zynex10q33110_5132010.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON , D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: March 31, 2010

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

For the transition period from ______ to ______

Commission file number 33-26787-D

Zynex, Inc.

(Exact name of registrant as specified in its charter)

NEVADA		90-0214497
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

9990 PARK MEADOWS DR LONE TREE, COLORADO	80124
(Address of principal executive offices)	(Zip Code)

(303) 703-4906

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No []

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [] No []

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. (Check One):


Large accelerated filer []	Accelerated filer []	Non-accelerated filer []	Smaller reporting company [X]
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [] No [X]

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

Class		Shares Outstanding as of May 10, 2010
Common Stock, par value $0.001		30,497,804

ZYNEX, INC. AND SUBSIDIARY

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements	Page

Condensed Consolidated Balance Sheets as of March 31, 2010 (unaudited)
and December 31, 2009	3

Unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 2010 and 2009	4

Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the
three months ended March 31, 2010	5

Unaudited Condensed Consolidated Statements of Cash Flows for the three	6
months ended March 31, 2010 and 2009

Unaudited Notes to Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations	15

Item 3. Quantitative and Qualitative Disclosures About Market Risk	20

Item 4T. Controls and Procedures	20


PART II - OTHER INFORMATION

Item 1. Legal Proceedings	20

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 6. Exhibits	21

Signatures	22

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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZYNEX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
	March 31,		December 31,
	2010		2009
	(UNAUDITED)
ASSETS
Current Assets:
Cash	$	1,064,035	$	862,645
Accounts receivable, net		5,860,311		5,039,023
Inventory		2,490,804		2,033,790
Prepaid expenses		32,124		139,475
Deferred tax asset		1,001,000		864,000
Other current assets		86,844		76,852

Total current assets		10,535,118		9,015,785

Property and equipment, net		2,853,569		2,717,924
Deposits		166,250		166,250
Deferred financing fees, net		84,944		30,000

	$	13,639,881	$	11,929,959

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit	$	995,503	$	-
Current portion of notes payable and other obligations		198,746		95,216
Accounts payable		1,132,426		1,126,543
Income taxes payable		1,083,000		905,343
Accrued payroll and payroll taxes		390,757		425,902
Other accrued liabilities		849,825		787,926

Total current liabilities		4,650,257		3,340,930

Notes payable and other obligations, less current portion		182,473		20,070
Deferred rent liability		825,907		543,663
Deferred tax liability		501,000		539,000

Total liabilities		6,159,637		4,443,663

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,
30,497,318 at March 31, 2010 and December 31, 2009		30,497		30,497
Paid-in capital		4,417,414		4,356,878
Retained earnings		3,032,333		3,098,921

Total stockholders' equity		7,480,244		7,486,296

	$	13,639,881	$	11,929,959

See accompanying notes to unaudited financial statements

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ZYNEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
	Three Months Ended
	March 31,
	2010			2009
Net revenue:
Rental	$	2,271,072		$	2,649,870
Sales		2,604,325			1,582,464
		4,875,397			4,232,334

Cost of revenue:
Rental		275,289			234,637
Sales		720,504			248,024
		995,793			482,661

Gross profit		3,879,604			3,749,673


Selling, general and administrative expense		3,847,002			2,413,805

Income from operations		32,602			1,335,868

Other income (expense):
Interest income		404			1,061
Interest expense and loss on extinguishment
of debt		(79,027	)		(34,261	)
Other expense		(17,567	)		(1,074	)
Gain on value of derivative liability		-			130,198
		(96,190	)		95,924

(Loss) income before tax		(63,588	)		1,431,792

Income tax expense		(3,000	)		(481,000	)

Net (loss) income	$	(66,588	)	$	950,792


Net income per share:
Basic	$		*	$	0.03

Diluted	$		*	$	0.03

* Less than ($0.01) per share

Weighted average number of common
shares outstanding:
Basic		30,497,318			29,907,708

Diluted		30,497,318			30,489,129

See accompanying notes to unaudited financial statements

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ZYNEX, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2010
(UNAUDITED)

	Number		Common		Paid in		Retained			Total
	of Shares		Stock		Capital		Earnings			Total

January 1, 2010		30,497,318	$	30,497	$	4,356,878	$	3,098,921		$	7,486,296


Employee stock option expense		-		-		60,536		-			60,536

Net loss, three months ended March 31, 2010		-		-		-		(66,588	)		(66,588	)

