S-1 1 zynexs1_8292008.htm REGISTRATION STATEMENT zynexs1_8292008.htm
 
 
As filed with the Securities and Exchange Commission on September 3, 2008
Registration No. 333-_______
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549



FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 

 

ZYNEX, INC.
 (Name of small business issuer in its charter)

     
NEVADA
3845
90-0214497
(State or other
(Primary Standard Industrial
(I.R.S. Employer
Jurisdiction of
Classification Code Number)
Identification No.)
Incorporation or
    
Organization)
    

8022 SOUTHPARK CIRCLE, SUITE 100
LITTLETON, CO 80120
(303) 703-4906
 (Address and telephone number of principal executive
offices and principal place of business)

THOMAS SANDGAARD, CHIEF EXECUTIVE OFFICER
8022 SOUTHPARK CIRCLE, SUITE 100
LITTLETON, CO 80120
(303) 703-4906
 (Name, address and telephone number of agent for service)

 
Copies to:
Mark Levy, Esq.
Holland & Hart LLP
8390 E. Crescent Parkway, Suite 400
Greenwood Village, Colorado  80111
(303) 290-1083
(303) 975-5386 (fax)
 

 
 
 
 

        Approximate Date of Proposed Sale to the Public:  From time to time after the effective date of this Registration Statement.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  [X]
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [  ]
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [  ]
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Dee the definitions of “large accelerated filer”, “accelerated filer”, and a “smaller reporting company” in Rule 12b-2 of the Exchange Act.
         Large accelerated filer
[  ]
         Accelerated filer
[  ]
         Non-accelerated filer
[  ] (do not check if a smaller reporting company)
         Smaller reporting company
[X]
 
CALCULATION OF REGISTRATION FEE

   
Proposed
    
 
Proposed Maximum
Maximum
    
Title of Each Class of Securities
Amount to be
Offering Price per
Aggregate
Amount of
to be Registered
Registered
Share (1)
Offering Price
Registration Fee
         
Common stock, $0.001 par value
312,500   (2)
$5.10
$1,593,750
$62.63
________________

(1)  
Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended.  The last sale price per share of our common stock on the OTC Bulletin Board as of August 28, 2008 was $5.10 per share. Pursuant to Rule 416(a) of the Securities Act of 1933, as amended, this registration statement also registers such additional shares of the registrant’s common stock as may become issuable to prevent dilution as a result of stock splits, stock dividends or similar transactions.
(2)  
Pursuant to Rule 429, the Prospectus included herein also relates to 2,273,006 shares of our common stock in relation to which a registration fee of $105.41 was previously paid.
 
 THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

Pursuant to Rule 429, the Prospectus included herein also relates to 2,273,006 shares of common stock registered under Registration Statement No. 333-148906 (to which this Registration Statement constitutes Post-Effective Amendment No. 1). In the event any previously registered common stock is offered prior to the effective date of this registration statement, the amount of such common stock will not be included in any prospectus hereunder. The amount of securities being registered in this registration statement, together with the common stock registered under Registration Statement No. 333-148906, represents the maximum amount of securities which are expected to be registered for sale.

 
 
 


THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THIS PROSPECTUS IS INCLUDED IN THE REGISTRATION STATEMENT THAT WAS FILED BY ZYNEX, INC., WITH THE SECURITIES AND EXCHANGE COMMISSION.  THE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE.  THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.


PROSPECTUS

SUBJECT TO COMPLETION, DATED September 3, 2008

Zynex, Inc.
2,585,506 shares of common stock

This prospectus relates to the resale by the selling stockholders of 2,585,506 shares of common stock issuable upon exercise of outstanding warrants or options (the “warrants” or “options”), based on current market prices. Of these shares, 1,740,000 have been sold as of August 11, 2008. The selling stockholders may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions. Please see the "Selling Stockholders" section in this prospectus for a complete description of all of the selling stockholders.
 
We will not receive any proceeds from the sale of shares by the selling stockholders. However, we will receive proceeds upon the exercise of any warrants or options that may be exercised by the selling stockholders, if any. We will pay the expenses of registering these shares.
 
Our common stock is listed on the Over-The-Counter Bulletin Board under the symbol "ZYXI." The last reported sales price per share of our common stock as reported by the Over-The-Counter Bulletin Board on August 28, 2008, was $5.10. 

INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 3.
 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
The date of this prospectus is __________________

 
 
 
 

Table of Contents

PROSPECTUS SUMMARY
  1
USE OF PROCEEDS
11
11
PLAN OF DISTRIBUTION
12
DESCRIPTION OF SECURITIES
14
DESCRIPTION OF BUSINESS
15
DESCRIPTION OF PROPERTY
22
LEGAL PROCEEDINGS
22
MARKET FOR COMMON EQUITY SECURITIES AND DIVIDENDS
22
FINANCIAL STATEMENTS
23
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
23
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
32
EXECUTIVE COMPENSATION
33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
36
38
LEGAL MATTERS
38
AVAILABLE INFORMATION
38
 
 
 
 
 

PROSPECTUS SUMMARY
 

This summary highlights information contained elsewhere in this prospectus.  You should read the entire prospectus carefully, including, the section entitled “Risk Factors” before deciding to invest in our common stock.  When used in this prospectus, 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.
 
Our Business

The Company designs, assembles and commercializes a line of FDA-cleared medical devices for the electrotherapy and stroke rehabilitation markets. The Company also purchases electrotherapy devices and supplies from other domestic and international suppliers for resale.  All of our products are cleared by the Food and Drug Administration for sale in the United States. In the United States, our products require a physician's prescription before they can be dispensed. A majority of our products have been developed by the founder of our business, Thomas Sandgaard.
 
The Company's business model is developed around the physician's prescription being considered an "order" to provide the product to the patient, after which the patient's private insurance, Medicare/Medicaid, workers compensation or automobile insurance is billed for payment. Our electrotherapy products, the IF8000, IF8100, TruWave and E-Wave, are promoted to physicians, physical therapists and clinics through our direct sales force. Our NeuroMove(TM) stroke rehabilitation product is marketed directly to the end-users and through our direct sales force to physicians who specialize in rehabilitation.  Our growth in terms of revenue requires additional sales representatives, which took place in 2007 and 2008 to date and is part of our business plan for the remainder of 2008.  In regard to international sales, we intend to continue using independent distributors who buy and resell our products.
 
For the six months ended June 30, 2008, we generated net revenues of $8,788,663 and reported net income of $3,045,203. For the year ended December 31, 2007, we generated net revenues of $8,048,252 and reported net income of $2,131,350. 

Our principal offices are located at 8022 Southpark Circle, Suite 100, Littleton, CO 80120, and our telephone number is (303) 703-4906. We are a Nevada corporation.

 
- 1 -
 
 
 
The Offering

Common stock offered by selling stockholders
2,585,506 shares issuable upon exercise of outstanding options and warrants.  Of these shares, 1,740,000 have been sold as of August 11, 2008. The 845,506 shares remaining to be issued and sold represent approximately 2.9% of our outstanding common stock.
   
Common stock to be outstanding after
the offering
30,126,597 shares, which assumes the exercise of all shares underlying outstanding warrants and options being registered in this offering.
   
Use of proceeds
We will not receive any proceeds from the sale of the common stock.   However, in the event that our outstanding warrants and options are exercised, we may receive proceeds of up to $307,872. Any such proceeds will be used for working capital purposes.
   
Over-The-Counter Bulletin Board Symbol
ZYXI

The above information is based on 29,281,091 shares of common stock outstanding as of August 11, 2008.

 
- 2 -
 

 
Risk Factors
 
An investment in our common stock involves a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this prospectus. If any of the events described below actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment as a result of these risks.
 
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.
 
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 reimbursement for such transactions, (c) the high level of outstanding accounts receivable because of deferred payment practices of third party health payers, and (d) 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.

Substantial competition may be expected in the future in the area of stroke rehabilitation that may directly compete with our NeuroMove product.  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. 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.
 
Our products are regulated by the U.S. Food and Drug Administration (FDA).  Competitors may develop products that are substantially equivalent to our FDA approved 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 would have a materially adverse affect on our operating results.

 
- 3 -
 
 

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 client preferences.
 
WE ARE DEPENDENT ON REIMBURSEMENT FROM INSURANCE COMPANIES AND GOVERNMENT (MEDICARE AND MEDICAID) AGENCIES; CHANGES IN INSURANCE REIMBURSEMENT POLICIES 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 delayed revenue recognition or a decline in our revenue as well as cash flow issues.
 
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. 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.

 
- 4 -
 
 
 
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.
 
OUR BUSINESS IS EXPOSED TO DOMESTIC INTEREST RATES AND FOREIGN CURRENCY FLUCTUATIONS; NEGATIVE CHANGES IN EXCHANGE RATES COULD RESULT IN GREATER COSTS.

Most of Zynex's revenue, expenses, and capital spending have been transacted in US dollars. Zynex's exposure to market risk for changes in interest rates relate primarily to Zynex's cash and cash equivalent balances, marketable securities, investment in sales-type leases, and loan agreements. The majority of Zynex's investments, if any, may be in short-term instruments and therefore subject to fluctuations in US interest rates. Due to the nature of such short-term investments, we cannot assure you that this will not have a material adverse impact on our financial condition and results of operations.
 
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 and currently sole director. 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 recruiting qualified managerial and sales personnel having experience in business. Competition for qualified individuals is intense. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able to find, attract and retain qualified new employees and retain existing employees.
 
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 NeuroMove NM900, IF8000, IF8100, TruWave, or E-Wave 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.
 
 
- 5 -
 
 
 
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.
 
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.

 
- 6 -
 
 

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, particularly our NeuroMove trademark which is registered in the United States and the European Union, our trade secrets and other intellectual property as an integral component of our success. We rely on trademark law, patents, 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.
 
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, 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, if at all, or
 
 
·
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;
 
 
- 7 -
 
 
 
 
·
promote frequent product use to increase sales of consumables; and
 
 
·
enter into relationships with well-established distributors in foreign market.
 
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.
 
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.

Our products are regulated by the FDA.  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 from the FDA may also be required before marketing certain previously marketed products, which have been modified after they have been cleared. Company personnel currently believe that certain planned enhancements to our current products will not necessitate the filing of a new 510(k) notification. However, the FDA could require the filing of a new 510(k) notification for the modification of the product before we can market 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.
 
 
- 8 -
 
 

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.
 
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.

 
- 9 -
 
 

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 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 5% of our total sales and rental income for 2006. 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 AND DIRECTOR OWNS A CONTROLLING INTEREST IN OUR VOTING STOCK AND INVESTORS WILL NOT HAVE ANY VOICE IN OUR MANAGEMENT.

Our Chief Executive Officer and current sole director, Thomas Sandgaard, beneficially owned approximately 62.3% of our outstanding common stock as of August 11, 2008. 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.
 
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.

 
- 10 -
 
 

Forward-Looking Statements
 
Certain statements in this registration statement 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 to obtain additional capital in order to grow our business, 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 on third party manufacturers to produce our goods on time and to our specifications, the acceptance of our products by hospitals and clinicians, implementation of our sales strategy including a strong direct sales force and other risks described in this registration statement. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this registration statement 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 prospectus, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

 
USE OF PROCEEDS
 
This prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholders of our company, referred to throughout this prospectus as the selling stockholders. There will be no proceeds to us from the sale of shares of common stock in this offering. However, in the event that our outstanding warrants and options as of August 11, 2008 are exercised, we may receive proceeds of up to $307,872. Any such proceeds will be used for working capital purposes. There can be no assurance that any of these warrants will be exercised.
 

SELLING SECURITY HOLDERS
 
The table below sets forth the number of shares of common stock that may be offered from time to time by each selling security holder.  These shares include shares issuable, or have been issued, upon exercise of warrants or options owned by the selling security holders.  All of the selling stockholders have warrants except that The Wall Street Group has options. We issued the warrants in a private placement in 2006 and early 2007, excluding the warrants of Ascendiant Capital Group, LLC and Ascendiant Securities, LLC. The warrants owned by Ascendiant Capital Group, LLC and Ascendiant Securities, LLC were issued in connection with a bridge loan in 2006 and services rendered by Ascendiant Securities, LLC. We issued the options to The Wall Street Group in 2005 as payment of services in 2006.  We will not receive any proceeds from the resale of the common stock by the selling stockholders. We will receive proceeds from the exercise of the options.

The bridge loan with Ascendiant Capital Group, LLC, which is an affiliate of Ascendiant Securities, LLC, is described in Note 3 to the Consolidated Financial Statements for the year ended December 31, 2007 in this Prospectus. In that transaction we also paid Ascendiant Securities, LLC a placement fee of $22,000 cash and issued to Ascendiant Securities, LLC a five-year warrant for 103,139 shares of common stock at an exercise price of $0.39 per share.

