purchase of our products, we will have reduced revenues and may not be able to fully fund operations.

 
- 13 -

 

AS A RESULT OF BEING IN THE MEDICAL DEVICE INDUSTRY, WE NEED TO MAINTAIN SUBSTANTIAL INSURANCE COVERAGE, WHICH COULD BECOME VERY EXPENSIVE OR HAVE LIMITED AVAILABILITY.

Our marketing and sale of products and services related to the medical device field creates an inherent risk of claims for liability. As a result, we carry product liability insurance with an aggregate limit of $5,000,000 and $2,000,000  per occurrence and will continue to maintain insurance in amounts we consider adequate to protect us from claims. We cannot, however, be assured to have resources sufficient to satisfy liability claims in excess of policy limits if required to do so. Also, there is no assurance that our insurance provider will not drop our insurance 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.

OUR FUTURE DEPENDS UPON OBTAINING REGULATORY APPROVAL OF ANY NEW PRODUCTS AND/OR MANUFACTURING OPERATIONS WE DEVELOP; FAILURE TO OBTAIN REGULATORY APPROVAL COULD RESULT IN INCREASED COSTS AND LOST REVENUE.

Before marketing any new products, we will need to complete one or more clinical investigations of each product. There can be no assurance that the results of such clinical investigations will be favorable to us. We may not know the results of any study, favorable or unfavorable to us, until after the study has been completed. Such data must be submitted to the FDA as part of any regulatory filing seeking approval to market the product. Even if the results are favorable, the FDA may dispute the claims of safety, efficacy, or clinical utility and not allow the product to be marketed. The sale price of the product may not be enough to recoup the amount of our investment in conducting the investigative studies.

WE MAY INCUR SUBSTANTIAL EXPENSES AND MAY INCUR LOSSES.

The area of medical device research is subject to rapid and significant technological changes. Developments and advances in the medical industry by either competitors or neutral parties can affect our business in either a positive or negative manner. Developments and changes in technology that are favorable to us may significantly advance the potential of our research while developments and advances in research methods outside of the methods we are using may severely hinder, or halt completely our development.

We are a small company in terms of employees, technical and research resources and capital. We expect to have research and development and significant sales and marketing, and general and administrative expenses for several years. These amounts may be expended before any commensurate incremental revenue from these efforts may be obtained. These factors could hinder our ability to meet changes in the medical industry as rapidly or effectively as competitors with more resources.

WE MAY BE UNABLE TO PROTECT OUR TRADEMARKS, TRADE SECRETS AND OTHER INTELLECTUAL PROPERTY RIGHTS THAT ARE IMPORTANT TO OUR BUSINESS.

We regard our trademarks, our trade secrets and other intellectual property as 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 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 our competitive position.

 
- 14 -

 

SUBSTANTIAL COSTS COULD BE INCURRED DEFENDING AGAINST CLAIMS OF INFRINGEMENT.

Other companies, including competitors, may obtain patents or other proprietary rights that would limit, interfere with, or otherwise circumscribe Zynex's ability to make, use, or sell products. Should there be a successful claim of infringement against us and if we could not license the alleged infringed technology, 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 on reasonable terms, if at all, and

-
Re-design Zynex's products incorporating the infringed intellectual property.

COMMERCIALIZATION OF OUR PRODUCTS COULD FAIL IF IMPLEMENTATION OF OUR SALES AND MARKETING STRATEGY IS UNSUCCESSFUL.

A significant sales and marketing effort may be necessary to achieve the level of market awareness and sales needed to achieve our financial projections. To increase sales and rental of our products we may utilize some or all of the following strategies in the future:

-
Contract with, hire and train sales and clinical specialists;

-
Build a larger direct sales force;

-
Manage geographically dispersed operations;

-
Explore potential reseller and original equipment manufacturer (OEM) relationships and assure that reseller and OEMs provide appropriate educational and technical support; and
 
-
Promote frequent product use to increase sales of consumables.

-
Enter into relationships with well-established distributors in foreign markets.
 
These strategies could be costly and may impact our operating results.  If these strategies do not generate increased revenue, the result will be increased operating expenses greater than the revenue, resulting in a reduction of net income or even a net loss.
 
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY RELIANCE ON SOLE SUPPLIERS.

Notwithstanding our current multiple supplier approach, in the future certain essential product components may be supplied by separate 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 affect our revenues and ability to retain our experienced sales force.

 
- 15 -

 

WE MAY NOT BE ABLE TO OBTAIN CLEARANCE OF A 510 (K) NOTIFICATION 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) notification may also be required before marketing certain previously marketed products, which have been modified after they have been cleared. . Should the FDA so require, the filing of a new 510(k) notification for the modification of the product may be required prior to marketing any modified devices.

THE FDA ALSO REQUIRES ADHERENCE TO GOOD MANUFACTURING PRACTICES (GMP) REGULATIONS, WHICH INCLUDE PRODUCTION DESIGN CONTROLS, TESTING, QUALITY CONTROL, STORAGE AND DOCUMENTATION PROCEDURES.

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. Our compliance status may change due to future changes in, or interpretations of, FDA regulations or other regulatory agencies. Such changes may result in the FDA withdrawing marketing clearance or requiring product recall. In addition, any changes or modifications to a device or its intended use may require us to reassess compliance with Good Manufacturing Practices guidelines, potentially interrupting the marketing and sale of products. Failure to comply with regulations could result in enforceable actions, including product seizures, product recalls, withdrawal of clearances or approvals, and civil and criminal penalties.

OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, THE FAILURE TO COMPLY WITH WHICH COULD RESULT IN SIGNIFICANT PENALTIES.

Numerous state and federal government agencies extensively regulate the manufacturing, packaging, labeling, advertising, promotion, distribution and sale of our products. Our failure or inability to comply with applicable laws and governmental regulations may result in civil and criminal penalties, which we are unable to pay or may cause us to curtail or cease operations. We must also expend resources from time to time to comply with newly adopted regulations, as well as changes in existing regulations. If we fail to comply with these regulations, we could be subject to disciplinary actions or administrative enforcement actions.

CHANGES IN COVERAGE AND REIMBURSEMENT POLICIES FOR OUR PRODUCTS BY MEDICARE OR REDUCTIONS IN REIMBURSEMENT RATES FOR OUR PRODUCTS 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 Zynex considers an order, we submit a claim for payment directly to third party payers such as private commercial insurance carriers, Medicare or Medicaid and others as appropriate and the payer reimburses Zynex 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.
 
With the passage of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act, a number of changes have been mandated to the Medicare payment methodology and conditions for coverage of our durable medical equipment, including our TENS and NMES devices. These changes include a freeze in payments for our durable medical equipment from 2004 through 2008, competitive bidding requirements, and new clinical conditions for payment and quality standards. Although these changes affect our products generally, specific products may be more or less affected by the Medicare Modernization Act's provisions.

 
- 16 -

 

Certain off-the-shelf durable medical equipment (DME), including TENS devices, may become subject to competitive bidding, in order to reduce costs and reimbursements to DME suppliers. Under competitive bidding, if implemented, Medicare will change its approach to reimbursing certain items and services covered by Medicare from the current fee schedule amount to an amount established through a bidding process between the government and suppliers. Competitive bidding may reduce the number of suppliers providing certain items and services to Medicare beneficiaries and the amounts paid for such items and services. Also, Medicare payments in regions not subject to competitive bidding may be reduced using payment information from regions subject to competitive bidding. Any payment reductions or the inclusion of certain of our products in competitive bidding, in addition to the other changes to Medicare reimbursement and standards contained in the Medicare Modernization Act, could have a material adverse effect on our results of operations.