March 31, 2010		30,497,318	$	30,497	$	4,417,414	$	3,032,333		$	7,480,244

See accompanying notes to unaudited financial statements

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ZYNEX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
	Three Months Ended
	March 31,
	2010			2009
Cash flows from operating activities:
Net (loss) income	$	(66,588	)	$	950,792
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation expense		200,709			154,124
Provision for provider discounts		16,440,947			11,708,313
Provision for losses in accounts receivable (uncollectibility)		962,020			722,302
Amortization of financing fees		10,856			4,342
Gain on value of derivative liability		-			(130,198	)
Provision for obsolete inventory		15,726			90,000
Deferred rent expense		282,244			-
Loss on lease termination		45,605
Gain on disposal of equipment		(27,839	)		-
Employee stock based compensation expense		60,536			31,244
Deferred tax benefit		(175,000	)		12,000
Changes in operating assets and liabilities:
Accounts receivable		(18,224,255	)		(13,436,828	)
Inventory		(472,740	)		(7,985	)
Prepaid expenses		107,351			9,424
Other current assets		(20,848	)		4,194
Accounts payable		5,883			525,432
Accrued liabilities		26,754			(147,101	)
Income taxes payable		177,657			469,000

Net cash (used in) provided by operating activities		(650,982	)		959,055

Cash flows from investing activities:
Proceeds received in lease termination		108,000			-
Purchases of equipment		(189,693	)		(382,510	)

Net cash used in investing activities		(81,693	)		(382,510	)

Cash flows from financing activities:
Decrease in bank overdraft		-			(86,391	)
Net borrowings from (payments on) line of credit		995,503			(511,885	)
Deferred financing fees		(54,944	)		-
Payments on notes payable and capital leases		(6,494	)		-
Repayments of loans from stockholder		-			(10,269	)
Issuance of common stock		-			32,000

Net cash provided by (used in) financing activities		934,065			(576,545	)

Net increase in cash		201,390			-
Cash at beginning of period		862,645			-
Cash at end of period	$	1,064,035		$	-

Supplemental cash flow information:
Interest paid	$	8,072		$	31,051

Supplemental disclosure of non-cash investing and financing activities:
Equipment acquired through capital lease	$	226,822		$	-

See accompanying notes to unaudited financial statements

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ZYNEX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2010

(1) UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements included herein have been prepared by Zynex, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited consolidated financial statements as filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Amounts as of December 31, 2009 are derived from those audited consolidated financial statements.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31, 2010 and the results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year.

(2) SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of Zynex, Inc. and its wholly-owned subsidiary, Zynex Medical, Inc. All intercompany balances and transactions have been eliminated in consolidation. In April 2010, Zynex, Inc. formed two wholly owned subsidiaries, Zynex Monitoring Solutions Inc. and Zynex NeuroDiagnostic Inc. These two new subsidiaries had no significant operations to date.

USE OF ESTIMATES

Preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from those estimates. The most significant management estimates used in the preparation of the accompanying consolidated financial statements are associated with the allowance for provider discounts and uncollectible accounts receivable, the reserve for obsolete and damaged inventory, share-based compensation and income taxes.

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REVENUE RECOGNITION, AND ALLOWANCES FOR PROVIDER DISCOUNTS AND COLLECTIBILITY

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) collectibility is reasonably assured. Accordingly, the Company recognizes revenue, both rental and sales, 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 for certain matters, 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 fulfilling an order and title has transferred.

A significant portion of the Company’s revenues are derived, and the related receivables are due, from insurance companies or other third party payors. 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 or other third party payors that are less than amounts claimed, where the amount claimed by the Company exceeds the insurance or other payor’s usual, customary and reasonable reimbursement rate, amounts subject to insureds’ deductibles, and when there is a benefit denial. The Company determines 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, the aging of the receivables, trends in the historical rates of collection and current relationships and experience with insurance companies or other third party payors. 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 it provides for additions to the allowance. A change in the rates of the Company’s collections can result from a number of factors, including experience and training of billing personnel, changes in the reimbursement policies or practices of payors, 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.

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 payors 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.