In March 2005, Zynex engaged The Wall Street Group as a financial public relations consultant beginning on April 15, 2005 and continuing until canceled at a fee of $7,500 per month, to be paid in cash and common stock. This engagement was terminated as of March 31, 2006.
 
The following table also sets forth the name of each person who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.
 
- 11 -
 
The table set forth below is as of August 11, 2008. This table reflects sales of shares of common stock issued upon exercise of the warrants prior to August 11, 2008.
 
 
Beneficial Ownership
Prior to Offering (1)
  
Beneficial Ownership
After Offering (1)
Name of Selling Security Holder
Shares
Percentage (2) 
Shares Offered
Shares
Percentage
           
Anderson, Bruce
62,500
*
62,500
--
*
Carne, Elizabeth Ann
62,500
*
62,500
--
*
Conine Capital Corporation
62,500
*
62,500
--
*
Roberta J. Cristantiello Trust
195,250
*
125,000
70,250
*
Fitzgerald III, Roy E.
62,500
*
62,500
--
*
Timothy M. Holmes Revocable Trust
125,000
*
125,000
--
*
Robert Kerls IRA
80,000
*
80,000
--
*
Lee, Michael Peter
281,250
*
125,000
156,250
*
Maldanado, Carmen
80,000
*
80,000
--
*
Mawson, Simon
62,500
*
62,500
--
*
Petrassi, Albert & Paula
250,000
*
250,000
--
*
Susan I Rowlands IRA
80,000
*
80,000
--
*
Samuelson, Erik R.
953,125
3.2%
562,500
390,625
1.3%
Ascendiant Capital Group LLC
533,006
1.8%
533,006
--
*
Wall Street Group
312,500
1.1%
312,500
--
*
_______________

* Less than 1%

(1)  
 Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of August 11, 2008 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. Beneficially owned shares in the table for a selling security holder includes shares issuable upon exercise of warrants owned by the selling security holder.

(2)  
Percentage of a selling security holder is based on 29,281,091 shares of common stock outstanding plus shares underlying warrants or options deemed outstanding for the selling security holder.


PLAN OF DISTRIBUTION
 
The selling stockholders and any of their respective non-sale pledgees, non-sale donees, non-sale assignees and other non-sale successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:
 
 
●
ordinary brokerage transactions and transactions in which the broker-dealer solicits the purchaser;

 
●
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
 
 
●
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
 
 
●
an exchange distribution in accordance with the rules of the applicable exchange;
 
 
●
privately-negotiated transactions;
 
 
●
short sales;

 
- 12 -
 

 
●
broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;
 
 
●
through the writing of options on the shares;
 
 
●
a combination of any such methods of sale; and
 
 
●
any other method permitted pursuant to applicable law.
 
The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. The selling stockholders shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.
 
The selling stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling stockholders defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.
 
The selling stockholders may also engage in short sales against the box, puts and calls and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades.
 
The selling stockholders or their respective non-sale pledgees, non-sale donees, non-sale transferees or other non-sale successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that a selling stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the then market price. The selling stockholders cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the selling stockholders. The selling stockholders and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus, may be deemed to be "underwriters" as that term is defined under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or the rules and regulations under such acts. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.
 
We are required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling stockholders, but excluding brokerage commissions or underwriter discounts.
 
The selling stockholders, alternatively, may sell all or any part of the shares offered in this prospectus through an underwriter. No selling stockholder has entered into any agreement with a prospective underwriter and there is no assurance that any such agreement will be entered into.
 
The selling stockholders and any other persons participating in the sale or distribution of the shares will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations under such act, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the shares by, the selling stockholders or any other such person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. In regards to short sells, the selling stockholder can only cover its short position with the securities they receive from us upon conversion. All of these limitations may affect the marketability of the shares.
 
We have agreed to indemnify the selling stockholders, or their transferees or assignees, against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may be required to make in respect of such liabilities.
 
 
- 13 -
 

If the selling stockholders notify us that they have a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the registration statement of which this prospectus is a part, and file a prospectus supplement to describe the agreements between the selling stockholders and the broker-dealer.
 

DESCRIPTION OF SECURITIES
 
The following description of our capital stock is a summary and is qualified in its entirety by the provisions of our articles of incorporation, with amendments, all of which have been filed as exhibits to our registration statement of which this prospectus is a part.
 
Common Shares

We are authorized to issue up to 100,000,000 shares of Common Stock, par value $.001. As of August 11, 2008, there were 29,281,091 shares of common stock issued and outstanding. Holders of common stock are entitled to one vote for each share held of record on all matters to be voted on by the stockholders. The holders of common stock are entitled to receive dividends ratably, when, as and if declared by the board of directors, out of funds legally available. In the event of our liquidation, dissolution or winding-up the holders of common stock are entitled to share equally and ratably in all assets remaining available for distribution after payment of liabilities and after provision is made for each class of stock, if any, having preference over the common stock. The holders of shares of common stock, as such, have no conversion, preemptive, or other subscription rights and there are no redemption provisions applicable to the common stock.
 
Preferred Shares

We are authorized to issue up to 10,000,000 shares of preferred stock, par value $.001. As of August 11, 2008, there were no shares of preferred stock issued and outstanding. The shares of preferred stock may be issued in series and shall have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issuance of such stock adopted from time to time by the board of directors. The board of directors is expressly vested with the authority to determine and fix in the resolution or resolutions providing for the issuances of preferred stock the voting powers, designations, preferences and rights, and the qualifications, limitations or restrictions thereof, of each such series to the full extent now or hereafter permitted by the laws of the State of Nevada.  Issuances of preferred stock could dilute the voting power of common stockholders, adversely affect the voting power of common stockholders, adversely affect the likelihood that common stockholders will receive dividend payments on liquidation, and have the effect of delaying or preventing a change in shareholder and management control.
 
Our articles of incorporation and the Nevada General Corporation Law include a number of provisions that may have the effect of encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our sole director rather than pursue non-negotiated takeover attempts. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging these proposals because, among other things, negotiation of the proposals might result in an improvement of their terms. Our articles of incorporation authorize the issuance of preferred stock. Our sole director can set and determine the voting, redemption, conversion and other rights relating to any series of preferred stock. In some circumstances, we could issue preferred stock to prevent a merger, tender offer or other takeover attempt, which our board of directors opposes.
 
Transfer Agent

Colonial Stock Transfer, 66 Exchange Place, Salt Lake City, Utah 84111, is the transfer agent and registrar for our securities.

 
- 14 -
 

 
DESCRIPTION OF BUSINESS
 
History

Zynex, Inc. (the "Company" or "Zynex"), formerly 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, Zynex, Inc. 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, Inc. is the parent company of Zynex Medical. Zynex Medical designs, manufactures and markets FDA approved 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 is 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 for sale 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.

We believe our products assist in improving the quality of life for patients suffering with impaired mobility from stroke or SCI, and those suffering from debilitating and chronic pain.
 
 
- 15 -
 


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. The NeuroMove is marketed directly to end-user patients and physicians who specialize in stroke and SCI rehabilitation.

To increase revenues, we added several experienced sales representatives in 2006. In 2007 we engaged over 25 additional sales representatives. More additions have been made in 2008 to date and are part of our 2008 business plan.

To expand our international sales we have obtained representation commitments from well established local medical device distributors and have engaged an internationally regarded consulting firm to assist us in preparing to apply for European Union CE Marking. See “Regulatory Approval and Process” below.

Our 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. EMG triggered Electrical Stimulation Device
   
 
Resale Products
  
   
Elpha 3000
Dual Channel NMES device
   
Conti4000
Electrical Stimulation Device for Incontinence Treatment
   
ValuTENS
Dual Channel TENS Device
   
Elpha 1000
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 a majority of its revenue in 2007 from the sale and rental of transcutaneous electrical nerve stimulation (“TENS”), interferential and muscle stimulation devices as well as electrode supplies.
 
 
- 16 -
 
 

Pain Management

Standard electrotherapy is a clinically proven and medically accepted alternative modality to manage acute and chronic pain. 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.

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 approximately 4 million (73%, of the estimated 5.7 million U.S. stroke survivors, a population that is estimated to be growing about 9% or 400,000 new survivors a year), have mobility impairments following the acute stage of the stroke.  

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 2006, living U.S. victims range between 227,000 and 300,000 and the SCI Injury Information Network estimate 11,000 new cases 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.

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.

 
- 17 -
 

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.

Pain Management and Control

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.

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.

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.

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 manufactures 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.  

We plan to increase our penetration of the standard electrotherapy market by further expanding our sales organization and broadening our product offering. We currently produce gross margins of between 85% and 95% and expect those margins to continue in the future. The high margins are possible in part because the products use a common technology platform with different software configurations.

 
- 18 -
 


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 on January 27, 2007, with approximately 5.7 million stroke survivors, growing approximately 9% a year, and approximately 227,000- 300,000 SCI survivors, growing approximately 11,000 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.
 
Key characteristics of our markets are:

-
Often more than 100 days is required to collect initial payment from insurance carriers and considerably longer from many attorney, personal injury and worker's compensation cases. Such delayed payment impacts the Company's cash flow and can slow its growth.

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

-
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.

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, Asia 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 are currently contracted 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 principal suppliers as of the date of February 2008 are:
Axelgaard Manufacturing Co., LTD, Fallbrook, CA, US
Byers Peak, Wheat Ridge, CO, US
Spectramed, Mount Vernon, OH, US
The Saunders Group (acquired by EMPI), Chaska, MN, US

Our employees develop the software used in our products.

 
- 19 -
 

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.

A majority of our revenue is derived from private health insurance carriers and HMOs on behalf of their insureds. We also receive revenues from Medicare and Medicaid, worker's compensation agencies, attorneys representing injured patients, hospitals, U.S. and international distributors.

A 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.

For fiscal 2007 approximately 66% of revenue was derived from rental (compared to 63% for 2006) and 34% (compared to 37% in 2006) from sales, including electrode sales.

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 core product line. 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 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.

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

 
- 20 -
 


Zynex expects to enter the European market through high quality and well-established local distributors after obtaining European Union ("EU") CE Marking. 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 ("EFTA"). We are focusing much effort and significant resources on preparation of the CE application, and it is targeted for completion, submission and approval in 2008. In anticipation of such approval we have had discussions with, and received verbal or written distribution commitments from local distributors.

CE Marking will also enhance our entry into other developed countries, and we plan to engage local distributors in those countries in the second half of 2008 and/or 2009.

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 it is also crucial to our efforts for international expansion around the world as many countries require the 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.
 
 
- 21 -
 

Employees

As of June 30, 2008, we employed 61 full time employees. We also engage a number of independent contractor, 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.
 

DESCRIPTION OF PROPERTY 

In November 2007, the Company moved its headquarters, office, plant and warehouse to a new facility in Littleton, Colorado. This new space, consisting of 16,553 square feet, is sub-leased under a 25-month agreement at an annual cost of $100,975 plus property taxes and common area maintenance expenses. The Company also maintains its prior facility, which is under a five-year lease expiring in February 2009. The base rent on that facility was originally $93,642 per year plus common area maintenance expenses. Base rent increased to $96,106 March 1, 2007 and increased to $98,570 March 2, 2008. The present configuration of both spaces will accommodate 100-125 employees. The Company believes that the leased property is sufficient to support its requirements until the sub-lease expires. 
 
 
LEGAL PROCEEDINGS
 
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results, except that at this time we are unable to predict the outcome of the matter below.
 
During the third quarter of 2008, Zynex, Inc. received a letter from counsel to a former female employee, alleging that the former employee had been wrongfully terminated on the basis of gender in violation of federal law and threatening a lawsuit.  The former employee alleges estimated economic damages of $300,000 plus unspecified punitive damages.  If the matter were to proceed to trial, the former employee could also claim her statutory attorney's fees and costs against Zynex.  While Zynex may engage in settlement discussions with the former employee’s counsel, Zynex denies the material allegations and intends to defend itself vigorously.
 

MARKET FOR COMMON EQUITY SECURITIES AND DIVIDENDS

Common Stock

Our common stock is currently traded on the OTC Bulletin Board under the symbol "ZYXI".  In August 2008, the Company applied for listing on the American Stock Exchange. A listing on AMEX involves various quantitative standards which we believe Zynex currently satisfies. Zynex is implementing a number of corporate governance matters to comply with AMEX’s standards. Any final decision regarding Zynex’s filing of a listing application with AMEX will depend upon the circumstances which exist at the time that Zynex may meet the listing standards. AMEX may also exercise its discretion in accepting any listing.