In addition, in 2003, the Centers for Medicare and Medicaid Services, or CMS made effective an interim final regulation implementing "inherent reasonableness" authority, which allows adjustments to payment amounts for certain “outlier” items and services covered by Medicare when the existing payment amount is determined to be "grossly excessive" or "grossly deficient " The regulation lists factors that may be used to determine whether an existing reimbursement rate is grossly excessive or grossly deficient and to determine what is a realistic and equitable payment amount. The regulation remains in effect after the enactment of the Medicare Modernization Act, although the new legislation precludes the use of inherent reasonableness authority for payment amounts established under competitive bidding. Medicare and Medicaid accounted for approximately 9% of our total sales and rental income for 2008. When using the inherent reasonableness authority, CMS may reduce reimbursement levels for certain of our products, which could have a material adverse effect on our results of operations.

OUR PRODUCTS ARE SUBJECT TO RECALL EVEN AFTER RECEIVING FDA OR FOREIGN CLEARANCE OR APPROVAL, WHICH WOULD HARM OUR REPUTATION AND BUSINESS.

We are subject to medical device reporting regulations that require us to report to the FDA or respective governmental authorities in other countries if our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur. The FDA and similar governmental authorities in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacturing. A government mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling.   Any recall would divert managerial and financial resources and could harm our reputation with customers. We cannot assure you that we will not have product recalls in the future or that such recalls would not have a material adverse effect on our business. We have not undertaken any voluntary or involuntary recalls to date. 
 
OUR PRINCIPAL OFFICER OWNS A CONTROLLING INTEREST IN OUR VOTING STOCK AND INVESTORS WILL NOT HAVE ANY VOICE IN OUR MANAGEMENT.

Our Chief Executive Officer and a director, Thomas Sandgaard, beneficially owns approximately 61.0% of our outstanding common stock as of March 27, 2009. As a result, Mr. Sandgaard has the ability to control substantially all matters submitted to our stockholders for approval, including:
 
-
Election of our board of directors;

-
Removal of any of our directors;

-
Amendment of our certificate of incorporation or bylaws; and

-
Adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.


 
- 17 -

 

As a result of his ownership and position, Mr. Sandgaard is able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, 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 us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.

MATERIAL WEAKNESSES IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING COULD MATERIALLY AND ADVERSELY IMPACT OUR BUSINESS.

We have reported material weaknesses in internal control over financial reporting for the last four years (including at December 31, 2008).  Our remediation steps have to date not eliminated material weaknesses.  A continuation of material weaknesses could result in future financial statements with material errors or inaccuracies.  If these types of problems occur in the future, in addition to any impact on our stock price, they could also result in defaults under our line of credit and could affect adversely our reputation, which collaterally could affect our ability to retain sales personnel and business relationships with insurance companies paying for our products and vendors.
 
INCOME TAX OBLIGATIONS MUST BE MET
 
The Company has a liability for approximately $600,000 on 2007 federal income taxes. The Company must arrange a proposed payment schedule with the Internal Revenue Service and then make timely payments under such a schedule.  Failure to do so could result in collection actions by the IRS against the Company and its assets. 

ECONOMIC CONDITIONS MAY ADVERSELY AFFECT US.

The United States is experiencing severe instability in the commercial and investment banking systems which is likely to continue to have far-reaching effects on the economic activity in the country for an indeterminable period. The United States is also experiencing relatively high levels of unemployment and a recession. The long-term impact of these matters on the United States economy and the Company’s operating activities and ability to raise capital cannot be predicted at this time, but may be substantial.

AN UNFAVORABLE OUTCOME IN PENDING LITIGATION COULD AFFECT ADVERSELY OUR FINANCIAL CONDITION AND OPERATIONS.

We are currently the subject of pending lawsuits, brought in April 2009, alleging securities law violations in regard to financial statements for the first three quarters of 2008 which were restated.  If these lawsuits are ultimately not covered by our insurance, or if any liability, settlement or defense costs cumulatively exceed our insurance limit of $5 million, these lawsuits could materially and adversely affect our cash flow, financial condition and financial results to the detriment of our Company.

THE UNCERTAINTY REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN MAY AFFECT OUR BUSINESS RELATIONSHIPS.

We have forecasted sufficient liquidity and the ability to satisfy financial covenants of our revolving line of credit in 2009, but these matters are not certain.  As a result, the report of our independent registered public accounting firm on our consolidated financial statements, as of and for the year ended December 31, 2008, refers to an explanatory Note regarding the uncertainty of our ability to continue as a going concern.  Any such concerns about our financial condition could impact our ability to retain sales representatives or employees and could affect the willingness of insurers and suppliers to work with us.  Any continuation of such concerns could thus have a material adverse effect on our business and results of operations in the future.


RISKS RELATING TO OUR COMMON STOCK

OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.


 
- 18 -

 

Since our common stock is not listed or quoted on any stock exchange and no other exemptions currently apply, trading in our common stock on the Over-The-Counter Bulletin Board is subject to the "penny stock" rules of the SEC. These rules require, among other things, that any broker engaging in a transaction in our securities provide its customers with a risk disclosure document, disclosure of market quotations, if any, disclosure of the compensation of the broker and its salespersons in the transaction, and monthly account statements showing the market values of our securities held in the customer's accounts. The brokers must provide bid and offer quotations and compensation information before making any purchase or sale of a penny stock and also provide this information in the customer's confirmation. Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock. 

OUR TRADING ON THE OVER THE COUNTER BULLETIN BOARD DEPENDS ON OUR FILING PERIODIC REPORTS WITH THE SECURITIES AND EXCHANGE COMMISSION ON A TIMELY BASIS

We were late in filing two periodic reports with the SEC in 2008. If we have a “third strike” consisting of another late report within a period of 24 months, our common stock would be removed from the OTCBB and then would probably be traded on the Pink Sheets.


ITEM 1B. UNRESOLVED STAFF COMMENTS

None


ITEM 2. PROPERTIES

In November 2007, the Company moved its headquarters, office, plant and warehouse to a facility in Littleton, Colorado. This space, consisting of 16,553 square feet, is sub-leased under a 25-month agreement, expiring in November 2009, at an annual cost of $113,802 plus property taxes and common area maintenance expenses. The Company believes that the leased property is sufficient to support its requirements until the sub-lease expires.


 
ITEM 3. LEGAL PROCEEDINGS

A lawsuit was filed against the Company, its President and Chief Executive Officer and its Chief Financial Officer on April 6, 2009, in the United States District Court for the District of Colorado (Marjorie and David Mishkin v. Zynex, Inc. et al.).  On April 9, 2009, a lawsuit was filed by Robert Hanratty in the same court against the same defendants.  On April 10, 2009, a lawsuit was filed by Denise Manandik in the same court against the same defendants.  These lawsuits allege substantially the same matters.  The lawsuits refer to the April 1, 2009 announcement of the Company that it will restate its unaudited financial statements for the first three quarters of 2008.  The lawsuits purport to be a class action on behalf of purchasers of the Company securities between May 21, 2008 and March 31, 2009.  The lawsuits allege, among other things, that the defendants violated Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934 by making intentionally or recklessly untrue statements of material fact and/or failing to disclose material facts regarding the financial results and operating conditions for the first three quarters of 2008.  The plaintiffs ask for a determination of class action status, unspecified damages and costs of the legal action.  The Company believes that the allegations are without merit and will vigorously defend itself in the lawsuits.  The Company has notified its directors and officers liability insurer of the claims.

We are not a party to any other material pending or threatened legal proceedings.  For information on a recent refund claim and settlement of it during the fourth quarter of 2008, please see Note 12 to the Consolidated Financial Statements in this Report, which Note is incorporated herein by reference.

 
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None 

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is currently traded on the OTC Bulletin Board under the symbol "ZYXI".

The following table sets forth the range of high and low bid quotations for our common stock for each quarter of the last two fiscal years, as reported on the Bulletin Board. The quotations represent inter-dealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions.