Due to the seasonal nature of the Company’s business, the net revenue and results of operations for the three month periods ended March 31, 2010 and March 31, 2009 are not indicative of the operating results that may be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes thereto, included in the Company’s 2009 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission

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At March 31, 2010 and December 31, 2009, the allowance for provider discounts and uncollectible accounts are as follows:

	March 31, 2010		December 31, 2009

Allowance for provider discounts	$	29,195,174	$	26,511,415
Allowance for uncollectible accounts receivable		1,588,000		1,435,000

	$	30,783,174	$	27,946,415

Changes in the allowance for provider discounts and uncollectible accounts receivable for the three months ended March 31, 2010 and 2009 are as follows:

	Three months ended March 31,
	2010			2009

Balances, beginning	$	27,946,415		$	13,747,123
Additions debited to net sales and rental revenue		17,402,967			12,430,615
Write-offs credited to accounts receivable		(14,566,208	)		(6,113,018	)
	$	30,783,174		$	20,064,720

FAIR VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK

The Company's financial instruments at March 31, 2010, include accounts receivable and payable and the line of credit balance; for which current carrying amounts approximate fair value due to their short term nature. At March 31, 2010 and December 31, 2009, the Company has no financial assets or liabilities subject to recurring fair value measurement.

INVENTORY

Inventories are valued at the lower of cost (average) or market. Finished goods include products held at different locations by health care providers or other third parties for rental or sale to patients.

The Company monitors inventory for turnover and obsolescence, and records losses for excess and obsolete inventory as appropriate. At March 31, 2010, the Company had a reserve for obsolete and damaged inventory of approximately $613,000 and a reserve of approximately $597,000 at December 31, 2009.

PROPERTY AND EQUIPMENT

Property and equipment as of March 31, 2010 and December 31, 2009 are as follows:

	March 31, 2010			December 31, 2009			Useful lives

Office furniture and equipment	$	783,044		$	563,075		3-7 years
Rental inventory		3,236,783			3,170,228		5 years
Vehicles		59,833			59,833		5 years
Leasehold improvements		369,935			369,935		2-6 years
Assembly equipment		10,690			10,690		7 years
		4,460,285			4,173,761
Less accumulated depreciation		(1,606,716	)		(1,455,837	)
	$	2,853,569		$	2,717,924

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(3) EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding and the number of dilutive potential common share equivalents during the period, calculated using the if-converted and treasury-stock methods.

The calculation of basic and diluted earnings per share for the three months ended March 31, 2010 and 2009 is as follows:

	Three months ended March 31,
	2010			2009
Basic:
Net (loss) income	$	(66,588	)	$	950,972
Weighted average shares outstanding - basic		30,497,318			29,907,708
Net income per share - basic	$	--		$	0.03


Diluted:
Net income	$	(66,588	)	$	950,972

Weighted average shares outstanding - basic		30,497,318			29.907,708
Dilutive securities		--			581,421
Weighted average shares outstanding - diluted		30,497,318			30,489,129
Net (loss) income per share - diluted	$	--		$	0.03

The effects of potential common stock equivalents have not been included in the computation of diluted net loss per share for the three months ended March 31, 2010 as their effect is anti-dilutive.

Certain potentially dilutive common shares were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive as the options' exercise prices exceeded the average market price. The actual effect of these shares, if any, on the diluted earnings per share calculation may vary significantly depending on fluctuations in the stock price.

Anti-dilutive shares as of March 31, 2010 and March 31, 2009, are as follows:

	2010		2009

2005 Stock Option Plan		1,595,898		2,042,071
Warrants		-		-

(4) STOCK-BASED COMPENSATION PLANS

The Company has a 2005 Stock Option Plan (the "Option Plan") and has reserved 3,000,000 shares of common stock for issuance under the Option Plan. Vesting provisions are determined by the Board of Directors. All stock options under the Option Plan expire no later than ten years from the date of grant.

For the three months ended March 31, 2010 and 2009, the Company recorded compensation expense related to stock options of $60,536 and $31,244, respectively. The stock compensation expense was included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

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The Company uses the Black-Scholes pricing model to calculate fair value of its option grants. The Company used the following assumptions to determine the fair value of stock option grants during the three months ended March 31, 2010. The Company did not grant stock options during the three months ended March 31, 2009:


Expected term	6.25 years
Volatility	113.6%
Risk-free interest rate	3.36%
Dividend yield	0%

The expected term of stock options represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of the Company’s common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected term of the related stock options. The dividend yield represents our anticipated cash dividend over the expected term of the stock options.