The following table sets forth the range of high and low bid quotations for our common stock for each quarter of 2005 through 2008, 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, 2006
    
First Quarter
$0.55
$0.31
Second Quarter
$0.50
$0.25
Third Quarter
$0.50
$0.25
Fourth Quarter
$0.45
$0.21
     
Year ended December 31, 2007
    
First Quarter
$0.45
$0.20
Second Quarter
$0.95
$0.34
Third Quarter
$1.43
$0.89
Fourth Quarter
$1.49
$1.18
     
Year ended December 31, 2008
    
First Quarter
$1.85
$1.11
Second Quarter
$1.81
$1.29
Third Quarter
N/A
N/A
Fourth Quarter
N/A
N/a
 
 
- 22 -
 


On August 28, 2008, the closing sale price for our common shares, as reported by the Bulletin Board, was $5.10 per share.
 
As of August 11, 2008, there were 29,281,091 shares of common stock outstanding and there were approximately 236 registered holders of our common stock.

Dividend Policy
 
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. Our loan agreement with Silicon Valley Bank prohibits the payment of any dividends or distributions with respect to our capital stock.


FINANCIAL STATEMENTS
 
The audited financial statements for the years ended December 31, 2007 and 2006, the notes thereto, and the reports thereon of GHP Horwath P.C. dated April 15, 2008 and April 16, 2007, respectively, as well as the unaudited financial statements and notes thereto, for the six months ended June 30, 2008 and 2007 are filed as part of this report starting on page F-1 below.



MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
    This discussion should be used in conjunction with our audited financial statements and accompanying footnotes included in this prospectus for the years ended December 31, 2007 and 2006 and in conjunction with the unaudited financial statements for the six months ended June 30, 2008 and 2007.

Annual Results of Operations - 2007

    For 2007, Zynex reported $8,048,253 revenue, an increase of 215% from 2006 and net income of $2,131,350, an increase from a net loss in 2006 of $320,370. The revenue increase was primarily accomplished through implementation of our 2004-2007 strategic and operating plans, recruitment of experienced sales representative in 2006 and 2007, and effective utilization of funds received from two 2004 private placements, 2005 and 2006 term loans from Silicon Valley Bank and proceeds from a 2006 non public offering to accredited investors and bridge loan. In the fall of 2005 the Company established a $400,000, three year term loan and banking relationship with Silicon Valley Bank, Costa Mesa, California and Boulder, Colorado. The relationship was expanded with an additional $240,000 three-year term loan in March 2006. Also in 2006 the Company raised a net $604,476 from the sale of 2,175,000 shares of common stock in a non public offering to accredited investors, and a net $206,563 from a bridge loan. For information on the repayment of the Silicon Valley Bank loan, see “Liquidity and Capital Resources” below.

    The incremental addition of industry experienced sales representatives during 2007 and the second half of 2006 allowed us to increase our market presence and increase orders during 2007. As a result of the sales force expansion our total orders increased 284% from 2,705 in 2006 to 10,383 in 2007.

 
- 23 -
 

RESULTS OF OPERATIONS - 2007

    Net sales and rental income for the quarter and twelve months ended December 31, 2007, were $3,101,869 and $8,048,253 an increase of $2,354,798 and $5,491,444 or 315% and 215% compared to $747,071 and $2,556,809 for the quarter and twelve months ended December 31, 2006. The increase in net sales and rental income for the quarter and twelve months ended December 31, 2007, compared to the quarter and twelve months ended December 31, 2006 was due primarily to an increase in prescriptions (orders) for rentals and purchases of the Company’s standard electrotherapy products resulting from the expansion of the sales force as discussed above, greater awareness of the Company's products by end users and physicians resulting from its increased 2006 and 2005 marketing investments, growing market penetration and increased rental income from the greater number of Zynex products placed in use during the prior periods.

Net sales and rental income by quarter were as follows: 
 
   
2007
    
2006
  
             
First quarter
   $ 1,336,731     $ 505,091  
Second quarter
     1,505,207       560,860  
Third quarter
     2,104,446       743,787  
Fourth quarter
     3,101,869       747,071  
                 
Total net sales and rental income
   $ 8,048,253     $ 2,556,809  
 
    Our sales and rental income is reported net, after deductions for bad debt 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 amounts deducted from gross sales and rental income for these charges were $7,997,932 for the twelve months ended December 31, 2007 compared to $2,363,485 for the 2006 year, an increase of $5,634,447 or 238%.

    Gross profit increased $5,066,117 over 2006, an increase of 225%. Gross profit as a percent of net sales and rental income was 90.9% in 2007 compared to 88.1% in 2006. The improvement in gross profit amounts and percent in 2007 compared to 2006 was due to an increase in revenue and increased rental income as a percentage of total revenue (rental equipment is depreciated and not part of the cost of goods sold). The company also benefited from reductions in costing of certain items in cost of goods sold based on volume purchase discounts.

    Selling, general and administrative expenses increased from $2,326,793 in 2006 to $4,003,432 in 2007, an increase of 72%. The increase was consistent with the growth in revenue and was primarily in the areas of sales commissions, salaries and wages, utilities, office expense, automobile, consulting expenses, postage and delivery, and travel and entertainment. The expense increases were somewhat offset by decreased expenses related to advertising, public company expense and equipment rental.

    Depreciation increased $59,432, from $94,009 in 2006 to $153,441 in 2007. The increase results primarily from higher levels of rental inventory, which is considered property and equipment.

    Interest expense increased $89,848 in 2007 compared to 2006.  The increases resulted primarily from the note issued to Ascendiant Capital as well as loans from its majority stockholder, which is described in Note 3 to the 2007 consolidated financial statements in this report.

    Income tax expense.  We reported expenses for income taxes in the amount of $790,000 in 2007.  This is primarily due to our having an income before taxes of $2,921,350. We expect to consume our net operating loss carry-forward, and therefore we will have to pay taxes on income going forward. Deferred tax assets have increased due to the effects of temporary differences primarily attributable to an increase in the allowance for doubtful accounts receivable.

 
- 24 -
 

LIQUIDITY AND CAPITAL RESOURCES - 2007

Cash provided by operating activities was $745,689 for the year ended December 31, 2007 compared with cash used in operating activities of $483,460 for the year ended December 31, 2006. The primary reasons for the increase in cash provided by operating activities was the net income for 2007 compared to the net loss for 2006. Accounts receivable increased primarily due to increased billings in the last half of 2007 compared to 2006. These factors were somewhat offset by growth in accounts payable and accrued liabilities due to purchases to build rental inventory for new orders and accruing commissions payable to sales representatives.

Cash used in investing activities was $751,310 for the year ended December 31, 2007 compared to cash used in investing activities of $151,586 for the year ended December 31, 2006. Cash used in investing activities represents the purchase of furniture, equipment and inventory rented to customers.

Cash used by financing activities was $259,576 for the year ended December 31, 2007 compared with cash provided by financing activities of $881,510 for the year ended December 31, 2006. The primary use of cash in financing activities during 2007, were the repayment of the bridge loan and principal payments on notes payable and a capital lease. Financing activities in 2006 include working capital loans from the principal stockholder and Chief Executive Officer, Thomas Sandgaard, a term loan from Silicon Valley Bank, net proceeds from an equity private placement and net proceeds from a bridge loan.
 
Payments Due by Period
 
Significant Contractual Obligations
  
Total
    
1 Year
    
2-3 Years
    
4-5 Years
    
5 Years
  
                               
Notes payable  (1)
   $ 397,041     $ 354,009     $ 43,032     $ --     $ --  
Capital lease obligations
     31,448       18,869       12,579       --       --  
Operating leases
     396,148       206,490       189,658       --       --  
                                         
Total contractual cash obligations
   $ 824,637     $ 579,368     $ 245,269     $ --     $ --  

(1) In February 2008, the Company paid $191,071 in full payment of the outstanding amounts under the notes to Silicon Valley Bank. Of this amount, $168,371 was due within one year and $22,700 was due within two to three years.

On October 5, 2005 Zynex received $400,000 under a three-year term loan agreement with Silicon Valley Bank, Santa Clara, California and Boulder, Colorado (the "Lender"). The loan incurred interest at a per annum fixed rate of 7.84%. The loan was guaranteed by Zynex Chairman, President and Chief Executive Officer Thomas Sandgaard and was collateralized by a first perfected security interest in accounts, inventory, chattel paper, equipment, fixtures, general intangibles, including intellectual property and other assets. The loan was payable in 36 equal monthly payments of principal and interest. The loan included financial covenants for minimum liquidity and minimum debt service coverage. In connection with the loan, the Lender was granted a seven-year warrant to purchase 50,000 shares of Zynex Common Stock at an exercise price of $0.71 per share.

On March 15, 2006 Zynex received another loan in the amount of $240,000 under a Default Waiver and First Amendment To Loan and Security Agreement with Silicon Valley Bank dated September 29, 2005. The Amendment to the existing loan agreement of September 29, 2005 provided for this second term loan and waived one covenant violation for the time period ended December 31, 2005. The new loan bore interest at a per annum fixed rate of 8.48%. Zynex began repaying the loan in 36 equal monthly payments of principal and interest, beginning April 1, 2006. All other terms and conditions were as stated in the September 29, 2005 loan agreement. This loan was also guaranteed by Zynex Chairman, President, Chief Executive Officer and major shareholder Thomas Sandgaard and was collateralized by a first security interest in accounts, inventory, chattel paper, equipment, fixtures, general intangibles, including intellectual property and other assets.

As indicated in the table above, the Silicon Valley Bank notes were repaid in full during February 2008.
 
- 25 -

 
On October 18, 2006, the Company entered into a loan transaction with Ascendiant Capital Group, LLC (an affiliate of Ascendiant Securities, LLC) and issued to Ascendiant Capital (a) a secured Note in the total principal amount of $275,000 (the "Note") and (b) a five-year warrant to purchase a total of 429,867 shares of our common stock at a fixed exercise price of $0.39 per share. The Note was convertible into common stock at a fixed conversion price of $0.32 per share. Net proceeds of approximately $206,000 from the transaction were used for general working capital.
 
Annual Results of Operations - 2006

For 2006, Zynex reported $2,556,809 revenue, an increase of 22% from 2005 and a $320,370 net loss, a decrease from 2005 net income of $301,064. The revenue increase was primarily accomplished through implementation of our 2004-2006 strategic and operating plans, recruitment of a net 17 experienced sales representative in 2006, and effective utilization of funds received from two 2004 private placements, 2005 and 2006 term loans from Silicon Valley Bank and proceeds from a 2006 non public offering to accredited investors and bridge loan. In the fall of 2005 the Company established a $400,000, three year term loan and banking relationship with Silicon Valley Bank, Costa Mesa, California and Boulder, Colorado. The relationship was expanded with an additional $240,000 three-year term loan in March 2006. Also in 2006 the Company raised a net $604,476 from the sale of 2,175,000 shares of common stock in a non public offering to accredited investors, and a net $206,563 from a bridge loan.

The incremental addition of 17 industry experienced sales representatives during the second half of 2006 allowed us to increase our market presence and increase orders in the last quarter of 2006. We also added a dedicated NeuroMove sales representative and began to implement an expanded NeuroMove sales program directly to physicians and stroke centers. As a result of the sales force expansion our total orders increased 66% from 1,627 in 2005 to 2,705 in 2006

RESULTS OF OPERATIONS - 2006

Net sales and rental income for the quarter and twelve months ended December 31, 2006, were $747,071 and $2,556,809 an increase of $389,514 and $458,401 or 109% and 22% compared to $357,557 and $2,098,408 for the quarter and twelve months ended December 31, 2005. The increase in net sales and rental income for the quarter and twelve months ended December 31, 2006, compared to the quarter and twelve months ended December 31, 2005 was due primarily to an increase in prescriptions (orders) for rentals and purchases of the Company’s standard electrotherapy products resulting from the expansion of the sales force as discussed above, greater awareness of the Company's products by end users and physicians resulting from its increased 2006 and 2005 marketing investments, growing market penetration and increased rental income from the greater number of Zynex products placed in use during the prior periods.
 
Net sales and rental income by quarter were as follows:

   
2006
    
2005
  
             
First quarter
   $ 505,091     $ 547,227  
Second quarter
     560,860       589,483  
Third quarter
     743,787       604,141  
Fourth quarter
     747,071       357,557  
                 
Total net sales and rental income
   $ 2,556,809     $ 2,098,408  


Our sales and rental income is reported net, after deductions for bad debt 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 amounts deducted from gross sales and rental income for these charges were $2,363,485 for the twelve months ended December 31, 2006 year compared to $1,180,635 for the 2005 year, an increase of $1,182,850 or 100%.