         PERIOD
HIGH
LOW
     
Year ended December 31, 2007
   
First Quarter
$0.45
$0.20
Second Quarter
$0.95
$0.34
Third Quarter
$1.43
$0.90
Fourth Quarter
$1.49
$1.18
     
Year ended December 31, 2008
   
First Quarter
$1.78
$1.15
Second Quarter
$1.81
$1.30
Third Quarter
$6.14
$1.74
Fourth Quarter
$5.20
$1.23
 
As of March 27, 2009, there were 29,971,041 shares of common stock outstanding and approximately 229 registered holders of our common stock.

The Company has never paid any cash dividends on our capital stock and does not anticipate paying any cash dividends on the common shares in the foreseeable future. The Company intends to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors (the "Board") and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board deems relevant.
 
In October 2008, the Company received notices of exercise related to options for 150,000 shares of common stock; 150,000 shares of common stock were issued in exchange for cash of $55,000.  In November 2008, the Company received notices of exercise related to options for 50,000 shares of common stock; 50,000 shares of common stock were issued in exchange for cash of $16,000.  In November 2008, the Company received notices of exercise related to warrants for 103,139 shares of common stock; 92,267 shares of common stock were issued in cashless exercises.  In December 2008, the Company issued 19,000 shares of common stock to individuals as non-cash compensation for services rendered, valued at $29,450 We made no general solicitation, and we believe that the issuance of shares met the standards for purchases under an exemption for a non-public offering or for an exchange of securities.

During the fourth quarter of 2008, the Company issued 19,000 shares of common stock to outside sales representatives as incentive awards.  We made no general solicitation, and we believe that the issuance of the shares met the standards for purchases under an exemption for a non-public offering or did not constitute a sale.

There were there no stock repurchases by the Company during 2008 or 2007.

 
- 20 -

 

 
ITEM 6. SELECTED FINANCIAL DATA

Not applicable.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

For 2008, Zynex reported $11,763,558 revenue, an increase of 46% from 2007 and net income of $110,952, a decrease of 95% from 2007.  The revenue increase was primarily accomplished through recruitment of experienced sales representatives in 2006, 2007 and 2008.

The decrease in net income was primarily due to decreasing the amounts we expect to collect from insurance providers in 2008. We increased our reserves to reflect the reduced collection expectations because of higher levels of claim denials by medical insurers and the need to improve the processes in our billing and collection department. This significantly impacted both revenue and net income in 2008. Refer to Note 13 to the consolidated financial statements.

In 2008 the percentage increase in revenues was significantly less than the percentage increase in orders received for the Company’s products primarily because of higher levels of claim denials by medical insurers; the need to improve the processes in our billing and collection department; increased reserves for returns, allowances and collectability, which reduced gross revenue; and net income.  See Note 2 for information on “Revenue Recognition and Allowances for Provider Discounts and Collectibility.”  Net revenue was also impacted significantly by our not recognizing revenues (approximately $1,075,000) from the rental of certain devices to insureds of Anthem Blue Cross Blue Shield during the third quarter due to a refund claim of Anthem which was settled in November 2008.  See Note 12 to the Consolidated Financial Statements in this Report.

The incremental addition of industry experienced sales representatives during 2007 and 2008 allowed us to increase our market presence and increase orders during 2007 and 2008. As a result of the sales force expansion, our total orders increased 140% from 10,383 in 2007 to 24,888 in 2008.  The level of orders for our products is significant in terms of (1) rental income which we anticipate receiving on a recurring basis over the time which patients use our products, subject to our ability to collect the rentals and the contractual adjustments by insurers, and (2) also corresponding recurring sales of electrodes and other supplies for the products.

Management believes that our overall business remains stable, with doctors and patients continuing to have a readiness to use our products.


RESULTS OF OPERATIONS

The following information should be read in conjunction with the Company’s Consolidated Financial Statements and related Notes contained in this Report.

Net Rental Revenue. Net rental revenue for the year ended December 31, 2008, was $7,938,323 an increase of $2,596,735 or 49% compared to $5,341,588 for the year ended December 31, 2007. The increase in net rental revenue for the year ended December 31, 2008 was due primarily to an increase in prescriptions (orders) for rentals of the Company’s electrotherapy products. Other reasons for the increase in net rental revenue are indicated in “Net Sales and Rental Revenue” below. Net rental revenue was also significantly impacted by increased reserves as mentioned above. In addition, net rental revenue slowed in the third and fourth quarter of 2008 because we did not recognize revenues from the rental of certain devices to insureds of Anthem Blue Cross Blue Shield during the quarters due to a refund claim of Anthem which was settled in November 2008. As part of the settlement the Company agreed to pay Anthem $679,930 and forego unpaid claims in existence at June 30, 2008 of $329,664. Substantially all of this $1,009,594 relates to and decreased net rental revenue. See Note 12 to the Consolidated Financial Statements in this Report.

 
- 21 -

 

Net rental revenue for the year ended December 31, 2008 made up 67% of net sales and rental revenue compared to 66% for the year ended December 31, 2007.

Our products may be rented on a monthly basis or purchased. Renters and purchasers are primarily patients and healthcare providers; there are also purchases by dealers. If the patient is covered by health insurance, the third-party payer typically determines whether the patient will rent or purchase a unit depending on the anticipated time period for its use. If contractually arranged, a rental continues until an amount equal to the purchase price is paid when we transfer ownership of the product to the patient and cease rental charges.

Net Sales Revenue. Net sales revenue for the year ended December 31, 2008, was $3,825,235, an increase of $1,118,571 or 41% compared to $2,706,664 for the year ended December 31, 2007. The increase in net sales revenue for the year ended December 31, 2008, compared to the year ended December 31, 2007 was due primarily to more products in use generating sales of consumable supplies to users of the Company’s products as well as higher levels of products sold. The majority of net sales revenue is derived from surface electrodes sent to existing patients each month and other consumable supplies for our products. Other reasons for the increase in net sales revenue are indicated in “Net Sales and Rental Revenue” below.  Net sales revenue was also significantly impacted by increased reserves as mentioned above.

Net sales revenue for the year ended December 31, 2008 made up 33% of net sales and rental revenue compared to 34% for the year ended December 31, 2007.

Net Sales and Rental Revenue. Net sales and rental revenue for the year ended December 31, 2008, was $11,763,558, an increase of $3,715,307or 46% compared to $8,048,252 for the year ended December 31, 2007. The increase in net sales and rental revenue for the year ended December 31, 2008, compared to the year ended December 31, 2007 was due primarily to an increase in prescriptions (orders) for rentals and purchases of the Company’s electrotherapy products. The increase resulted from the expansion of the sales force in 2007 and 2008, greater awareness of the Company's products by end users and physicians resulting from marketing investments in 2007 and 2006; growing market penetration; and increased rental revenue from the greater number of Zynex products placed in use during prior periods.  The increase in net revenue rental was offset by the settlement of the refund claim mentioned above, the increase in allowances applied against gross revenues also mentioned above and inefficient processes at our billing and collection departments.

Our sales and rental revenue is reported net, after deductions for uncollectable and estimated insurance company reimbursement deductions. The deductions are known throughout the health care industry as “contractual adjustments” and describe the process whereby the healthcare insurers unilaterally reduce the amount they reimburse for our products as compared to the rental rates and sales prices charged by us.  The deductions from gross revenue also take into account the estimated denials of claims for our products placed with patients and other factors which may affect collectability.  See Note 2 to the Consolidated Financial Statements in this Report.

Net sales and rental revenue by quarter were as follows. 
 