A summary of stock option activity under the Option Plan for the three months ended March 31, 2010 is presented below:

						Weighted
				Weighted		Average
	Shares			Average		Remaining	Aggregate
	Under			Exercise		Contractual	Intrinsic
	Option			Price		Life	Value

Outstanding at January 1, 2010		1,387,250		$	1.10

Granted		89,500		$	1.06
Exercised		-		$	--
Forfeited		(34,000	)	$	1.19
Outstanding at March 31, 2010		1,442,750		$	1.09	8.4 Years		$	130,960

Exercisable at March 31, 2010		353,188		$	1.09	7.5 Years		$	104,591

A summary of status of the Company’s non-vested shares as of and for the three months ended March 31, 2010 is presented below:


	Nonvested			Weighted
	Shares			Average
	Under			Grant Date
	Option			Fair Value

Non-vested at January 1, 2010		1,103,500		$	0.94

Granted		89,500		$	0.91
Vested		(75,438	)	$	0.78
Forfeited		(28,000	)	$	1.00
Non-vested at March 31, 2010		1,089,562		$	0.95

As of March 31, 2010, the Company had approximately $628,000 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of approximately 4 years.

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(5) INCOME TAXES

The provision for income taxes is recorded at the end of each interim period based on the Company's best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company paid income taxes of $850,000 in May 2010 which were accrued at December 31, 2009. For the three months ended March 31, 2010, permanent differences are added back to net loss creating taxable income for purposes of calculating tax expense to be accrued.

(6) NOTES PAYABLE

Marquette Loan

Through March 19, 2010, the Company had a loan agreement with Marquette Healthcare Finance (“Marquette”) that provided Zynex with a revolving credit facility of up to $3,000,000 (the “Loan”). The Loan included a number of affirmative and negative covenants on the part of the Company, including

Minimum EBITDA, a Minimum Debt Service Coverage Ratio, a Minimum Current Ratio and a prohibition on dividends on shares and purchases of any Company stock. The Company was in compliance with these covenants at December 31, 2009. As of December 31, 2009, the balance on the facility was $0 and maximum borrowings available were $2,654,000 (remaining availability of $2,654,000). The Company exercised an early termination right in this loan agreement effective March 19, 2010 and replaced it with a loan agreement with CapitalSource Bank outlined below. As a result of the early termination, the Company paid $70,000 in related penalties.

CapitalSource

On March 19, 2010 (the “Closing Date”), the Company entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with CapitalSource Bank, a California industrial bank (“Lender”). The Credit Agreement provides the Company with a revolving credit facility of up to $3,500,000 (the “Credit

Agreement”).

The Company may borrow, repay and reborrow under the Credit Agreement. The amount available for advances under the Credit Agreement cannot exceed the lesser of the facility cap of $3,500,000 (the “facility cap”) and 85% of the borrowing base less certain amounts reserved. The “borrowing base” is generally the net collectible dollar value of the Company’s eligible accounts. The Credit Agreement bears interest at a floating rate based on the one-month London interbank offered rate (LIBOR), divided by the sum of one minus a measure of the aggregate maximum reserve requirement for “Eurocurrency Liabilities” for the previous month that was imposed under Regulation D of the Board of Governors of the Federal Reserve System, plus 4.0%. Interest is payable monthly. The Credit Agreement is secured by a first security interest in all of Zynex’s assets, including accounts, documents, chattel paper, commercial tort claims, deposit accounts, general intangibles, goods, instruments, investment property, letter-of-credit rights, intellectual property, cash, and 100% of the shares of Zynex Medical, Inc., which are owned by Zynex, Inc., and other assets. Although the Credit Agreement may be terminated earlier by either party under certain circumstances, the Loan will terminate under the terms of the Credit Agreement, and must be paid in full, on March 19, 2013.

Fees payable to the Lender under the Credit Agreement include an unused line fee of 0.042% per month on the difference between the average outstanding daily balance for the preceding month and the total facility cap, a one-time commitment fee of $70,000 paid in two installments during March and April 2010, and a monthly collateral management fee of 0.042% of the facility cap. Upon the termination of the Credit Agreement for any reason, Zynex will pay the Lender 2% of the facility cap if the termination occurs after the first anniversary but before the second anniversary of the closing date, and 1% of the facility cap if the termination occurs on or after the second anniversary, but before the third anniversary, of the closing date. If the termination occurs on or prior to the first anniversary of the closing date, Zynex will pay the Lender an amount equal to the product of (a) the all-in effective yield (as a percentage per annum) of the Credit Agreement for the six months prior to termination, (b) the facility cap and (c) the quotient of (i) the number of months in the remaining term and (ii) twelve.