Gross profit increased $271,201 over 2005, an increase of 13.7%. Gross profit as a percent of net sales and rental income was 88.1% in 2006 compared to 94.4% in 2005. The improvement in gross profit in 2006 compared to 2005 was due to an increase in revenue and increased rental income as a percentage of total revenue (rental equipment is depreciated and not part of the cost of goods sold). The decrease in gross profit margin in 2006 compared to 2005 was due to increases in insurance company reimbursement deductions, which reduced our net sales while cost of sales remained in line with the gross sales.
 
- 26 -

 
Selling, general and administrative expenses increased from $1,717,575 in 2005 to $2,326,793 in 2006. The increase was consistent with the growth in revenue and was primarily in the areas of sales commissions, public company expenses, utilities, office expense, advertising, marketing and promotion, depreciation expense related to the increased amount of rental products, accounting and auditing expenses, payroll expense, postage and delivery, and travel and entertainment. . The expense increases were somewhat offset by decreased expenses related to consulting, finance charges and late fees, equipment rental, bank service charges, and insurance premiums.

Depreciation increased $29,211, from $64,798 in 2005 to $94,009 in 2006. The increase results primarily from higher levels of rental inventory.

The Company's federal tax loss carry forward as of December 31, 2006 is $191,203.

Interest expense increased $118,172 in 2006 compared to 2005 because of the Company’s higher level of debt as discussed below and the bridge loan discussed below.

Other Income decreased $137,170 in 2006 because 2006 did not reflect any benefit from the elimination of potential unclaimed liabilities, as was the case in 2005.

LIQUIDITY AND CAPITAL RESOURCES - 2006

Cash used in operating activities was $483,460 for the year ended December 31, 2006 compared with cash used in operating activities of $127,063 for the year ended December 31, 2005. The primary reasons for the increase in cash used in operating activities were the net loss for 2006 compared to net income for 2005 and the growth in accounts receivable. Accounts receivable increased primarily due to increased billings in the last half of 2006 compared to 2005. These factors were somewhat offset by growth in accounts payable and accrued liabilities due to purchases to build rental inventory for new orders and accruing commissions payable to sales representatives.
 
Cash used in investing activities was $151,586 for the year ended December 31, 2006 compared to cash used in investing activities of $106,079 for the year ended December 31, 2005. Cash used in investing activities represents the purchase of equipment and inventory rented to customers.

Cash provided from financing activities was $881,510 for the year ended December 31, 2006 compared with cash provided by financing activities of $248,797 for the year ended December 31, 2005. Financing activities include working capital loans from the principal stockholder and Chief Executive Officer, Thomas Sandgaard, a term loan from Silicon Valley Bank, net proceeds from an equity private placement and net proceeds from a bridge loan.

Contingencies such as unanticipated shortfalls and revenues, collections of accounts receivable or increases in expenses could affect our projected revenue, cash from operations and liquidity.
 
Payments Due by Period

Significant Contractual Obligations
  
Total
    
1 Year
    
2-3 Years
    
4-5 Years
    
5 Years
  
                               
Notes payable
   $ 712,241     $ 458,445     $ 253,796     $ --     $ --  
Capital lease obligations
     50,317       18,869       31,448       --       --  
Operating leases
     214,962       100,375       114,587       --       --  
                                         
Total contractual cash obligations
   $ 977,520     $ 577,689     $ 399,831     $ --     $ --  
 
- 27 -

 
On October 5, 2005 Zynex received $400,000 under a three-year term loan agreement with Silicon Valley Bank, Santa Clara, California and Boulder, Colorado (the "Lender"). The loan bears interest at a per annum fixed rate of 7.84%. The loan is guaranteed by Zynex Chairman, President and Chief Executive Officer Thomas Sandgaard and is collateralized by a first perfected security interest in accounts, inventory, chattel paper, equipment, fixtures, general intangibles, including intellectual property and other assets. The Company will repay the loan in 36 equal monthly payments of principal and interest. The loan includes financial covenants for minimum liquidity and minimum debt service coverage. In connection with the loan, the Lender was granted a seven-year warrant to purchase 50,000 shares of Zynex Common Stock at an exercise price of $0.71 per share.

On March 15, 2006 Zynex received another loan in the amount of $240,000 under a Default Waiver and First Amendment To Loan and Security Agreement with Silicon Valley Bank dated September 29, 2005. The Amendment to the existing loan agreement of September 29, 2005 provided for this second term loan and waived one covenant violation for the time period ended December 31, 2005. The new loan bears interest at a per annum fixed rate of 8.48%. Zynex began repaying the loan in 36 equal monthly payments of principal and interest, beginning April 1, 2006. All other terms and conditions are as stated in the September 29, 2005 loan agreement. This loan is also guaranteed by Zynex Chairman, President, Chief Executive Officer and major shareholder Thomas Sandgaard and is collateralized by a first security interest in accounts, inventory, chattel paper, equipment, fixtures, general intangibles, including intellectual property and other assets.

    Interim Results of Operations

Net Rental Income. Net rental income for the three and six months ended June 30, 2008, was $3,487,496 and  $6,077,542 an increase of $2,522,432 and $4,309,416 or 261% and 244% compared to $965,064 and $1,768,126 for the three and six months ended June 30, 2007. The increase in net rental income 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 income are indicated in “Net Sales and Rental Income” below.

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

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. Approximately 2/3rds of net sales income is derived from surface electrodes sent to existing patients each month and other consumable supplies for our products.

Net Sales Income. Net sales income for the three and six months ended June 30, 2008, were $1,560,139 and  $2,711,121 an increase of $1,019,996 and $1,637,309 or 189% and 152% compared to $540,143 and $1,073,812 for the three and six months ended June 30, 2007. The increase in net sales income 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. Other reasons for the increase in net sales income are indicated in “Net Sales and Rental Income” below.

Net sales income for the three and six months ended June 30, 2008 made up 31% and 31% of net sales and rental income 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 income was due primarily to increased orders for rentals of products compared to orders for purchases of products. The percentage of net sales revenue could increase if we get large orders from resellers.

 
- 28 -
 


Net Sales and Rental Income. Net sales and rental income for the three and six months ended June 30, 2008, were $5,047,635 and  $8,788,863 an increase of $3,542,428 and $5,946,725 or 235% and 209% 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 income 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 as discussed in the Company's Form 10-KSB/A filed April 16, 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 income from the greater number of Zynex products placed in use during prior periods. We continue to add outside sales representatives with a small increase to the total number of such representatives since December 31, 2007.

Our sales and rental income is reported net, after deductions for bad debt 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 amounts deducted from net sales and rental income for these charges in the three and six months ended June 30, 2008, were $4,615,068 and  $7,889,712 an increase of $3,228,340 and $5,344,207 or 233% and 210% compared to $1,386,728 and $2,545,505 for the three and six months ended June 30, 2007. This increase is in proportion to the increase in net sales.

The amounts deducted from net sales and rental income for bad debts in the three and six months ended June 30, 2008, were $438,096 and  $755,908 an increase of $307,054 and $511,787 or 233% and 210% compared to $131,042 and $244,121 for the three and six months ended June 30, 2007. This increase is in proportion to the increase in net sales.

Gross Profit. Gross profit for the three and six months ended June 30, 2008, was $4,769,423 and $8,053,737 or 94.5% and 91.6 % of net revenue. For three and six months ended June 30, 2008, this represents an increase of $3,463,920 and $5,530,183 or 265% and 219% from the gross profit of $1,305,503 or 86.7% and $2,523,554 or 88.8% of net 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 and six months ended June 30, 2008 as compared with the same periods in 2007 is primarily because of an increase in rental income as a percentage of total revenue.  Rental revenue has a higher gross profit margin due to the cost of the product being depreciated over its useful life.
 
Selling, General and Administrative. Selling, general and administrative expenses for the 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 advertising, marketing and promotion costs, and temporary services.  Because we have moved to a new location effective in November 2007, which is described in Note 3 to the consolidated financial statements for the year ended December 31, 2007, and we have not yet subleased our previous location, we may incur an increase to selling, general and administrative expenses of approximately $20,000 per quarter.

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 increases 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, which is described in Note 7 to the Condensed Consolidated Financial Statements in this Report. 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 $860,000 and $1,380,000 for the three and six months ended June 30, 2008 compared to $130,300 of expense and $216,000 of expense for the same periods in 2007.  This is primarily due to our having higher income before taxes of $2,712,212 and $4,425,203 for the three and six months ended June 30, 2008 compared to income before taxes of $481,848 and $799,229 for the same periods in 2007.

 
- 29 -
 
 
 
Liquidity and Capital Resources. We have limited liquidity.

Our cash requirements increase as our operations expand for the reasons indicated below for our limited liquidity.  We have begun to see our operations provide enough cash for our current operating requirements.  Our planned operations might also provide sufficient cash to implement our business plan.  Our business plan requires funds for the purchases of equipment, primarily for rental inventory.  However, there can be no assurance that our operations will provide enough cash in the future for current operating requirements or for additional purchases of equipment.  For this reason we may raise additional capital through debt or equity financing in 2008 or 2009. We are actively pursuing a commercial line of credit. There can be no assurance that we will be able to raise such additional financing or do so on terms that are acceptable to the Company.
 
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 reimbursement for such transaction, (c) the high level of outstanding accounts receivable because of the deferred payment practices of third party health payers, and (d) the delayed cost recovery inherent in rental transactions. Our growth results in higher cash needs.

Contingencies such as unanticipated shortfalls in revenues or increases in expenses could affect our projected revenue, cash flows from operations and liquidity.

Cash provided by operating activities was $430,897 for the six months ended June 30, 2008 compared to $185,380 of cash provided by operating activities for the six months ended June 30, 2007. The primary reasons for the increase in cash flow was the increase to net income in 2008 compared to 2007, an increase in non-cash expenses including provision for losses on accounts receivable, provisions for payment provider discounts and income taxes payable, offset by an increase in accounts receivable due to the increase in gross revenue.

Cash used in investing activities for the six months ended June 30, 2008 was $499,597 compared to cash used in investing activities of $185,191 for the six months ended June 30, 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 $258,320 for the six months ended June 30, 2008 compared with cash used in financing activities of $244,332 for the six months ended June 30, 2007.  The primary financing source of cash in 2008 were from proceeds from 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.   .

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.

Revenue Recognition. The Company’s policy for revenue recognition for the rental of products is to recognize revenue ratably over the products’ rental period. Rental revenue is shown net of the estimated discounts, which will be taken by healthcare payment providers.

 
- 30 -
 


The Company’s policy for revenue recognition for the sale of products is to recognize revenue when the product has been shipped and when applicable, a claim prepared by the Company has been filed with the patient’s insurance provider. Sales revenue is shown net of the estimated discounts, which will be taken by healthcare payment providers.

Revenue is recognized under rental agreements and product shipments only after the following criteria are met; (i) there exists adequate evidence of the transactions; (ii) delivery of goods has occurred or services have been rendered; and (iii) the price is not contingent on future activity; and (iv) collectibility is reasonably assured.

Reserves For Provider Discounts And Collectibility. The Company maintains reserves for provider discounts and collectibility. Provider discounts result from reimbursements from insurance providers that are less than amounts claimed, as provided by agreement, where the amount claimed by the Company exceeds the insurance provider's usual, customary and reasonable reimbursement rate and when units are returned because of benefit denial. The provision is provided for by reducing gross revenue by a portion of the amount invoiced during the relevant period. The amount of the reduction is estimated based on historical experience. The reserve for collectibility is the customary allowance for bad debts.

Reserve for Obsolete/Excess Inventory. Inventories are stated at the lower of cost or market. We regularly review our inventories and, when required, will record a provision for excess and obsolete inventory based on factors that may impact the realizable value of our inventory including, but not limited to, technological changes, market demand, regulatory requirements and significant changes in our cost structure. If ultimate usage varies significantly from expected usage, or other factors arise that are significantly different than those anticipated by management, inventory write-downs or increases in reserves might be required.

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.

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.

Recently Issued Accounting Pronouncement

    In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities: (“SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirements for FASB Statement No. 133, “Derivative Instruments and Hedging Activities” (“SFAS No. 133”). It requires enhanced disclosure about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments and related hedge items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for the Company as of January 1, 2009. The Company is currently assessing the impact of SFAS 161 on its financial position and results of operations.