   
2008
   
2007
 
             
First quarter
  $ 2,588,720     $ 1,336,731  
Second quarter
    3,040,460       1,505,207  
Third quarter  (see Note 12 to the Consolidated Financial Statements)
    2,198,738       2,104,446  
Fourth quarter
    3,935,640       3,101,868  
                 
Total net sales and rental revenue
  $ 11,763,558     $ 8,048,252  
 
Gross Profit. Gross profit for the year ended December 31, 2008, was $9,523,924 or 81% of net sales and rental revenue compared to $7,205,163 or 90% in 2007.  The increase in gross profit for the year ended December 31, 2008 as compared with the same period in 2007 is primarily because revenue increased from the year ended December 31, 2007. The decrease in gross profit percentage for the year ended December 31, 2008 as compared with the year ended December 31, 2007 is primarily from the increased reserves as described above and from not recognizing revenue from the rental of certain devices to insureds of Anthem during the third quarter of 2008 which reduced net sales and rental revenue in the third and fourth quarters of 2008.

 
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Selling, General and Administrative. Selling, general and administrative expenses for the year ended December 31, 2008, was $9,214,748, an increase of $5,171,919 or 128% compared to $4,042,829 for the year ended December 31, 2007.  The increase was primarily due to increases in sales representative commissions, payroll, public company expenses, legal expenses, accounting services and office expenses.  The increases were in part offset by lower marketing and promotion costs.

The year ended December 31, 2008 included expenses for commissions earned by sales representatives on orders which did not result in collections, including in the third quarter rentals and sales of certain devices to the insureds of Anthem which the Company did not bill to Anthem.  The impact in 2008 was more significant than in prior years.  The Company pays commission based on orders, with the collections dependent upon policies of the insurers and our internal processes.

Interest and other income or expense.  Interest and other income or expense for the year ended December 31, 2008, was $38,223, a decrease of $202,761 or 84% compared to $240,984 for the year ended December 31, 2007. We anticipate increases in the interest expense level in 2009 and future years because of our borrowing under the line of credit established in September 2008. The decrease in interest expense resulted primarily from the Company's repayment in 2007 of the note issued to Ascendiant Capital in June of 2007, and the Company’s repayment of the loans payable to Silicon Valley Bank in February 2008. The Company also recorded other income of $27,201 in the quarter ended June 30, 2008 resulting from the disposal of leased equipment which had been treated as a capital lease.

Income tax expense.  We reported expenses for income taxes in the amount of $160,000 for the year ended December 31, 2008 compared to $790,000 of expense for the year ended December 31, 2007.  This is primarily due to our having lower income before taxes of $270,953 for the year ended December 31, 2008 compared to $2,921,350 of income before taxes for the year ended December 31, 2007. The decrease in income before taxes was primarily due to decreasing the amounts we expect to collect from insurance providers as described above.

LIQUIDITY AND CAPITAL RESOURCES

Line of Credit

Please see Note 7 of the Consolidated Financial Statements in this Report for information on a line of credit established with Marquette Healthcare Finance in September 2008.  On April 7, 2009, we entered into a letter agreement with Marquette in which Marquette states its willingness to waive breaches of financial covenants by us. In the letter agreement, Marquette indicates that Zynex did not meet the EBITDA covenant and debt service coverage ratio covenant as of December 31, 2008 and that Zynex would not meet the EBITDA covenant as of March 31, 2009. Marquette stated its willingness to forebear taking action on these financial covenant defaults for the quarters ended December 31, 2008 and March 31, 2009 and to waive any default fee or default interest rate.  Marquette and we also agreed on amounts for resetting the minimum EBITDA covenant, which is on a trailing 12 month basis, as of the end of each quarterly period in 2009.  When available, financial projections for 2010 will be used to set future EBITDA covenant targets in Marquette’s sole discretion.  With respect to Zynex’s restatement of financial statements for the first three quarters of 2008, Marquette waived any breach of a representation, warranty or covenant concerning the accuracy of the original unaudited financial statements for these quarterly periods.  Notwithstanding such waiver, Marquette expressly reserved any right to declare a default, and any other claim, right or remedy with respect to (a) the restated financial statements for these quarterly periods and (b) any fraud or intentional misrepresentation in connection with the original financial statements for these quarterly periods.  Further, Marquette and we will amend the line of credit to increase the margin to 3.25% and increase the collateral monitoring fee to $1,750 per month. The interest rate for the line of credit is the margin plus the higher of the (i) a floating prime rate; or (ii) the floating LIBOR rate plus 2%.


 
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Limited Liquidity

We have limited liquidity.  Our limited liquidity is primarily a result of (a) the required high levels of consignment inventory that are standard in the electrotherapy industry, (b) the payment of commissions to salespersons based on sales or rentals prior to payments for the corresponding product by insurers, (c) the high level of outstanding accounts receivable because of the deferred payment practices of third-party health payors, (d) the need for improvements to the Company’s internal billing processes and (e) delayed cost recovery inherent in rental transactions. Our growth results in higher cash needs.

Our long-term business plan continues to contemplate growth in revenues and thus to require, among other things, funds for the purchases of equipment, primarily for rental inventory, and the payment of commissions to an increasing number of sales representatives.

The Company’s independent registered public accounting firm have included a going concern emphasis paragraph in their report for the December 31, 2008 consolidated financial statements. See Note 1 to the consolidated financial statements. The plans of Company’s management indicate that, while uncertain, the Company’s projected cash flows from operating activities and borrowing available under the Marquette line of credit will fund our cash requirements for the year ending December 31, 2009.  The availability of the line of credit depends our ongoing compliance with covenants, representations and warranties in the agreement for the line of credit and borrowing base limitations. Although the maximum amount of the line of credit is $3,000,000, the amount available for borrowing under the line of credit is subject to a ceiling based upon eight trailing weeks of collections and other limitations and is thus less than the maximum amount ($2,202,000 maximum as of December 31, 2008). The balance on the line of credit at December 31, 2008 was $1,780,701.

There is no assurance that our operations and available borrowings will provide enough cash for operating requirements or for the additional purchases of equipment.  For this reason or to lower expenses, we may seek to reduce expenses during 2009.  We have no arrangements for any additional external financing of debt or equity, and we are not certain whether any such financing would be available on acceptable terms.  Any additional debt would require the approval of Marquette.

Our limited liquidity and dependence on operating cash flow means that risks involved in our business can significantly affect our liquidity.  Contingencies such as unanticipated shortfalls in revenues or increases in expenses could affect our projected revenue, cash flows from operations and liquidity.

Cash used by operating activities was $715,160 for the year ended December 31, 2008 compared to $745,689 of cash provided by operating activities for the year ended December 31, 2007. The primary reasons for the decrease in cash flow was the increase to accounts receivable and inventory in 2008 compared to 2007, offset by an increase in non-cash expenses including provision for losses on accounts receivable, provisions for payment provider discounts or denials and income taxes payable.

Cash used in investing activities for the year ended December 31, 2008 was $1,400,895 compared to cash used in investing activities of $751,310 for the year ended December 31, 2007. Cash used in investing activities primarily represents the purchase and in-house production of rental products as well as some purchases of capital equipment.

Cash provided by financing activities was $2,116,055 for the year ended December 31, 2008 compared with cash used in financing activities of $259,576 for the year ended December 31, 2007.  The primary financing source of cash in 2008 were from proceeds from borrowings under the Marquette line of credit and the sales of common stock partially offset by payments on notes payable including the notes payable to Silicon Valley Bank.  The primary financing uses of cash in 2007 were payments on notes payable partially offset by proceeds of loans issued to a stockholder.

The following table summarizes the future cash disbursements to which we are contractually committed as of December 31, 2008.