- 12 -

The Credit Agreement includes a number of affirmative and negative covenants on the part of Zynex. Affirmative covenants cover, among other things, Zynex’s compliance with requirements of law, engaging only in the same businesses conducted on the Closing Date, accounting methods, financial records, notices of certain events, maintenance of insurance, uses of proceeds and financial reporting requirements. Zynex has granted a right of first refusal to the Lender with respect to any offer received by Zynex to provide any type of financing, pursuant to which the Lender will have a period of thirty days to agree to provide financing to Zynex on substantially the same terms. Zynex’s negative covenants under the Credit Agreement include financial covenants; specifically, maintaining minimum EBITDA, minimum fixed charge coverage ratio, minimum cash velocity and minimum liquidity. Other negative covenants include, among other things, restrictions on Zynex’s incurrence of indebtedness, creation of liens, acquisitions of stock or assets of any person or entity, making of any loans or guarantees, sales of assets or collateral, issuance of dividends and repurchase or redemption of any Zynex stock, and transactions with affiliates.

Events of Default under the Credit Agreement include, among other things: Zynex’s failure to pay any obligation under the Credit Agreement when due or perform or observe covenants or other obligations under the Credit Agreement or other loan documents or other documents pursuant to which Zynex owes any third party repayment of indebtedness (subject to certain cure periods in certain instances); the occurrence of a default or an event of default under any other loan document; the occurrence of certain events related to bankruptcy or insolvency; the occurrence of any material adverse change; a sale of all or substantially all of Zynex’s assets, or a change of control with respect to Zynex, Inc. or Zynex Medical, Inc., including any transaction that would result in any holders of twenty-five percent or more of Zynex voting stock immediately prior to a transaction, holding less than twenty-five percent of Zynex voting stock after such transaction.

As of March 31, 2010, the Company is not in compliance with the minimum EBITDA covenant, and therefore the amount outstanding on the Line of Credit is callable. The Company has requested a waiver, and although the Company expects to obtain such a waiver, there is no assurance that it will, and if not, the Lender can demand payment of the Line of Credit, which could have a material adverse impact on the Company’s cash flow and liquidity.

(7) CONCENTRATIONS

The Company had receivables from two private health insurance carriers at March 31, 2010 that made up approximately 25% and 12% of the net accounts receivable balance. The same two two private health insurance carriers made up approximately 18% and 13% of net accounts receivable at December 31, 2009.

(8) LITIGATION

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 and April 10, 2009, two other lawsuits were filed in the same court against the same defendants. These lawsuits alleged substantially the same matters and have been consolidated. On April 19, 2010, plaintiffs filed a Consolidated Class Action Complaint (Civil Action No. 09-cv-00780-REB-KLM). The consolidated lawsuit refers to the April 1, 2009 announcement of the Company that it would restate its unaudited interim financial statements for the first three quarters of 2008. The lawsuit purports to be a class action on behalf of purchasers of the Company’s securities between May 21, 2008 and March 31, 2009. The lawsuit alleges, 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 and other misleading statements. The plaintiffs ask for a determination of class action status, unspecified damages and costs of the legal action.

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The Company believes that the allegations are without merit and will vigorously defend itself in the lawsuit. The Company has notified its directors and officers liability insurer of the claim. At this time, the Company is not able to determine the likely outcome of the legal matters described above, nor can it estimate its potential financial exposure. Litigation is subject to inherent uncertainties, and if an unfavorable resolution of any of these matters occurs, the Company’s business, results of operations, and financial condition could be adversely affected.

(9) SUBSEQUENT EVENTS

Compensation Matters

In April 2010, the independent members of the Board of Directors of the Company approved of an amendment to the employment agreement of Thomas Sandgaard, the Company’s President and Chief Executive Officer. Among other things, the Amendment provides for:

Extension of the term of the Employment Agreement through December 31, 2010.

An increase of Mr. Sandgaard’s annual base salary to $360,000, commencing on April 1, 2010.

Bonus compensation based on exceeding cash collections, EBITDA and revenue amounts set as targets for the quarter or year, as the case may be, based on the Company’s budget that has been accepted by the Board for the applicable periods. The annual bonus may be earned irrespective of whether an individual quarter’s bonus was earned and is applicable for 2010; although, the quarterly based bonuses are effective for quarters beginning April 1, 2010.

In April 2010, the Company approved an amendment to the employment arrangement with Fritz G. Allison, the Company’s Chief Financial Officer, to increase his base salary from $13,000 per month to $14,000 per month, effective April 1, 2010.

In January 2010, the Company agreed to issue 100,000 of restricted stock under a consulting agreement. These shares were issued in May 2010. The consulting agreement also calls for 25,000 shares to be issued quarterly beginning April 2010.