 
- 31 -
 


DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
 
The following table provides information concerning each of the Company's directors and executive officers at August 15, 2008:
   
Director
  
     Name
Age
Since
Position or Office
       
Thomas Sandgaard
50
1996
President, Chief Executive Officer, Director and Chairman
       
Fritz G. Allison 
48
N/A
Chief Financial Officer
       
 
During the five years preceding the date of this report, the director and executive officers named above have not been convicted in any criminal proceeding nor are they subject to any pending criminal proceeding.

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 has been a Certified Public Accountant.

In connection with a listing application to the American Stock Exchange, Zynex is considering, and will implement if listed, the addition of at least two independent directors to Zynex’s Board of Directors, the establishment of an audit committee of the Board and the adoption of a code of ethics. Zynex will be considered a “controlled company” under AMEX rules and will not be required to have a majority of independent directors.


 
- 32 -
 

EXECUTIVE COMPENSATION
 
Summary Compensation Table

The following table shows, as to the Chief Executive Officer and the Chief Financial Officer, the only highly compensated executive officers whose salary plus bonus exceeded $100,000, information concerning compensation paid for services to the Company in all capacities during the years ended December 31, 2007 and December 31, 2006:
 
 
Name and Principal Position
  
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($) (3)
Non-Equity Incentive Plan Compensation
($)
Change in
Pension
Value and Nonqualified Deferred Compensation Earnings
($)
All Other
Compensation
($)
Total
($)
Thomas Sandgaard
  
2007
144,000
50,000
0
0
0
0
51,414(1) 
245,414
Chief Executive Officer
  
2006
144,000
16,000
0
0
0
0
43,880(1) 
203,880
             
 
 
 
 
Fritz G. Allison
  
2007
98,354
0
0
3,217
0
0
1,472(2)
103,033
Chief Financial
  
2006
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
Officer
            
 
 
 
 
             
 
 
 
 
Peter J. Leveton
  
2007
21,327
0
0
13,475
0
0
0
21,327
Former Chief Financial
  
2006
83,063
102,500
0
0
0
0
0
185,563
Officer
                    
______________
 
(1) We pay for 100% of Mr. Sandgaard's health and dental insurance. In addition, two company vehicles and two home telephone lines are provided to Mr. Sandgaard at our expense.

(2) We pay for 100% of Mr. Allison's health and dental insurance.

(3) The Option Awards represents the dollar amount recognized for financial statement reporting purposes with respect to 2006 and 2007 for the fair value of stock options granted to each of the named executive officers, in accordance with SFAS 123R.

Mr. Leveton’s employment with us was terminated on February 16, 2007.

Employment Agreements

Thomas Sandgaard

On February 1, 2004, Zynex Medical, Inc. entered into a three-year employment agreement with the Company's President, Chief Executive Officer and former sole shareholder. The agreement expired January 31, 2007 and the agreement was automatically extended for an additional two-year period. The initial annual base salary under the agreement was $174,000 and may be increased annually at the board of director's discretion. The agreement also provides for a 50% annual bonus if annual net revenue exceeds $2.25 million, medical and life insurance, and a vehicle. The agreement contains a non-compete provision for the term of the agreement and 24 months following termination of the agreement.

 
- 33 -
 

On January 1, 2005, the agreement was amended to provide an annual base salary of $144,000 and quarterly bonuses pursuant to the following schedule; provided that if the Company does not have net income for that quarter then only half of the bonus amount listed below shall be paid:

Quarterly Revenue
Quarterly Bonus
   
$0 to $600,000
$ 0
$600,001 - $800,000
$ 10,000
$800,001 - $1,000,000
$ 25,000
$1,000,001 and greater
$ 50,000
 
Fritz G. Allison

The Company has established the following compensation arrangements with Mr. Allison, effective February 19, 2007: A base salary of $8,000 per month, before taxes, for the first three months and $10,000 per month, before taxes, thereafter; grant under the Company’s 2005 stock option plan of an option to purchase up to 100,000 shares of the Company’s common stock, with a ten year term starting February 19, 2007, an exercise price equal to $0.45 per share, the fair market value of the Company’s common stock on such date, and a vesting schedule of 25,000 shares vesting on the first anniversary of the date of grant and 25,000 shares vesting on each subsequent anniversary of the date of grant; a bonus payable in 2008 in the amount of $20,000 cash and an option grant for an additional 50,000 shares in the event (a) the Company’s net revenue meets a revenue target for the 2007 year,(b) the Company has a positive net income for the 2007 year, and (c) the Company does not have any restatements of its financial statements during 2007 and for any periods during 2007 or the year 2007 on or prior to the completion of the audit of the 2007 financial statements. Mr. Allison also received full health and dental insurance coverage through the Company.
 
Peter J. Leveton

On May 31, 2005, Zynex Medical Holdings, Inc. entered into a compensation agreement with Peter J. Leveton, the Company's Chief Financial Officer to be effective as of April 18, 2005 (the "Effective Date"). Mr. Leveton’s employment with the Company was terminated on February 16, 2007. The agreement provided for a monthly salary of $2,250 per month. It also provided for an increase in the monthly salary of an additional $4,000 per month (the "First Raise") in the event (a) the Company obtained a line of credit of at least $250,000, or (b) the Company received third party equity or debt investment of at least $1,000,000, or (c) the Company had annual audited "positive net cash provided by operating activities" of at least $500,000, or (d) the Company underwent a liquidity event with a valuation of at least $10,000,000 (items (b) through (d) shall be referred to as "Raise Events"). Mr. Leveton met the standard for the First Raise and it was in effect. The agreement also provided for an additional increase in the monthly salary of $5,000 per month (the "Second Raise") in the event the Company undergoes a Raise Event. Mr. Leveton met the standard for the Second Raise in 2006, and it was in effect. The First Raise and Second Raise, once earned and vested, were paid in arrears with respect to each month of employment beginning as of the Effective Date through the month of vesting, and then were paid currently through the date of termination of Mr. Leveton's employment. Mr. Leveton and the Company entered into a Separation Agreement whereby Mr. Leveton agreed to extend payment of the previously earned portion of the second raise over the ten-month period January-October 2007 with interest at 8.25%.

Under the Agreement Mr. Leveton received stock options to purchase up to 350,000 shares of the Company's Common Stock. Such options have a ten-year term, except options for 100,000 shares which expire on April 17, 2010, and an exercise price equal to the fair market value of the Common Stock on the date of grant, April 18, 2005. Such options were vested as follows: 100,000 shares vested on the date of grant; 25,000 shares vested on June 30, 2005; and 25,000 shares vested as of the last day of each full calendar quarter beginning as of July 1, 2005 through December 31, 2006; and 50,000 shares vested upon a Raise Event which was completed in January 2007. All unvested quarterly options would have immediately vested and become exercisable upon a liquidity event with a valuation of at least $10,000,000; provided the liquidity event occured during Mr. Leveton's employment or if Mr. Leveton played an active, integral and key role in accomplishing such event, within 90 days of involuntary termination. All unvested options expired upon the termination of Mr. Leveton’s employment. As of February 16, 2007, Mr. Leveton’s termination date, 325,000 of the options had vested. In February 2008, Mr. Leveton exercised 325,000 options for 282,440 shares of common stock in a cashless exercise.

 
- 34 -
 

Outstanding Equity Awards At 2007 Year-End

The following table sets forth information concerning unexercised options, stock that is not vested and equity incentive plan awards for each executive officer named in the Summary Compensation Table as of December 31, 2007:
 
               Name 
Number of Securities
Underlying Unexercised
Options (#)
Exercisable
Number of Securities
Underlying Unexercised
Options (#)
Unexercisable
Equity Incentive
Plan Awards:
Number of Securities
Underlying Unexercised
Unearned Options (#)
Option 
Exercise
Price  
Option
Expiration
Date
 
 
       
Thomas Sandgaard
--
--
--
--
--
 
 
   
 
 
Fritz G. Allison (1) 
--
104,000
--
$0.45
February 17,
September 30, 2017
 
 
   
 
 
Peter J. Leveton (2)
325,000
--
--
$0.22
April 18, 2015
           
____________
 
(1) For information on the vesting of the options for 100,000 shares of common stock held by Mr. Allison, see "Employment Agreements – Fritz G Allison" above in this Item. Mr. Allison also participates in the 2005 Stock Option Plan discussed below in this item. The options under the Plan vest over a four-year period.

(2) For information on the vesting of the options held by Mr. Leveton, see "Employment Agreements - Peter J. Leveton" above in this Item.

Effective December 30, 2005, the primary stockholder, Thomas Sandgaard, approved the 2005 Stock Option Plan ("2005 Plan") that authorized the granting of options to purchase 3,000,000 shares of the Company's common stock, subject to adjustment for stock splits, recapitalizations and similar events. Options granted under the 2005 Plan may be either non-qualified or incentive and may be granted to employees, directors, independent contractors and consultants. at the discretion of the Board of Directors (the "Board"). The 2005 Plan is available for option grants until December 31, 2014. The 2005 Plan is administered by Zynex's President and Chief Executive Officer (the "Administrator"). The option price per share under the 2005 Plan must be the fair market value of the Company’s common stock on the date of grant unless such option is granted in substitution of options granted by a new employee's previous employer or the optionee pays or foregoes compensation in the amount of any discount. The options have a maximum term of ten years and will vest as determined by the Administrator. Options cease to be exercisable one month after termination of an optionee's continuous service due to reasons other than cause, and twelve months after death, disability or retirement. Options may be suspended or terminated if the Administrator or any person designated by the Administrator reasonably believes that the optionee has committed an act of misconduct against Zynex. Options are not transferable unless specified by the Administrator.
 
Director Compensation

We have only one director, Mr. Sandgaard. He receives no additional compensation for serving as a director.

 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
The following table contains certain information regarding beneficial ownership of the Company's common stock as of August 11, 2008 by (i) each person who is known by the Company to own beneficially more than 5% of the Company’s common stock, (ii) each of the Company’s directors, (iii) the Company’s executive officers named in the Directors, Executive Officers and Control Persons Table above and (iv) all directors and executive officers as a group. The information provided regarding beneficial ownership of the principal stockholders is based on publicly available filings and, in the absence of such filings, on the shares held of record by such persons.

 
- 35 -
 
 
 
   
Number of Shares
Percent
   
Beneficially
Of
         Name 
Class of Stock
Owned (2) 
Class
       
Executive Officers:
      
       
Thomas Sandgaard
8022 Southpark Cir. Suite 100
Littleton, CO  80120
Common
18,245,500
62.3%
       
Fritz Allison
8022 Southpark Cir. Suite 100
Littleton, CO  80120
Common
25,500 (3)
0.1%
 
 
   
Other 5% Beneficial Owners
      
       
Regency Group
      
4600 S Ulster St., Suite 975
Denver, Colorado (1)
Common
1,900,000
6.1%
       
All Directors and
      
Named Executive Officers
      
As a Group
Common
20,171,000
62.3%
_______________

(1) On September 27, 2004, the Company issued options valued at $11,707 to acquire 1,900,000 shares of common stock to this financial consulting firm in exchange for consulting services provided in connection with the Company's reverse acquisition and past investor relations. The options, which expire September 26, 2009, permit the purchase of common stock in certain quantities and at various prices ranging from $.40 per share to $4.00 per share, as set forth in Note 5 of the Notes to Consolidated Financial Statements for the year ended December 31, 2007.

(2) A person has beneficial ownership of any securities to which the person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or investment power or as to which such person has the right to acquire such voting and/or investment power within 60 days from August 11, 2008. The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person by the sum of the number of shares outstanding as of such date and the number of unissued shares as to which the person has the right to acquire voting and/or investment power within 60 days.

(3) These shares are subject to stock options held by Mr. Allison.


CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
The Company has entered into loans to the Company by Thomas Sandgaard. Interest payable on these loans for 2007 was a total of $7,617, and the Company has paid this interest to Mr. Sandgaard. For a full description and the terms of these notes please see Note-6 “Loans from Stockholder” in the notes to the consolidated financial statements below in this prospectus for the nine months ended September 30, 2007.

The loans with Silicon Valley Bank in the amount of $400,000 and $240,000, made in 2005 and 2006, as described above, were guaranteed by Zynex Chairman, President and Chief Executive Officer, Thomas Sandgaard, and were collateralized by a first perfected security interest in accounts, inventory, chattel paper, equipment, fixtures, general intangibles, including intellectual property and other assets. Mr. Sandgaard did not receive any compensation for this guarantee. This bank loan was repaid in February, 2008.


 
- 36 -
 

Our sole director, Mr. Sandgaard, is not an independent director as defined in rules of the NASDAQ Stock Market or AMEX.

Mr. Sandgaard, because of his stock ownership and position as the sole director, may be considered a “parent” of the Company.