 
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Payments Due by Period:
 
Significant Contractual Obligations
 
Total
   
1 Year
   
2-3 Years
   
4-5 Years
   
5 Years
 
                               
Notes payable
  $ 1,818,059     $ 1,818,059     $ --     $ --     $ --  
Anthem obligation
    606,981       606,981       --       --       --  
Capital lease obligations
    164,961       37,884       75,768       51,309       --  
Operating leases
    150,239       128,377       21,862       --       --  
                                         
Total contractual cash obligations
  $ 2,740,240     $ 2,591,301     $ 97,630     $ 51,309     $ --  
 
In addition to the above contractual obligations, the Company must pay approximately $600,000 of federal income taxes still owed for 2007.  The Company intends to propose a payment plan for these taxes. 
 
In September 2008, the Company entered into a Loan and Security Agreement with Marquette Business Credit, Inc., d/b/a Marquette Healthcare Finance. The Loan Agreement provides Zynex with a revolving credit facility of up to $3,000,000. As of December 31, 2008, the balance on the facility was $1,780,701.  See “Line of Credit” above and Note 7 to the Consolidated Financial Statements.

Effective March 1, 2006 a previously non-interest bearing loan from Thomas Sandgaard, President and Chief Executive Officer, in the amount of $14,980 was converted to a 24 month, 8.25% term loan, with equal monthly payments of principal and interest commencing April 1, 2006.  As of December 31, 2007, this loan had been paid in full.

In 2006 Mr. Sandgaard loaned the Company $146,900, of which $50,000 was converted to a 24 month, 8.25% term loan, with equal monthly payments of principal and interest commencing April 1, 2006. As of December 31, 2008, this loan had been paid in full.  The loans from Mr. Sandgaard were used for working capital purposes.

In May and June 2007, Mr. Sandgaard made 24-month unsecured loans to the Company in the principal amounts of $50,000 and $24,000 for a total amount of $74,000, The loans bear interest at 8.25% per annum and require monthly payments of $2,267, commencing June 2007 and $1,088 commencing July 2007, for a total of $3,355.  As of December 31, 2008, $13,567 and $9,527 remain outstanding. The loans from Mr. Sandgaard were used for working capital purposes and repayment of the Note Payable to Ascendiant Capital Group, LLC.

In September 2007, Mr. Sandgaard made a loan to the Company in the principal amount of $59,500.  The loan bears interest at 8.25% per annum commencing September 30, 2007 and is a demand note.  As of December 31, 2008, $1,760 remains outstanding.  The loan from Mr. Sandgaard was used for working capital purposes.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We monitor our estimates on an on-going basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

We have identified the policies below as critical to our business operations and the understanding of our results of operations.


 
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Revenue Recognition And Allowances For Provider Discounts And Collectability:  The Company recognizes revenue when each of the following four conditions are met: 1) a contract or sales arrangement exists; 2) products have been shipped and title has transferred or rental services have been rendered; 3) the price of the products or services is fixed or determinable; and 4) collectability is reasonably assured. Accordingly, the Company recognizes revenue, both rental and purchase, when products have been dispensed to the patient and the patient’s having insurance has been verified.  For medical products that are sold from inventories consigned at clinic locations, the Company recognizes revenue when it receives notice that the product has been prescribed and dispensed to the patient and the patient’s having insurance has been verified or preauthorization has been obtained from the insurance company, when required.  Revenue from the rental of products is normally on a month-to-month basis and is recognized ratably over the products’ rental period. Products on rental contracts are placed in property and equipment and depreciated over their estimated useful life. All revenue is recognized at amounts estimated to be paid by customers or third-party providers using the Company’s established rates, net of estimated provider discounts.  The Company recognizes revenue from distributors when it ships its products.

A significant portion of the Company’s revenues are derived, and the related receivables are due, from insurance companies or other third-party providers. The nature of these receivables within this industry has typically resulted in long collection cycles. The process of determining what products will be reimbursed by third-party providers and the amounts that they will reimburse is complex and depends on conditions and procedures that vary among providers and may change from time to time. The Company maintains an allowance for provider discounts and records additions to the allowance to account for the risk of nonpayment. Provider discounts result from reimbursements from insurance providers that are less than amounts claimed, where the amount claimed by the Company exceeds the insurance provider's usual, customary and reasonable reimbursement rate, amounts subject to insureds’ deductibles, and when there is a benefit denial. The Company sets the amount of the allowance, and adjusts the allowance at the end of each reporting period, based on a number of factors, including historical rates of collection, trends in the historical rates of collection and current relationships and experience with insurance companies or other third-party providers. If the rates of collection of past-due receivables recorded for previous fiscal periods changes, or if there is a trend in the rates of collection on those receivables, the Company may be required to change the rate at which they provide for additions to the allowance. A change in the rates of the Company’s collections can result from a number of factors, including turnover in personnel, changes in the reimbursement policies or practices of providers, or changes in industry rates of reimbursement. Accordingly, the provision for provider discounts recorded in the income statement as a reduction of revenue has fluctuated and may continue to fluctuate significantly from quarter to quarter. Such allowances have increased as third-party providers have delayed payments and restricted amounts to be reimbursed for products provided by the Company.

Due to the nature of the industry and the reimbursement environment in which the Company operates, estimates are required to record net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of third-party billing arrangements and the uncertainty of reimbursement amounts for certain products or services from providers may result in adjustments to amounts originally recorded. Due to continuing changes in the health care industry and third-party reimbursement, it is possible that management’s estimates could change in the near term, which could have an impact on results of operations and cash flows. Any differences between estimated settlements and final determinations are reflected as a reduction to revenue in the period known.

In addition to the allowance for provider discounts, the Company provides for uncollectible accounts receivable. These uncollectible accounts receivable are a result of non-payment from patients who have been direct billed for co-payments or deductibles; lack of appropriate insurance coverage; and disallowances of charges by third-party providers. The reserve is based on historical trends, current relationships with providers, and internal process improvements. If there were a change to a material insurance provider contract or policies or application of them by a provider, a decline in the economic condition of providers, or a significant turnover of Company personnel, the current level of the reserve for uncollectible accounts receivable may not be adequate and may result in an increase of these levels in the future.

Share-based Compensation:  In December 2004, the FASB issued SFAS No. 123 (R) Share-Based Payment, which addresses the accounting for share-based payment transactions. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, and generally requires instead that such transactions be accounted and recognized in the statement of income based on their fair value. SFAS No. 123 (R) was effective and adopted by the Company as of January 1, 2006.

 
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Transactions in which the Company issues stock-based compensation for goods or services received from non-employees are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is the more reliably measurable. The Company often utilizes pricing models in determining the fair values of options and warrants issued as stock-based compensations to non-employees. These pricing models utilize the market price of the Company’s common stock and the exercise price of the option or warrant, as well as time value and volatility factors underlying the positions.

Income Taxes:

Income taxes are computed using the liability method. The provision for income taxes includes taxes payable or refundable for the current period and the deferred income tax consequences of transactions that have been recognized in the Company's financial statements or income tax returns. The carrying value of deferred income taxes is determined based on an evaluation of whether the Company is more likely than not to realize the assets. Temporary differences result primarily from basis differences in property and equipment and net operating loss carry forwards. The valuation allowance is reviewed periodically to determine the amount of deferred tax asset considered realizable.

Based on management’s assessment of Financial Interpretation Number (FIN) 48, it was concluded that the adoption of FIN 48, as of January 1, 2007, had no significant impact on the Company’s results of operations or financial position, and required no adjustments to the opening balance sheet accounts.  The year-end analysis supports the same conclusion, and the Company does not have an accrual for uncertain tax positions as of December 31, 2008.  The Company recognized income tax related interest and penalties assessed on 2007 income taxes recorded and charged approximately $27,000 in interest and penalties to income tax expense.  It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date.  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 the Company’s tax returns from 2005 through the current period.
 