Refund Request

On April 26, 2010, the Company received a refund request from Anthem Blue Cross Blue Shield (“Anthem”) covering the period from October 1, 2008 (the date of the last retrospective audit by Anthem) through March 12, 2010. The Company receives refund claims on a daily basis; however, the Anthem request included a significant number of refund claims in a single request, totaling approximately $1,318,000. Typically, refund requests refer to specific patients and dates of service, allowing the Company to verify and evaluate the request;however, the Anthem request was not initially accompanied by such information. The Company is in the process of obtaining and analyzing the information relating to this request in order to fully understand the nature of the claim and to determine whether a refund is appropriate. In response to an initial request for detailed information from Anthem by the Company, Anthem invited the Company to discuss a settlement amount.

Separate from the Anthem request, the Company was in the process of rebilling a significant number of claims for which the Company believes it was not properly reimbursed by Anthem, and pursuing reimbursement relating to amounts held back by Anthem that management believes should not have been held back pursuant to the terms of a 2008 settlement agreement between the Company and Anthem. The Company cannot at this time determine an amount, if any, that may be received from Anthem as a result of this process. Amounts that may be due from Anthem as a result of such rebilling and reimbursement could potentially offset, in part, the amount requested by Anthem.

The lack of available detail regarding the basis for the Anthem request has prevented the Company from performing an evaluation and determination of a likely outcome of this matter and an estimate of any amount considered probable of net refund to Anthem, thus requiring an accrual. Therefore, no specific accrual has been made related to the Anthem claim as of March 31, 2010. Should the ultimate resolution of this matter result in an unfavorable outcome (a significant net amount that may be refundable to Anthem), the Company’s business, results of operations, financial condition, cash flows and liquidity could be adversely impacted.

In addition to determining whether the refund claims are valid, the Company is in the process of determining whether any valid refund claim amounts are already taken into account in its established allowances and reserves for provider discounts and collectibility of accounts.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the Company's condensed consolidated financial statements and related footnotes contained in this report, and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009.

For the three months ended March 31, 2010, Zynex reported net revenue of $4,875,397, an increase of $643,063 or 15% and compared to $4,232,334 for the three months ended March 31, 2009. The revenue increase was primarily accomplished through recruitment of experienced sales representatives over the last four years ended December 31, 2009 and in the three months ended March 31, 2010.

The incremental addition of industry-experienced sales representatives allowed us to increase our market presence and increase orders. 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) corresponding recurring sales of electrodes and other supplies for the products.

During the three months ended March 31, 2010, the Company experienced a seasonal impact on net revenue. The first quarter of the calendar year was impacted by many patients having their deductible period in the beginning of the calendar year. The Company reduced the estimate for collectibility in this period to properly estimate net revenue.

Results of Operations

Net Rental Revenue. Net rental revenue for the three months ended March 31, 2010, was $2,271,072, a decrease of $378,798 or 14% compared to $2,649,870 for the three months ended March 31, 2009. The decrease in net rental revenue for the three months ended March 31, 2010 was due primarily to reducing the estimate for collectibility in this period due to seasonal impacts on net revenue as discussed above and a decrease in reimbursement amounts by significant third party payor.

Net rental revenue for the three months ended March 31, 2010 made up 47% of net rental and sales revenue compared to 63% for the three months ended March 31, 2009. The primary reason for the decrease as a percentage of net rental and sales revenue was due to the increase of net sales revenue for the reasons discussed below.

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.

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Net Sales Revenue. Net sales revenue for the three months ended March 31, 2010, was $2,604,325, an increase of $1,021,861 or 65% compared to $1,582,464 for the three months ended March 31, 2009. The increase in net sales revenue for the three months ended March 31, 2010, compared to the three months ended March 31, 2009 was due primarily to more products in use generating sales of consumable supplies to users of the Company’s products, the addition of Lumbar Support products, beginning in June 2009, which are complementary to the Company’s electrotherapy products and only sold, not rented, as well as higher levels of products sold. The majority of net sales revenue ($1,989,011 in 2010 and $1,155,720 in 2009) is derived from surface electrodes and batteries sent to existing patients each month as consumable supplies for our electrotherapy products. Other reasons for the increase in net sales revenue are indicated in “Net Rental and Sales Revenue” below.

Net sales revenue for the three months ended March 31, 2010 made up 53% of net rental and sales revenue compared to 37% for the three months ended March 31, 2009. The increase as a percentage of net rental and sales revenue was due primarily to more products in use generating sales of consumable supplies to users of the Company’s products and other reasons indicated above for the increased sales.