We employ Mr. Sandgard’s wife in a full time position as Billing Manager.  In addition, we employ Mr. Sandgard’s two children in part time positions.  The following table sets forth their compensation:
 
Name and Principal Position
  
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($) (1)
Non-Equity Incentive Plan Compensation
($)
Change in
Pension
Value and Nonqualified Deferred Compensation Earnings
($)
All Other Compensation
($)
Total
($)
Birgitte Sandgaard
  
2007
66,000
0
0
580
0
0
0
66,580
Billing Manager
  
2006
50,400
0
0
200
0
0
0
50,600
                     
Joachim Sandgaard
  
2007
33,791
0
0
580
0
0
0
34,371
Insurance Claims
  
2006
17,528
0
0
200
0
0
0
17,728
                     
Martin Sandgaard
  
2007
10,082
0
0
65
0
0
0
10,147
Accounts Receivable
Specialist
  
2006
0
0
0
0
0
0
0
0
 
(1)            The Option Awards represents the dollar amount recognized for financial statement reporting purposes with respect to 2006 and 2007 for the fair value of stock options granted to each of the named related parties, in accordance with SFAS 123R.
 

 Indemnification For Securities Act Liabilities
 
The Articles of Incorporation and Bylaws of the Company provide for indemnification of our directors and certain officers for liabilities and expenses that they may incur in such capacities. In general, our directors and certain officers are indemnified with respect to actions taken in good faith and in a manner such person believed to be in our best interests, and with respect to any criminal action or proceedings, actions that such person has no reasonable cause to believe were unlawful. Furthermore, the personal liability of our directors is limited as provided in our Articles of Incorporation.
 
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 
 
- 37 -
 
 
 EXPERTS
 
Our audited financial statements included herein and elsewhere in the Registration Statement of which this prospectus is a part have been audited by GHP Horwath, P.C. an independent registered public accounting firm, for the periods and to the extent set forth in their reports dated April 15, 2008 and April 16, 2007 (which includes an explanatory paragraph relating to our adoption of Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment effective January 1, 2006) appearing herein and elsewhere in the Registration Statement of which this prospectus is a part. Such financial statements have been so included in reliance upon the reports of such firm given upon the firm’s authority as an expert in auditing and accounting.


LEGAL MATTERS

The validity of the shares of common stock being offered hereby was passed upon for us by Holland & Hart LLP.


AVAILABLE INFORMATION
 
We have filed a registration statement on Form S-1 under the Securities Act of 1933, as amended, relating to the shares of common stock being offered by this prospectus, and reference is made to such registration statement. This prospectus constitutes the prospectus of Zynex, Inc., filed as part of the registration statement, and it does not contain all information in the registration statement, as certain portions have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission.
 
We are subject to the informational requirements of the Securities Exchange Act of 1934, which requires us to file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information may be inspected at public reference facilities of the SEC at 100 F Street N.E., Washington D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the SEC at 100 F Street N.E., Washington, D.C. 20549 at prescribed rates. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC's Internet website at http://www.sec.gov.
 

 
- 38 -
 
 

 

 
Zynex Medical Holdings, Inc.
 
 
Consolidated Financial Statements
December 31, 2007
 
 



 
 
 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors
Zynex Medical Holdings, Inc.


We have audited the accompanying consolidated balance sheet of Zynex Medical Holdings, Inc. and subsidiary (the “Company”) as of December 31, 2007 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zynex Medical Holdings, Inc. and subsidiary as of December 31, 2007, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
 

/s/ GHP Horwath, P.C.
GHP Horwath, P.C.

Denver, Colorado
April 15, 2008
 
 
F - 1
 
 
Zynex Medical Holdings, Inc.
Consolidated Balance Sheet
December 31, 2007
 
 
ASSETS
      
Current Assets:
      
Accounts receivable, less allowance for uncollectible
        
accounts of $5,901,724
  
$
4,475,932
  
Inventory
    
937,694
  
Deferred financing fees
    
5,525
  
Prepaid expenses
    
34,795
  
Deferred tax asset
    
210,000
  
Other current assets
    
47,715
  
         
Total current assets
    
5,711,661
  
         
Property and equipment, less accumulated
        
depreciation of $412,315
    
932,222
  
Deposits
    
21,286
  
         
         
   
$
6,665,169
  
         
         
LIABILITIES AND STOCKHOLDERS' EQUITY
        
Current Liabilities:
        
Bank overdraft
  
$
89,347
  
Notes payable
    
252,573
  
Loan from stockholder
    
118,451
  
Capital lease
    
17,932
  
Accounts payable
    
817,429
  
Income taxes payable
    
910,000
  
Accrued payroll and payroll taxes
    
213,935
  
Other accrued liabilities
    
498,709
  
         
Total current liabilities
    
2,918,376
  
         
Loan from stockholder, less current maturities
    
20,332
  
Notes payable, less current maturities
    
6,732
  
Capital lease, less current maturities
    
12,189
  
Long-term deferred tax liability
    
90,000
  
         
Total liabilities
    
3,047,629
  
         
Contingencies and Commitments
    
--
  
         
Stockholders' Equity:
        
Preferred stock, $.001 par value, 10,000,000 shares authorized,
    
--
  
no shares issued or outstanding
        
Common stock, $0.001, par value, 100,000,000 shares authorized,
    
26,831
  
26,831,113 shares issued and outstanding
        
Additional paid-in capital
    
2,634,075
  
Retained earnings
    
956,634
  
         
         
Total stockholders' equity
    
3,617,540
  
         
   
$
6,665,169
  

See accompanying notes to financial statements.

 
F - 2
 
 
Zynex Medical Holdings, Inc.
Consolidated Statements of Operations
Years ended December 31,
 
 
   
2007
    
2006
  
             
Net sales and rental income
   $ 8,048,252     $ 2,556,809  
Cost of sales and rentals
     729,046       303,719  
                 
Gross profit
     7,319,206       2,253,090  
                 
Operating expenses:
                
Selling, general and administrative, including
                
common stock and warrants issued for consulting services
                
of $101,250 and $102,250 in 2007 and 2006, respectively
     4,003,432       2,326,793  
Depreciation
     153,442       94,009  
                 
      4,156,874       2,420,802  
                 
Income (loss) from operations
     3,162,332       (167,712 )
                 
Other income (expense):
                
Interest income
     24       1,370  
Interest expense
     (244,840 )     (155,492 )
Other income
     3,834       1,464  
                 
      2,921,350       (320,370 )
                 
Income tax expense
     790,000       --  
                 
                 
Net income (loss)
   $ 2,131,350     $ (320,370 )
                 
Net income (loss) per common and common equivalent share
                
                 
Basic
   $ 0.08       *  
                 
Diluted
   $ 0.07       *  
                 
Weighted average number of shares outstanding
                
                 
Basic
     26,595,967       24,026,988  
                 
Diluted
     28,455,447       24,026,988  
 
* Less than $0.01 per share

See accompanying notes to financial statements.

 
F - 3
 
 
Zynex Medical Holdings, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
 
   
2007
    
2006
  
             
Cash flows from operating activities:
            
Net income (loss)
  
$
2,131,350
    
$
(320,370
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                
Depreciation
    
153,442
      
94,009
  
Provision for losses in accounts receivable
    
4,801,724
      
386,518
  
Amortization of deferred consulting and financing fees
    
156,303
      
108,816
  
Issuance of common stock and warrants for consulting services, interest and loan fees
    
68,537
      
46,000
  
Deferred income tax benefit
    
(120,000
 )     
--
  
Provision for obsolete inventory
    
109,886
      
16,000
  
Amortization of discount on note payable to interest expense
    
56,548
      
38,670
  
Amortization of beneficial conversion feature to interest expense
    
3,961
      
3,533
  
Employee stock based compensation expense
    
28,797
      
20,110
  
Changes in operating assets and liabilities:
                
Accounts receivable
    
(7,939,783
)
    
(1,029,501
)
Inventory
    
(486,567
)
    
(87,782
)
Prepaid expenses
    
3,271
      
(2,252
)
Refundable income taxes
    
--
      
7,586
  
Other current assets
    
(36,465
)
    
(9,818
)
Deposits and other assets
    
(10,348
) 
    
--
  
Accounts payable
    
419,444
      
94,566
  
Accrued liabilities
    
495,589
      
150,455
  
Income taxes payable
    
910,000
      
--
  
                 
Net cash produced by (used in) operating activities
    
745,689
      
(483,460
)
                 
Cash flows from investing activities:
                
Purchases of equipment
    
(751,310
)
    
(151,586
)
                 
Net cash used in investing activities
    
(751,310
)
    
(151,586
)
                 
Cash flows from financing activities:
                
Increase in bank overdraft
    
89,347
      
--
  
Payments on notes payable and capital lease
    
(429,331
)
    
(208,275
)
Proceeds from sale of common stock and exercise warrants, net
    
1,767
      
604,476
  
Proceeds from loans payable
    
--
      
446,563
  
Proceeds from loans from stockholder
    
133,500
      
146,900
  
Repayment of loans from stockholder
    
(54,859
)
    
(108,154
)
                 
Net cash (used in) financing activities
    
(259,576
) 
    
881,510
  
                 
(Decrease) increase in cash and cash equivalents
    
(265,197
) 
    
246,464
  
                 
Cash and cash equivalents at beginning of period
    
265,197
      
18,733
  
                 
Cash and cash equivalents at end of period
  
$
--
    
$
265,197
  
                 
Supplemental cash flow information:
                
Conversion of notes payable to common stock
  
$
99,175
    
$
--
  
Acquisition of furniture in exchange for note payable
  
$
7,000
          
 
See accompanying notes to financial statements.

 
F - 4
 
 
Zynex Medical Holdings, Inc.
Consolidated Statements of Stockholders' Equity
 
               
Additional
              
   
Number
          
Paid in
    
Accumulated
        
   
of Shares
    
Amount
    
Capital
    
Deficit
    
Total
  
                               
January 1, 2006
     23,199,421     $ 23,199     $ 1,465,024     $ (854,346 )   $ 633,877  
                                         
Private placement of common stock, net of offering costs
     2,429,475       2,430       602,046       --       604,476  
                                         
Warrants granted upon issuance of note payable and for financing fee
     --       --       107,537       --       107,537  
                                         
Conversion feature of note payable
     --       --       8,593       --       8,593  
                                         
Issuance of common stock for financing fee
     65,000       65       21,385       --       21,450  
                                         
Issuance of common stock for consulting services
     575,612       576       202,924       --       203,500  
                                         
Employee stock compensation expense
     --       --       20,110       --       20,110  
                                         
Issuance of common stock in satisfaction of payable
     41,403       41       8,240       --       8,281  
                                         
Net loss
     --       --       --       (320,370 )     (320,370 )
                                         
December 31, 2006
     26,310,911       26,311       2,435,859       (1,174,716 )     1,287,454  
                                         
Issuance of common stock for loan extension and conversion
     459,916       460       167,713       --       168,173  
                                         
Issuance of common stock for the exercise of warrants
     59,048       59       531       --       590  
                                         
Issuance of common stock for cash
     1,238       1       1,175       --       1,176  
                                         
Employee stock compensation expense
     --       --       28,797       --       28,797  
                                         
Net income
     --       --       --       2,131,350       2,131,350  
                                         
December 31, 2007
     26,831,113     $ 26,831     $ 2,634,075     $ 956,634     $ 3,617,540  
                                         
 
See accompanying notes to financial statements.
 
 
F - 5
 
 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS

Zynex Medical, Inc. was incorporated under the laws of the state of Colorado on March 3, 1998, under the name of "Stroke Recovery Systems, Inc." (SRSI). On October 1, 2003, Zynex Medical, Inc. acquired, through merger, the assets and liabilities of Dan Med, Inc. (DMI), a Colorado corporation under common control. The companies were merged in order to simplify the operating and capital structure of both companies. SRSI concurrently changed its name to Zynex Medical, Inc. Zynex Medical Holdings, Inc. (the “Company”) was created in February 2004 through a reverse acquisition.

At present, Zynex Medical, Inc. generates substantially all its revenue in North America from sales and rentals of its products to patients, dealers and health care providers. The amount of net revenue derived from Medicare and Medicaid programs for 2007 and 2006 is approximately 6% and 5% respectively.

The Company designs, assembles and commercializes a line of FDA cleared medical devices for the electrotherapy and stroke rehabilitation markets. The Company also purchases electrotherapy devices and supplies from other domestic and international suppliers for resale.

 
F - 6
 
 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of Zynex Medical Holdings, Inc. and Zynex Medical, Inc. for all of the periods presented. All inter company balances and transactions have been eliminated in consolidation.