RESTATEMENT OF QUARTERLY FINANCIAL RESULTS

The Board of Directors and Audit Committee have concluded that our unaudited financial statements for the quarters ended March 31, 2008, June 30, 2008 and September 30, 2008, included in its quarterly reports, should be revised to reflect adjustments to the allowance for provider discounts, accounts receivable and net revenue for such periods.  These quarterly adjustments were determined after an evaluation of adjustments identified in connection with the 2008 year-end closing and the audit of the 2008 financial statements.  See Note 13 to the Consolidated Financial Statements in this Report.

The adjustments identified in connection with the year-end closing and 2008 year-end audit result in a decrease in net accounts receivable and related net revenues of approximately $5.1 million as of and for the year ended December 31, 2008. A substantial part of these adjustments applies to the first three quarters of 2008. These adjustments are based on a re-evaluation of the estimated allowance for provider discounts that management believes should have been utilized in 2008. The change in the provider discount rates is based on management’s analysis of business conditions, recent rates of collection and additional methodologies that the Company applied in estimating these rates at year end, which management believes are more accurate than previously applied rates during the quarterly periods in 2008. Zynex’s allowance for provider discounts is recorded to account for the risk of non-payment arising from reimbursements from insurance providers that are less than amounts claimed, amounts subject to patients’ deductibles and benefit denials.

The following is managements discussion and analysis of financial results and unaudited restated financial statements for the quarters ended March 31, 2008, June 30, 2008 and September 30, 2008

Quarter Ended March 31, 2008 – Results of Operations:
Net Rental Revenue. Net rental revenue for the three months ended March 31, 2008, was $1,792,263 an increase of $989,201 or 123% compared to $803,062 for the three months ended March 31, 2007. The increase in net rental revenue for the three months ended March 31, 2008 was due primarily to an increase in prescriptions (orders) for rentals of the Company’s electrotherapy products. Other reasons for the increase in net rental revenue are indicated in “Net Sales and Rental Revenue” below. Net rental revenue was also significantly impacted by increased reserves as mentioned above.

 
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Net rental revenue for the three months ended March 31, 2008 made up 69% of net sales and rental revenue compared to 60% for the three months ended March 31, 2007. The increase in the percentage of total net sales and rental revenue from rental revenue was due primarily to increased orders for rentals of products compared to orders for sales of products and, once rented, continuation of rental revenue while the products are used or until sold.

Our products may be rented on a monthly basis or purchased. Renters and purchasers are primarily patients and healthcare providers; there are also purchases by dealers. If the patient is covered by health insurance, the third-party payer typically determines whether the patient will rent or purchase a unit depending on the anticipated time period for its use. If contractually arranged, a rental continues until an amount equal to the purchase price is paid when we transfer ownership of the product to the patient and cease rental charges.

Net Sales Revenue. Net sales revenue for the three months ended March 31, 2008, was $796,458, an increase of $262,789 or 49% compared to $533,669 for the three months ended March 31, 2007. The increase in net sales revenue for the three months ended March 31, 2008, compared to the three months ended March 31, 2007 was due primarily to more products in use generating sales of consumable supplies to users of the Company’s products as well as higher levels of products sold. The majority of net sales revenue is derived from surface electrodes sent to existing patients each month and other consumable supplies for our products. Other reasons for the increase in net sales revenue are indicated in “Net Sales and Rental Revenue” below.  Net sales revenue was also significantly impacted by increased reserves as mentioned above.

Net sales revenue for the three months ended March 31, 2008 made up 31% of net sales and rental revenue compared to 40% for the three months ended March 31, 2007. The decrease in the percentage of total net sales and rental revenue was due primarily to increased orders for rentals of products compared to orders for purchases of products.

Net Sales and Rental Revenue. Net sales and rental revenue for the three months ended March 31, 2008, was $2,588,720, an increase of $1,251,989 or 94% compared to $1,336,731 for the three months ended March 31, 2007. The increase in net sales and rental revenue for three months ended March 31, 2008, compared to the three months ended March 31, 2007 was due primarily to an increase in prescriptions (orders) for rentals and purchases of the Company’s electrotherapy products. The increase resulted from the expansion of the sales force in 2007 and 2008, greater awareness of the Company's products by end users and physicians resulting from marketing investments in 2007 and 2006; growing market penetration; and increased rental revenue from the greater number of Zynex products placed in use during prior periods.  The increase in net revenue rental was offset by the increase in allowances applied against gross revenues also mentioned above and inefficient processes at our billing and collection departments.  The increase in allowances reflect reduced collections expectations because of higher levels of claim denials by medical insurers and the need to improve the processes in our billing and collection department.

Gross Profit. Gross profit for the three months ended March 31, 2008, was $2,132,006 or 82% of net revenue. For three months ended March 31, 2008, this represents an increase of $913,955 or 75% from the gross profit of $1,218,051 or 91% of net revenue for the three months ended March 31, 2007. The increase in gross profit for the three months ended March 31, 2008 as compared with the same period in 2007 is primarily because revenue increased from the prior period. The decrease in gross profit percentage for the three months ended March 31, 2008 as compared with the same period in 2007 is primarily from the increased reserves as described above.
 
Selling, General and Administrative. Selling, general and administrative expenses for the three months ended March 31, 2008 were $1,556,267 an increase of $777,680 or 100% compared to $778,587 for the same period in 2007.  The increase was primarily due to increases in sales representative commissions, payroll, public company expenses, legal expenses, accounting services and office expenses.  The increases were in part offset by lower advertising, marketing and promotion costs, and temporary services.  .

Interest and other income or expense.  Interest and other income or expense for the three months ended March 31, 2008 were $15,056 of expense, compared to $122,083 of expense for the same period in 2007. The decrease resulted primarily from the Company's repayment of the note issued to Ascendiant Capital in June of 2007, and the Company’s repayment of the loans payable to Silicon Valley Bank in February 2008.


 
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Income tax expense.  We reported expenses for income taxes in the amount of $330,000 for the three months ended March 31, 2008 compared to $85,700 of expense for the same period in 2007.  This is primarily due to our having higher income before taxes of $560,683 for the three months ended March 31, 2008 compared to income before taxes of $317,381 for the same period in 2007.

The following is the unaudited, restated statement of operations for the 3 months ended March 31, 2008:

   
Unaudited
 
   
For the 3 months ended:
 
   
31-Mar-08
   
adjustment
   
31-Mar-08
   
31-Mar-07
 
   
restated
         
as filed
       
                         
Net rental revenue
  $ 1,792,263       (797,783 )   $ 2,590,046     $ 803,062  
Net sales revenue
    796,458       (354,524 )     1,150,982       533,669  
Net rental and sales revenue
    2,588,720               3,741,028       1,336,731  
                                 
Cost of rentals
    103,019               103,019       25,648  
Cost of sales
    353,695               353,695       93,032  
Cost of rentals and sales
    456,714               456,714       118,680  
                                 
Gross profit
    2,132,006               3,284,314       1,218,051  
                                 
                                 
Selling, general and administrative
    1,556,267               1,556,267       778,587  
                                 
Income from operations
    575,739               1,728,047       439,464  
                                 
Other income (expense):
                               
Interest income
    861               861       -  
Interest expense
    (15,917 )             (15,917 )     (122,083 )
(Loss) gain on disposal of equipment
    -               -       -  
                                 
      560,683               1,712,991       317,381  
                                 
Income tax expense
    330,000       (190,000 )     520,000       85,700  
                                 
Net income
  $ 230,683             $ 1,192,991     $ 231,681  
                                 
Net income per common and
                               
common equivalent share:
                               