Net Rental and Sales Revenue. Net rental and sales revenue for the three months ended March 31, 2010, was $4,875,397, an increase of $643,063 or 15% compared to $4,232,334 for the three months ended March 31, 2009. The increase in net rental and sales revenue for the three months ended March 31, 2010, compared to the three months ended March 31, 2009 was due primarily to an increase in prescriptions (orders) for rentals and purchases of the Company’s electrotherapy products and the resulting greater number of products in use during 2010. The increased orders resulted from the expansion of the industry experienced sales force in 2006 through 2009, and greater awareness of the Company's products by end users and physicians. Products in use create recurring rental revenue and sales of consumable supplies for those products.

Our rental and sales 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 rental and sales revenue by quarter were as follows:

	2010		2009

First quarter	$	4,875,397	$	4,232,334
Second quarter		-		4,346,588
Third quarter		-		4,690,715
Fourth quarter		-		5,411,605

Total net revenue	$	4,875,397	$	18,681,242

Gross Profit. Gross profit for the three months ended March 31, 2010, was $3,879,604 or 80% of net rental and sales revenue compared to $3,749,673 or 89% in 2009. The increase in gross profit for the three months ended March 31, 2010 as compared with the same period in 2009 is primarily because revenue increased. The decrease in gross profit percentage for the year three months ended March 31, 2010 as compared with the three months ended March 31, 2009 is primarily from the increase of net sales revenue as a percentage of net rental and sales revenue as described above. Net sales revenue has a lower gross profit than net rental revenue. The decrease in gross profit percentage was also due to reducing the estimate for collectibility in this period due to a decrease in reimbursement amounts by significant third party payor.

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Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended March 31, 2010 was $3,847,002, an increase of $1,433,197 or 59% compared to $2,413,805 for the three months ended March 31, 2009. Selling expenses increased primarily due to increases in sales commissions. Commissions are earned by sales representatives on orders received during the period. General and administrative expenses increased primarily due to increased payroll and benefits and facility costs including rent. The number of employees increased 27% since year-end 2009. Selling, general and administrative expenses increased 59% while net revenue increased 15% during the three months ended March 31, 2010; this difference is due in large part to 2010 including costs for the new headquarters facility along with costs for the previous facility through February 2010.

On November 12, 2009, the Company entered into a lease agreement with Spiral Lone Tree, LLC (the “Lease Agreement”). The Lease Agreement provides for the lease of 75,000 square feet in Lone Tree, Colorado (the “Property”) beginning January 1, 2010. The Property serves as the Company’s headquarters, office, plant and warehouse, replacing the previous facilities of approximately 17,000 square feet which are under an expired lease. The move to the larger space was driven by the Company’s recent and anticipated growth, including the hiring of additional billing personnel and the planned engagement of 25 more sales representatives.

Other Income (Expense). Interest and other income (expense) is comprised of interest income, interest expense, other income (expense) and gain on the value of a derivative liability.

Interest income for the three months ended March 31, 2010 was $404, compared to $1,061 for the same period in 2009.

Interest expense for the three months ended March 31, 2010 was $79,027, compared to $34,261 for the same period in 2009. The increase in interest expense resulted primarily from the expensing of early termination fees related to the Marquette line of credit which was terminated in March 2010.

Other expense for the three months ended March 31, 2010 was $17,567, compared to $1,074 for the same period in 2009. The expense in 2010 resulted primarily from a net loss on a lease termination.

The gain on value of a derivative liability of $130,198 for the three months ended March 31, 2009 reflects a reduction in the market value of certain outstanding warrants (these warrants were exercised in September, 2009 and are no longer outstanding).

Income Tax Expense. We reported income tax expense in the amount of $3,000 for the three months ended March 31, 2010 compared to $481,000 of expense for the same period in 2009. This is primarily due to our having a loss income before taxes of $63,588 for the three months ended March 31, 2010 compared to income before taxes of $1,431,792 for the same period in 2009.

Liquidity and Capital Resources.

Line of Credit

See Note 6 of the Consolidated Financial Statements in this Report for information on a line of credit established with Marquette Healthcare Finance in September 2008 and terminated in March 2010 and for information on a line of credit established with CapitalSource Bank in March 2010.

On March 19, 2010, the Company entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with CapitalSource Bank, a California industrial bank. The Credit Agreement provides the Company with a revolving credit facility of up to $3,500,000.