REVENUE RECOGNITION

Sales and rental income is recognized when a product has been medically prescribed and dispensed to a patient and, when applicable, a claim prepared by the Company has been filed with the patient's insurance provider. Product and rental income is recognized net of the estimated uncollectible percentage of sales as described below.

RESERVE FOR SALES RETURNS, ALLOWANCES AND COLLECTIBILITY

The Company maintains a reserve for sales allowances, returns and collectibility. Sales returns and allowances result from reimbursements from insurance providers that are less than amounts claimed, as provided by agreement, where the amount claimed by the Company exceeds the insurance provider's usual, customary and reasonable reimbursement rate and when units are returned because of benefit denial. The provision is provided for by reducing gross revenue by a portion of the amount invoiced during the relevant period. The amount of the reduction is estimated based on historical experience.

Changes in the allowance for uncollectible accounts receivable for the years ended December 31, 2007 and 2006 are as follows:
 
   
2007
    
2006
  
             
Balances, beginning of year
   $ 1,100,000     $ 713,481  
Additions credited to net sales and rental income
     8,033,045       1,128,734  
Write-offs credited to accounts receivable
     (3,231,321 )     (742,215 ) 
                 
    $ 5,901,724     $ 1,100,000  
 
USE OF ESTIMATES

Preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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 financial statements are associated with collectibility of accounts receivable.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents are stated at cost. Cash equivalents consist of all highly liquid investments with maturities of three months or less when acquired.
 

 
F - 7
 
 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK

The Company's financial instruments primarily consist of cash, receivables and payables for which current carrying amounts approximate fair value. Additionally, interest rates on outstanding borrowings are at rates that approximate market rates for borrowings with similar terms and average maturities. The fair value of the loan from stockholder is not practicable to estimate, due to the related party nature of the underlying transactions.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade receivables.

The Company has recorded trade receivables from business operations. Management regularly evaluates the collectibility of accounts receivable and believes that net receivables recorded as of December 31, 2007 to be collectible.

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 December 31, 2007, the Company had a reserve balance for slow moving inventory of approximately $125,000.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. The Company removes the cost and the related accumulated depreciation from the accounts of assets sold or retired, and the resulting gains or losses are included in the results of operations. Depreciation is computed using the straight-line method. Cost and related estimated useful lives of property and equipment as of December 31, 2007 are as follows:
 
   
Cost
  
Useful lives
         
Office furniture and equipment
  
$
198,173
  
3-7 years
Rental inventory
    
1,068,303
  
5 years
Vehicles
    
59,833
  
5 years
Leasehold Improvements
    
8,500
  
5 years
Assembly equipment
    
9,728
  
7 years
     
1,344,537
    
Less accumulated depreciation
    
(412,315
)
  
Net
  
$
932,222
    

Repairs and maintenance costs are charged to expense as incurred.

SHIPPING COSTS

Shipping costs are included in cost of sales and rentals.

 
F - 8
 
 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


STOCK-BASED COMPENSATION

Effective January 2006, the Company has adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award that is ultimately expected to vest during the period. SFAS 123R requires the stock compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the requisite service period, which in the Company’s case is the same as the vesting period).
 
In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. Prior to our adopting SFAS 123R, we accounted for our employee stock-based compensation plans under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, generally no compensation expense was recorded when the terms of the award were fixed and the exercise price of the employee stock option equaled or exceeded the fair value of the underlying stock on the date of grant.

 
F - 9
 
 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ADVERTISING

The Company expenses advertising costs as they are incurred. Advertising expenses for the years ended December 31, 2007 and 2006 totaled $32,008 and $146,814, respectively.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed when incurred. There were $15,705 in research and development expenses for the year ended December 31, 2007 and no research and development expenses in 2006. Research and development costs as well as salaries related to research and development are included in selling, general and administrative expenses.

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.

COMPREHENSIVE INCOME

There are no adjustments necessary to the net income (loss) as presented in the accompanying statement of operations to derive comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income."

SEGMENT REPORTING

In June 1997, SFAS 131, "Disclosure about Segments of an Enterprise and Related Information," was issued. Operating segments, as defined in the pronouncement, are components of an enterprise about which separate financial information is available and that are evaluated regularly by management in deciding how to allocate resources and assess performance. To date, the Company has only had one operating segment.
 
 
F - 10
 
 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EARNINGS PER SHARE

The Company computes net earnings (loss) per share in accordance with SFAS No. 128, "Earnings per Share", which establishes standards for computing and presenting net 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 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. The effects of potential common stock equivalents have not been included in the computation of diluted net loss per share for the year ended December 31, 2006 as their effect is anti-dilutive.

The calculation of basic and diluted earnings per share for 2007 is as follows:

BASIC
  
2007
  
       
Net income applicable to common stockholders
  
$
2,131,350
  
         
         
Weighted average shares outstanding - basic
    
26,595,967
  
         
         
Net income per share - basic
  
$
0.08
  
         
         
DILUTED
        
         
Net income applicable to common stockholders
  
$
2,131,350
  
         
         
Weighted average shares outstanding - basic
    
26,595,967
  
         
         
Dilutive securities
    
1,859,480
  
         
         
Weighted average shares outstanding - diluted
    
28,455,447
  
         
Net income per share - diluted
  
$
0.07
  
 

 
F - 11
 
 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations (“SFAS 141 (R)”) which becomes effective for fiscal periods beginning after December 15, 2008. SFAS No. 141 (R) requires all business combinations completed after the effective date to be accounted for by applying the acquisition method (previously referred to as the purchase method). Companies applying this method will have to identify the acquirer, determine the acquisition date and purchase price and recognize at their acquisition date fair values of the identifiable assets acquired, liabilities assumed, and any non-controlling interests in the acquiree. In the case of a bargain purchase the acquirer is required to reevaluate the measurements of the recognized assets and liabilities at the acquisition date and recognize a gain on that date if an excess remains. The Company is currently assessing the impact that the adoption of this statement may have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51 (“SFAS 160”) which becomes effective for fiscal periods beginning after December 15, 2008. This statement amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The statement requires ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. The statement also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest with disclosure on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. In addition this statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment to FASB Statement No. 115 .This statement permits companies to choose to measure many financial instruments and other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement of accounting for financial instruments. This statement applies to all entities, including not for profit. The fair value option established by this statement permits all entities to measure eligible items at fair value at specified election dates. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently assessing the impact that the adoption of this statement may have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS No. 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2008 for non-financial assets and liabilities, and is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities.. The Company is currently assessing the impact that the adoption of this statement may have on its consolidated financial statements.

 
F - 12
 
 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - NOTES PAYABLE AND LEASES

On October 5, 2005 Zynex received $400,000 under a three-year term loan agreement with Silicon Valley Bank, Santa Clara, California and Boulder, Colorado (the "Lender"). The loan bore interest at a per annum fixed rate of 7.84%. The loan was guaranteed by Zynex Chairman, President and Chief Executive Officer Thomas Sandgaard and was collateralized by a first perfected security interest in accounts, inventory, chattel paper, equipment, fixtures, general intangibles, including intellectual property and other assets. The Company was to repay the loan in 36 equal monthly payments of principal and interest. The loan included financial covenants for minimum liquidity and minimum debt service coverage, which the Company was in compliance with as of December 31, 2007 and 2006. In connection with the loan, the Lender was granted a seven-year warrant to purchase 50,000 shares of Zynex Common Stock at an exercise price of $0.71 per share.

On March 15, 2006 Zynex received $240,000 under a three-year term loan agreement with Silicon Valley Bank, Santa Clara, California and Boulder, Colorado (the "Lender"). The loan bore interest at a per annum fixed rate of 8.48%. The loan was guaranteed by Zynex Chairman, President and Chief Executive Officer Thomas Sandgaard and was collateralized by a first perfected security interest in accounts, inventory, chattel paper, equipment, fixtures, general intangibles, including intellectual property and other assets. The Company was to repay the loan in 36 equal monthly payments of principal and interest. The loan included financial covenants for minimum liquidity and minimum debt service coverage, which the Company was in compliance with as of December 31, 2007 and 2006.

On October 18, 2006, the Company entered into a loan transaction with Ascendiant Capital Group, LLC (an affiliate of Ascendiant Securities, LLC) and issued to Ascendiant Capital (a) a secured Note in the total principal amount of $275,000 (the "Note") and (b) a five-year warrant to purchase a total of 429,867 shares of our common stock at a fixed exercise price of $0.39 per share. The warrants were valued at the date of grant at $113,437 using the Black-Scholes option-pricing model. The relative fair value of the warrants ($80,310) was accounted for as a discount applied against the face amount of the Note. The discount was amortized over the term of the promissory note to interest expense. For the years ended December 31, 2007 and 2006, the Company recorded $47,294 and $33,016 interest expense, respectively. The Note was convertible into common stock at a fixed conversion price of $0.32 per share. The conversion of the Note was deemed to be beneficial as the Note converted to common stock at $0.32 per share and the estimated fair value of the common stock was determined to be $0.33 per share on the date the transaction was entered into. The intrinsic value of the beneficial conversion feature of $8,593 was amortized as additional interest expense over the term of the Note. Net proceeds of approximately $206,000 from the transaction were used for general working capital.

In connection with the Note, the Company issued 65,000 shares of common stock to Ascendiant Capital as a fee and granted a warrant to purchase 103,130 shares of common stock with an exercise price of $0.39 per share as a placement fee to Ascendiant Securities.  The shares were values at $21,450 (based on the closing market price of $0.33 per share at the date the transaction was closed) and the warrants were valued at $27,227 using the Black Scholes option-pricing model. These fees and $32,000 of financial fees paid at closing were amortized over the six month term.

In May 2007, the Company and Ascendiant Capital agreed to extend the maturity date of the loan and to modify extension terms of the Note.  Under the modified agreement the principal was to be paid in six equal monthly installments plus interest at 21%, although prepayment was permitted without penalty.  The entire amount was to be repaid no later than October 18, 2007.  For extending the Note, the Company issued 75,000 shares of common stock in May 2007.  The shares were valued at $26,250. The extension agreement called for additional shares to be issued every month as long as an outstanding balance remained on the Note.  The number of shares to be issued monthly depended upon the balance of the Note, up to an aggregate maximum of 450,000 shares of common stock, which number included the 75,000 shares of common stock issued in May 2007.  Previously, 450,000 shares were to be issued upon the extension.
 
F - 13
 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In May 2007, the Company repaid principal of $100,000, interest of $4,812 and issued 50,000 shares of common stock valued at $21,500.

In June 2007, the Company repaid principal of $76,000, interest of $3,062 and issued 25,000 shares of common stock valued at $21,250.

On June 21, 2007, Ascendiant Capital surrendered the Note for conversion into common stock at the fixed conversion price of $0.32 per share.  The remaining principal of $99,000 plus accrued interest of $173 were converted into 309,916 shares of common stock.

In November 2006, the Company issued a note payable in the amount of $25,881 in satisfaction of a payable due to a sales representative of the company. This note is unsecured and bears interest at 8.25%. Interest that accrues through March 31, 2007 was due and payable on that date. The note is being paid in 12 equal payments of $2,224 through March 1, 2008. Principal payments of $19,300 were made through December 31, 2007. 
 
Notes payable at December 31, 2007 consisted of the following:

Note payable to a bank, principal and interest payments of $12,531 due on a monthly
      
basis through September, 2008. Annual interest rate of 7.84%, collateralized
      
by accounts, inventory, chattel papers, equipment, fixtures, and general intangibles,
      
including intellectual property. The note was guaranteed by the President and
      
Chief Executive Officer and largest shareholder
  
$
120,994
  
         
Note payable to a bank, principal and interest payments of $7,559 due on a monthly
        
basis through March, 2009. Annual interest rate of 8.48%, collateralized
        
by accounts, inventory, chattel papers, equipment, fixtures, and general intangibles,
        
Including intellectual property. The note was guaranteed by the President and
        
Chief Executive Officer and largest shareholder
    
107,221
  
         
Motor vehicle contract payable in 60 monthly
        
installments of $1,351, annual interest at
        
15.1%, secured by automobile.
    
18,350
  
         
Note payable to a sales representative of the Company, principal and interest
        
payments of $2,239 due in 12 equal installments from April 1, 2007 through
        
March 31, 2008, annual interest at 8.25%, unsecured.
    
6,580
  
         
Note payable to landlord for furniture payable in 25 monthly installments of $280, annual interest of 8.2%, secured by furniture.
    