Basic
  $ 0.01             $ 0.04     $ 0.01  
                                 
Diluted
  $ 0.01             $ 0.04     $ 0.01  
                                 
                                 
Weighted average number of
                               
 shares outstanding
                               
Basic
    27,717,457               27,717,457       26,310,911  
                                 
Diluted
    29,332,966               29,332,966       27,399,773  


 
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The following is the unaudited, restated balance sheet as of March 31, 2008:

   
unaudited
 
   
As of
   
As of
 
   
31-Mar-08
   
31-Mar-08
 
   
restated
   
as filed
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 45,287     $ 45,287  
Accounts receivable, net of allowance for provider
               
   discounts and collectibility
    4,932,389       6,084,697  
Inventory
    1,125,039       1,125,039  
Deferred financing fees
    -       -  
Prepaid expenses
    22,054       22,054  
Deferred tax asset
    290,000       290,000  
Other current assets
    52,791       52,791  
                 
Total current assets
    6,467,560       7,619,868  
                 
Property and equipment, less accumulated
               
  depreciation
    1,006,783       1,006,783  
Deferred financing fees
    21,286       21,286  
                 
    $ 7,495,629     $ 8,647,937  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities:
               
Bank overdraft
  $ -     $ -  
Notes payable
    18,126       18,126  
Loan from stockholder
    114,204       114,204  
Capital lease
    17,650       17,650  
Accounts payable
    869,343       869,343  
Income taxes payable
    945,000       1,135,000  
Accrued payroll and payroll taxes
    206,447       206,447  
Other accrued liabilities
    713,689       713,689  
                 
Total current liabilities
    2,884,459       3,074,459  
                 
Loan from stockholder, less current maturities
    11,401       11,401  
Notes payable, less current maturities
    2,520       2,520  
Capital lease, less current maturities
    4,652       4,652  
Long-term deferred tax liability
    115,000       115,000  
                 
Total liabilities
    3,018,032       3,208,032  
                 
Stockholders' Equity:
               
Preferred Stock; $.001 par value, 10,000,000 shares
               
  authorized, no shares issued or outstanding
    -       -  
Common Stock, $.001 par value, 100,000,000 shares
               
  authorized.
    28,943       28,943  
Paid-in capital
    3,261,337       3,261,337  
Retained earnings
    1,187,317       2,149,625  
                 
Total stockholders' equity
    4,477,597       5,439,905  
                 
    $ 7,495,629     $ 8,647,937  


 
- 30 -

 

The following is the unaudited, restated statement of cash flows for the 3 months ended March 31, 2008:

   
Unaudited
 
             
   
Three Months Ended:
 
   
31-Mar-08
   
31-Mar-08
 
   
restated
   
as filed
 
             
Cash flows from operating activities:
           
Net income
  $ 230,683     $ 1,192,991  
Adjustments to reconcile net income to net cash provided by
               
  operating activities:
               
Depreciation
    71,643       71,643  
Provision for losses in accounts receivable (uncollectability)
    -       -  
Provision for provider discounts
    3,283,758       2,131,450  
Amortization of deferred consulting and financing fees
    5,525       5,525  
Issuance of common stock and warrants for services,
               
  interest, loan fees and employee incentive
    -       -  
Provision for obsolete inventory
    12,000       12,000  
Amortization of discount on note payable
    -       -  
Amortization of beneficial conversion feature
    -       -  
Gain on disposal of equipment
    -       -  
Employee stock based compensation expense
    9,892       9,892  
Deferred tax benefit
    (55,000 )     (55,000 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (3,740,215 )     (3,740,215 )
Inventory
    (199,345 )     (199,345 )
Deferred financing fees, current
    -       -  
Prepaid expenses
    12,741       12,741  
Deferred financing fees, non-current
    -       -  
Other current assets
    (5,076 )     (5,076 )
Deposits and other assets
    -       -  
Accounts payable
    51,914       51,914  
Accrued liabilities
    207,490       207,490  
Income taxes payable
    35,000       225,000  
                 
Net cash provided by operating activities
    (78,990 )     (78,990 )
                 
Cash flows from investing activities:
               
Proceeds from disposal of equipment
    -       -  
Purchases of equipment
    (146,202 )     (146,202 )
                 
Net cash used in investing activities
    (146,202 )     (146,202 )
                 
Cash flows from financing activities:
               
Increase in bank overdraft
    (89,347 )     (89,347 )
Payments on notes payable and capital lease
    (246,478 )     (246,478 )
Proceeds from loans from stockholder
    (13,178 )     (13,178 )
Proceeds from loans and capital lease
    -       -  
Repayments of loans from stockholder
    -       -  
Issuance of common stock for cash, net
    619,482       619,482  
                 
Net cash (used in) provided by financing activities
    270,479       270,479  
                 
Net (decrease) increase in cash and cash equivalents
    45,287       45,287  
                 
Cash and cash equivalents at beginning of period
    -       -  
                 
Cash and cash equivalents at end of period
  $ 45,287     $ 45,287  
                 
Supplemental cash flow information:
               
Interest paid
  $ 5,991     $ 5,991  
Income taxes paid
  $ 350,000     $ 350,000  
 
 
 
- 31 -

 

Quarter Ended June 30, 2008 – Results of Operations:
Net Rental Revenue. Net rental revenue for the three and six months ended June 30, 2008, was $2,100,705 and $3,892,967 an increase of $1,135,641 and $2,124,841or 118% and 120% compared to $965,064 and $1,768,126 for the three and six months ended June 30, 2007. The increase in net rental revenue for the three and six months ended June 30, 2008 was due primarily to an increase in prescriptions (orders) for rentals of the Company’s electrotherapy products. Other reasons for the increase in net rental revenue are indicated in “Net Sales and Rental Revenue” below. Net rental revenue was also significantly impacted by increased reserves as mentioned above.

Net rental revenue for the three and six months ended June 30, 2008 made up 69% and 69% of net sales and rental revenue compared to 64% and 62% for the three and six months ended June 30, 2007. The increase in the percentage of total net sales and rental revenue from rental revenue during the first six months of 2008 was due primarily to increased orders for rentals of products compared to orders for sales of products and, once rented, continuation of rental revenue while the products are used or until sold.

Our products may be rented on a monthly basis or purchased. Renters and purchasers are primarily patients and healthcare providers; there are also purchases by dealers. If the patient is covered by health insurance, the third-party payer typically determines whether the patient will rent or purchase a unit depending on the anticipated time period for its use. If contractually arranged, a rental continues until an amount equal to the purchase price is paid when we transfer ownership of the product to the patient and cease rental charges.

Net Sales Revenue. Net sales revenue for the three and six months ended June 30, 2008, were $939,755 and  $1,736,212 an increase of $399,612 and $662,400 or 74% and 62% compared to $540,143 and $1,073,812 for the three and six months ended June 30, 2007. The increase in net sales revenue for the three and six months ended June 30, 2008, compared to the three and six months ended June 30, 2007 was due primarily to more products in use generating sales of consumable supplies to users of the Company’s products as well as higher levels of products sold. The majority of net sales revenue is derived from surface electrodes sent to existing patients each month and other consumable supplies for our products. Other reasons for the increase in net sales revenue are indicated in “Net Sales and Rental Revenue” below. Net sales revenue was also significantly impacted by increased reserves as mentioned above.

Net sales revenue for the three and six months ended June 30, 2008 made up 31% and 31% of net sales and rental revenue compared to 36% and 38% for the three and six months ended June 30, 2007. The decrease in the percentage of total net sales and rental revenue during the first six months of 2008 was due primarily to increased orders for rentals of products compared to orders for purchases of products.