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The Company may borrow, repay and reborrow under the Credit Agreement. The amount available for advances under the Credit Agreement cannot exceed the lesser of the facility cap of $3,500,000 and 85% of the borrowing base less certain amounts reserved. The borrowing base is generally the net collectible dollar value of the Company’s eligible accounts. The Credit Agreement bears interest at a floating rate based on the one-month London interbank offered rate (LIBOR), divided by the sum of one minus a measure of the aggregate maximum reserve requirement for “Eurocurrency Liabilities” for the previous month that was imposed under Regulation D of the Board of Governors of the Federal Reserve System, plus 4.0%. Interest is payable monthly. The Credit Agreement is secured by a first security interest in all of the Company’s assets, including accounts, documents, chattel paper, commercial tort claims, deposit accounts, general intangibles, goods, instruments, investment property, letter-of-credit rights, intellectual property, cash, and 100% of the shares of Zynex Medical, Inc., which are owned by Zynex, Inc., and other assets. Although the Credit Agreement may be terminated earlier by either party under certain circumstances, the Credit Agreement will terminate and must be paid in full, on March 19, 2013.

Limited Liquidity

We have limited liquidity. Our limited liquidity is primarily a result of (a) the required high levels of inventory with sales representatives that are standard in the electrotherapy industry, (b) the payment of commissions to salespersons based on sales or rental orders prior to receiving 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 expenditures to make improvements to the Company’s internal billing processes (e) delayed cost recovery inherent in rental transactions and (f) increased commitments resulting from the premises lease signed in November 2009. 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, the payment of commissions to an increasing number of sales representatives, and the increase in cash payments for the Company’s office lease to support of the higher level of operations.

The plans of the Company’s management indicate that the Company’s projected cash flows from operating activities and borrowing available under the CapitalSource line of credit will fund our cash requirements for the year ending December 31, 2010.

The availability of the line of credit depends upon 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 $3,500,000, the amount available for borrowing under the line of credit is subject to a ceiling based upon eligible receivables and other limitations and may be less than the maximum amount. The amount available on the line of credit at March 31, 2010 is $2,429,497.

There is no assurance that our operations and available borrowings will provide enough cash for operating requirements or for increases in our inventory of products as needed for growth. 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 CapitalSource.

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 $650,982 for the three months ended March 31, 2010 compared to $959,055 of cash provided by operating activities for the three months ended March 31, 2009. The primary reasons for the decrease in cash flow was the decrease to net income, and increases to inventory in 2010 compared to 2009, offset, in part, by increases in non-cash expenses such as deferred rent.

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Cash used in investing activities for the year ended three months ended March 31, 2010 was $81,693 compared to cash used in investing activities of $382,510 for the three months ended March 31, 2009. Cash used in investing activities primarily represents the purchase and in-house production of rental products as well as some purchases of capital equipment offset by proceeds received in a lease termination.

Cash provided by financing activities was $934,065 for the three months ended March 31, 2010 compared with cash used in financing activities of $576,545 for the three months ended March 31, 2009. The primary financing sources of cash in 2010 were borrowings on the line of credit partially offset by payments on capital lease obligations and deferred financing fees. The primary financing use of cash in 2009 were payments on the line of credit and the decrease in the bank overdraft.

Subsequent Events

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There are several accounting policies that involve management’s judgments and estimates and are critical to understanding our historical and future performance, as these policies and estimates affect the reported amounts of revenue and other significant areas in our reported financial statements.

Please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” located within our 10-K filed on March 31, 2010 for the year ended December 31, 2009, and Note 2 to the Condensed Consolidated Financial Statements in this Report for further discussion of our “Critical Accounting Policies”.

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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain information included in this quarterly report contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities, as well as other capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks include the need for additional capital in order to grow our business, our ability to engage additional sales representatives, the need to obtain FDA clearance and CE marking of new products, the acceptance of new products as well as existing products by doctors and hospitals, our dependence on the reimbursement from insurance companies for products sold or rented to our customers, acceptance of our products by health insurance providers for reimbursement, larger competitors with greater financial resources, the need to keep pace with technological changes, our dependence on third-party manufacturers to produce 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 our 10-K Report for the year ended December 31, 2009.

10.1		Amendment to Employment Agreement among the Company, Zynex Medical, Inc., and Thomas Sandgaard dated as of April 14, 2010

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350

		ZYNEX, INC.
Dated May 17, 2010		/s/ Thomas Sandgaard
		Thomas Sandgaard
		President, Chief Executive Officer and Treasurer



Dated May 17, 2010		/s/ Fritz G. Allison
		Fritz G. Allison
		Chief Financial Officer