Net Sales and Rental Revenue. Net sales and rental revenue for the three and six months ended June 30, 2008, were $3,040,460 and  $5,629,180 an increase of $1,535,253 and $2,787,242 or 102% and 98% compared to $1,505,207 and $2,841,938 for the three and six months ended June 30, 2007. The increase in net sales and rental revenue for the three and six months ended June 30, 2008, compared to the three and six months ended June 30, 2007 was due primarily to an increase in prescriptions (orders) for rentals and purchases of the Company’s electrotherapy products. The increase resulted from the expansion of the sales force in 2007 and 2008, greater awareness of the Company's products by end users and physicians resulting from marketing investments in 2007 and 2006; growing market penetration; and increased rental revenue from the greater number of Zynex products placed in use during prior periods.  The increase in net revenue rental was offset by the increase in allowances applied against gross revenues also mentioned above and inefficient processes at our billing and collection departments.  The increase in allowances reflect reduced collections expectations because of higher levels of claim denials by medical insurers and the need to improve the processes in our billing and collection department.

Gross Profit. Gross profit for the three and six months ended June 30, 2008, was $2,762,248 and $4,894,254 or 91% and 87 % of net sales and rental revenue. For three and six months ended June 30, 2008, this represents an increase of $1,456,745 and $2,370,700 or 112% and 94% from the gross profit of $1,305,503 or 87% and $2,523,554 or 89% of net sales and rental revenue for the three and six months ended June 30, 2007. The increase in gross profit for the three and six months ended June 30, 2008 as compared with the same periods in 2007 is primarily because revenue increased from the prior periods. The increase in gross profit percentage for the three months ended June 30, 2008 as compared with the same periods in 2007 is primarily from the increased percentage of net rental revenue, which has a higher gross profit percentage, due to cost of product being depreciated over its useful life. The decrease in gross profit percentage for the six months ended June 30, 2008 as compared with the same periods in 2007 is primarily from increased reserves as mentioned above.

 
- 32 -

 

Selling, General and Administrative. Selling, general and administrative expenses for the t three and six months ended June 30, 2008 were $2,076,900 and $3,633,167 an increase of $1,351,798 and $2,129,478 or 186% and 142%, compared to $725,102 and $1,503,689 for the same periods in 2007.  The increase was primarily due to increases in sales representative commissions, payroll, public company expenses, legal expenses, accounting services and office expenses.  The increases were in part offset by lower marketing and promotion costs, and temporary services.

Interest and other income or expense.  Interest and other income or expense for the three and six months ended June 30, 2008 were $19,689 of income and $4,633 of income, compared to $98,553 of expense and $220,636 of expense for the same periods in 2007. The decrease in interest expense resulted primarily from the Company's repayment in 2007 of the note issued to Ascendiant Capital in June of 2007, and the Company’s repayment of the loans payable to Silicon Valley Bank in February 2008. The Company also recorded other income of $27,201 in the quarter ended June 30, 2008 resulting from the disposal of leased equipment which had been treated as a capital lease.

Income tax expense.  We reported expenses for income taxes in the amount of $416,000 and $746,000 for the three and six months ended June 30, 2008 compared to $130,300 and $216,000 of expense for the same periods in 2007.  This is primarily due to our having higher income before taxes of $1,265,720 for the six months ended June 30, 2008 compared to income before taxes of $799,229 for the same period in 2007.


 
- 33 -

 

The following is the unaudited, restated statement of operations for the 3 months ended June 30, 2008:

   
Unaudited
 
   
For the 3 months ended:
 
   
30-Jun-08
   
adjustment
   
30-Jun-08
   
30-Jun-07
 
   
restated
         
as filed
       
                         
Net rental revenue
  $ 2,100,705       (1,386,791 )   $ 3,487,496     $ 965,064  
Net sales revenue
    939,755       (620,384 )     1,560,139       540,143  
Net rental and sales revenue
    3,040,460               5,047,635       1,505,207  
                                 
Cost of rentals
    113,209               113,209       68,155  
Cost of sales
    165,003               165,003       131,549  
Cost of rentals and sales
    278,212               278,212       199,704  
                                 
Gross profit
    2,762,248               4,769,423       1,305,503  
                                 
Selling, general and administrative
    2,076,900               2,076,900       725,102  
                                 
Income from operations
    685,348               2,692,523       580,401  
                                 
Other income (expense):
                               
Interest income
    210               210       -  
Interest expense
    (7,722 )             (7,722 )     (98,553 )
(Loss) gain on disposal of equipment
    27,201               27,201       -  
                                 
      705,037               2,712,212       481,848  
                                 
Income tax expense
    416,000       (444,000 )     860,000       130,300  
                                 
Net income
  $ 289,037             $ 1,852,212     $ 351,548  
                                 
Net income per common and
                               
common equivalent share:
                               
Basic
  $ 0.01             $ 0.06     $ 0.01  
                                 
Diluted
  $ 0.01             $ 0.06     $ 0.01  
                                 
                                 
Weighted average number of
                               
 shares outstanding
                               
Basic
    29,132,219               29,132,219       26,427,002  
                                 
Diluted
    30,277,702               30,277,702       27,823,336  


 
 
- 34 -

 

The following is the unaudited, restated statement of operations for the 6 months ended June 30, 2008:

   
Unaudited
 
   
For the 6 months ended:
 
   
30-Jun-08
   
adjustment
   
30-Jun-08
   
30-Jun-07
 
   
restated
         
as filed
   
as filed
 
                         
Net rental revenue
  $ 3,892,967       (2,184,575 )   $ 6,077,542     $ 1,768,126  
Net sales revenue
    1,736,212       (974,909 )     2,711,121       1,073,812  
Net rental and sales revenue
    5,629,180               8,788,663       2,841,938  
                                 
Cost of rentals
    216,228               216,228       93,803  
Cost of sales
    518,698               518,698       224,581  
Cost of rentals and sales
    734,926               734,926       318,384  
                                 
Gross profit
    4,894,254               8,053,737       2,523,554  
                                 
Selling, general and administrative
    3,633,167               3,633,167       1,503,689  
                                 
Income from operations
    1,261,087               4,420,570       1,019,865  
                                 
Other income (expense):
                               
Interest income
    1,071               1,071       -  
Interest expense
    (23,639 )             (23,639 )     (220,636 )
(Loss) gain on disposal of equipment
    27,201               27,201       -  
                                 
      1,265,720               4,425,203       799,229  
                                 
Income tax expense
    746,000       (634,000 )     1,380,000       216,000  
                                 
Net income
  $ 519,720             $ 3,045,203     $ 583,229  
                                 
Net income per common and
                               
common equivalent share:
                               
Basic
  $ 0.02             $ 0.11     $ 0.02  
                                 
Diluted
  $ 0.02             $ 0.10     $ 0.02  
                                 
                                 
Weighted average number of
                               
 shares outstanding
                               
Basic
    28,424,838               28,424,838       26,369,277  
                                 
Diluted
    29,976,696               29,976,696       27,250,434  



 
- 35 -

 

The following is the unaudited, restated balance sheet as of June 30, 2008:

   
unaudited
 
   
As of
   
As of
 
   
30-Jun-08
   
30-Jun-08
 
   
restated
   
as filed
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 189,620     $ 189,620  
Accounts receivable, net of allowance for provider
               
   discounts and collectibility
    4,791,463       7,950,946  
Inventory
    1,482,452       1,482,452  
Deferred financing fees
    -       -  
Prepaid expenses
    68,189       68,189  
Deferred tax asset
    390,000       390,000  
Other current assets
    57,600       57,600  
                 
Total current assets
    6,979,324       10,138,807  
                 
Property and equipment, less accumulated
               
  depreciation
    1,299,366       1,299,366  
Deferred financing fees
    21,286       21,286  
                 
    $ 8,299,976     $ 11,459,459  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities:
               
Bank overdraft
  $ -     $ -  
Notes payable
    14,750       14,750  
Loan from stockholder
    106,248       106,248  
Capital lease
    25,558       25,558  
Accounts payable
    965,352       965,352  
Income taxes payable
    1,351,000       1,985,000  
Accrued payroll and payroll taxes
    286,262       286,262  
Other accrued liabilities
    666,747       666,747