6,440
  
         
Total
    
259,585
  
         
         
Less current maturities
    
(252,853
)
         
Long-term maturities
  
$
6,732
  
 
Future maturities of the notes payable are as follows:
 
 Year ending December 31,
      
       
                 2008
  
$
252,853
  
                 2009
    
6,732
  
         
   
$
259,585
  
  
 
F - 14
 

ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO 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, 2007, $14,592 of this amount remained outstanding   The remaining $96,900 was represented by 8.25% demand notes and will be repaid as the Company's cash position and its financing covenants allow. As of December 31, 2007, $4,171 of this amount remained outstanding. 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, 2007, $40,920 and $18,365 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, 2007, $60,735 remains outstanding.  The loan from Mr. Sandgaard was used for working capital purposes.

Future maturities of these loans are as follows:
 
Year ending December 31,
      
                 2008
  
$
118,451
  
                 2009
    
20,332
  
                
    
 
  
         
   
$
138,783
  
 
The Company has commitments under various operating and capital leases that are payable in monthly installments. In November 2007, the Company entered into a 25-month sublease of office, plant and warehouse space in Littleton, Colorado. The lease provides for annual rent of $100,975 plus property taxes and maintenance costs. As of December 31, 2007, future minimum lease payments under non-cancelable operating and capital leases are as follows:
 
   
Capital
    
Operating
  
   
Lease
    
Leases
  
             
2008
  
$
18,869
    
$
206,480
  
2009
    
12,579
      
175,083
  
2010
            
14,575
  
                 
Total future minimum lease payments
    
31,448
    
$
396,138
  
                 
Less amount representing interest
    
1,327
          
                 
Present value of net minimum lease payments
    
30,121
          
Less current portion
    
(17,932
)
        
                 
Long-term capital lease obligation
  
$
12,189
          

Rent expense under operating leases for 2007 and 2006 was $114,553 and $122,206, respectively. 

 
F - 15
 

ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - INCOME TAXES

Income tax (benefit) expense consists of the following for the year ended December 31, 2007:
 
       
Current tax (benefit) expense
      
   
        
    Federal
  
 $
 800,000
  
    State 
    
 110,000
  
         
     
910,000
  
Deferred tax (benefit) expense
        
  
        
    Federal
  
 
 (110,000
)
    State
    
 (10,000
)
         
         
Decrease in valuation allowance
    
(120,000
) 
         
   
$
790,000
  
 
There is no federal or state income taxes for the year ended December 31, 2006.

A reconciliation of income tax computed at the U.S. statutory rate of 35% to the effective income tax rate is as follows:
 
   
2007
    
2006
  
             
Statutory rate
    
(35
)%
    
(35
)%
State taxes
    
(2
)%
    
(5
)%
Permanent differences
    
(2)
%
    
10
%
Temporary timing differences
    
10
%
    
1
%
Net operating loss carryover and other
    
2 
%
    
29
%
                 
Combined effective rate
    
27
%
    
0
%
 
The tax effects of temporary differences that give rise to deferred tax assets (liabilities) at December 31, 2007 are as follows:
 
Current deferred tax assets:
      
Accrued expenses
  
$
14,000
  
Accounts receivable
    
185,000
  
Inventory
    
47,000
  
         
     
246,000
  
Valuation allowance
    
(36,000
)
         
Net current deferred tax asset
  
$
210,000
  
         
Long-term deferred tax liabilities:
        
Property and equipment
  
$
90,000
  
         
Net long-term deferred tax liability
  
$
90,000
  
 
F - 16
 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SFAS 109 requires that all deferred tax balances be determined using the tax rates and limitations expected to be in effect when the taxes will actually be paid or recovered. Consequently, the income tax provision will increase or decrease in the period in which a change in tax rate or limitation is enacted. As of December 31, 2007, the Company had total deferred tax assets of $210,000 and deferred tax liabilities of $90,000. The Company recorded a valuation allowance in the amount of $36,000 at December 31, 2007, against the amount by which deferred tax assets exceed deferred tax liabilities. The valuation reserve at December 31, 2007 has been provided due to the uncertainty of the amount of future taxable income. The Company provides a valuation allowance in the full amount of its deferred tax assets that exceed deferred tax liabilities because under the criteria of SFAS No. 109, the Company does not have a basis to conclude that it is more likely than not that it will realize the deferred tax assets.


NOTE 5 - Stockholders' Equity, Common Stock and Warrants

On November 3, 2006, the Company entered into a twelve-month consulting services agreement with Ascendiant Capital, in which this party agreed to advise the Company in business and financial matters for the twelve-month term of the agreement. Compensation consisted of 150,000 shares of the Company’s restricted common stock with a market value of approximately $67,500 (based on the closing market price of $0.45 per share at the date the transaction was entered into). The deferred cost was amortized on a straight-line basis over the twelve-month period from the date of the agreement. During the years ended December 31, 2007 and 2006, $56,250 and $11,250, respectively, was expensed.

On July 1, 2006, the Company entered into a twelve-month agreement with a consultant for investor relations services. Compensation consists of (a) a monthly fee of $8,000 cash and either $4,000 cash or 13,333 shares and (b) 300,000 of the Company’s restricted common stock with a market value of approximately $90,000 (based on the closing market price of $0.30 per share at the date the transaction was entered into). In October 2006, the client renegotiated its agreement with the consultant to exclude the $8,000 cash payment. In November, the number of shares to be issued as part of the monthly retainer was reduced to 10,000 per month, effective October 1. During the year ended December 31, 2006, 69,999 shares were issued under the agreement with a fair market value of $21,000. The deferred cost of $90,000 was being amortized on a straight-line basis over the twelve-month period from the date of the agreement. During each of the years ended December 31, 2007 and 2006, $45,000 was expensed.

 
 
F - 17
 

 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
During 2006, in terms of unregistered sales of securities, the Company (a) sold 2,175,000 shares of common stock, and five-year warrants to purchase a total of 1,740,000 shares of common stock at $0.32 per share, to accredited investors in a non public offering, (b) issued 254,475 shares to investment bankers responsible for the non public offering, issued to the provider of the convertible $275,000 bridge loan five-year warrants to purchase a total of 429,867 shares of common stock at $0.39 per share and a fee of 65,000 shares of common stock, (d) issued to the investment banker for the loan five-year warrants to purchase a total of 103,139 shares of common stock at $0.39 per share, (e) issued 150,000 shares to the investment banker responsible for such loan for future consulting services and (f) issued 425,612 shares to investor relations firms for services rendered including 55,613 shares with a total market value of $25,000 were issued to the Wall Street Group in return for investor relations services. In these issuances, the Company made no general solicitation, the Company believes that purchasers of the securities were accredited investors, the Company believes that the investment bankers, lender and investor relations firms were accredited investors or met the standards for a purchaser is a non-public offering, and the Company relied upon an exemption from securities registration for a non-public offering.

During the year ended December 31, 2005, the Company issued 312,500 warrants to purchase common stock with a fair market value of $41,250, 129,044 shares of unregistered common stock with a total market value of $46,500 and paid $6,250 to The Wall Street Group in return for investor relations services. The Company also issued (a) 8,333 warrants to purchase common stock at a fair market value of $2,870 to a financial consultant for preparation of financial projections and introduction to Silicon Valley Bank; (b) 50,000 warrants to purchase common stock with a fair market value of $22,100 to Silicon Valley Bank in connection with their September 2005, $400,000 term loan; (c) and 100,000 warrants to purchase common stock with a fair market value of $17,200 to an investment banking firm for services rendered. The agreement with The Wall Street Group ended in April 2006. The $22,100 additional compensation to Silicon Valley Bank was being amortized over the three-year term of the agreement and $5,525 has been deferred at December 31, 2007.
 
In, 2004, the Company sold 685,715 shares of common stock to five investors at $1.75 per share. The proceeds realized from the sale were $897,789, net of offering expenses and the fair value of Broker Warrants issued. In connection with the sales, the Company granted Class A Warrants to purchase an additional 342,859 shares of common stock at $1.75 per share, Class B Warrants to purchase an additional 685,715 shares of common stock at $2.00 per share, Class C Warrants to purchase 22,858 shares of common stock at $.01 per share and Broker Warrants to purchase 45,715 shares of common stock at $.01 per share.

The Class B, Class C and Broker's Warrants expire on June 4, 2009. The Class A Warrants expired February 20, 2006. The Company's registration statement, filed July 16, 2004 on Form SB-2/A, became effective July 20, 2004 and a First Amendment on Form SB-2/A became effective June 7, 2005.

Upon exercise of the warrants, the Company is required to pay Warrant Exercise Compensation equal to 10 percent of the cash proceeds payable to the Company. The Company is further required to issue one Broker's Warrant for each 10 shares of Class A, Class B and Class C Warrants exercised by the subscribers.

During the year ended December 31, 2007, the Company issued 59,048 shares of common stock upon the exercise of Class B and Class C Warrants and received $590.
 
 
F - 18
 

ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

In September 2004, the Company issued options to acquire 1,900,000 shares of common stock to a financial consulting firm in exchange for consulting services provided in connection with the Company's reverse acquisition, private placement and ongoing investor relations. The options, which expire September 26, 2009, permit the purchase of common stock in quantities and at prices set forth as follows:

Number of Shares
Price Per Share
   
100,000
$0.40
400,000
$1.75
200,000
$2.00
200,000
$2.25
200,000
$2.50
200,000
$2.75
200,000
$3.00
200,000
$3.50
200,000
$4.00

Also during 2004, the Company issued 120,000 warrants to purchase common stock for five years to two consultants and one employee; 110,000 of these warrants are exercisable at $3.00 per share and 10,000 are exercisable at $0.55 per share.
 
During 2006 and 2005, the Company also issued common stock and common stock warrants to consultants and debtors - see Note 3 - Notes payable and leases.

Stock Options:

On January 3, 2005, the Company established the 2005 Stock Option Plan (the "Option Plan") and 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 expire 10 years from the date of grant.

A summary of stock option activity under the Option Plan for the year ended December 31, 2007 is presented below:

             
Weighted
      
         
Weighted
  
Average
      
   
Shares
    
Average
  
Remaining
  
Aggregate
  
   
Under
    
Exercise
  
Contractual
  
Intrinsic
  
   
Option
    
Price
  
Life
  
Value
  
                     
Outstanding at January 1, 2007
     286,670     $ 0.34            
                           
Granted
     352,000     $ 0.68            
Exercised
     --     $ --            
Forfeited
     (142,670 )   $ 0.36            
Outstanding at December 31, 2007
     496,000     $ 0.58  
8.52 Years
     $
276,640
  
                             
Exercisable December 31, 2007
     91,500     $ 0.34  
7.74 Years
     $ 89,040  
 
 
F - 19
 

ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
The following table summarizes information about stock options outstanding as of December 31, 2007:

Options Outstanding
    
Options Exercisable
  
                           
           
Remaining
              
Exercise
    
Number of
    
contractual
    
Number of
    
Exercise
  
prices
    
options   
   
life (years)
    
options  
   
price
  
                           
                           
$0.30
     80,000    
7.00
     40,000    
$0.30
  
$0.23
     10,000    
7.25
     5,000    
$0.23
  
$0.50
     14,000    
7.50
     6,000    
$0.26
  
$0.75
     14,000    
7.75
     7,000    
$0.50
  
$0.27
     92,000    
8.50
     6,000    
$0.26
  
$0.33
     14,000    
8.75
     23,000    
$0.27
  
$0.26
     24,000    
9.00
     3,500    
$0.33
  
$0.45
     100,000    
9.25
              
$0.42
     22,000    
9.25
              
$0.85
     32,000    
9.50
              
$1.32
     74,000    
9.75
              
$1.33
     10,000    
9.80
              
$1.43
     10,000    
9.90
              
                           
      496,000           91,500        
 
For the years ended December 31, 2007 and 2006, the Company recorded compensation expense related to stock options that decreased net income (increased net loss) from operations and decreased net income (increased net loss) by $28,797 and $20,110, respectively. The stock compensation expense was included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.
 
During the year ended December 31, 2007 the Company granted stock options to acquire 352,000 shares of common stock to employees at exercise prices that ranged from 90,000 shares of common stock at $0.26 per share, 100,000 shares of common stock at an exercise price of $0.45 per share, 28,000 shares of common stock at an exercise price of $0.42 per share, 38,000 shares of common stock at an exercise price of $0.85 per share, 76,000 shares of common stock at an exercise price of $1.32 per share, 10,000 shares of common stock at an exercise price of $1.33 per share and 10,000 shares of common stock at an exercise price of $1.43 per share. The fair value of stock options at the date of grant during the three months ended December 31, 2007 was $1.199, $1.203 and $1.291 respectively. During the year ended December 31, 2006 the Company granted stock options to acquire 146,000 shares of common stock at an exercise prices that ranged from $0.27 to $0.33. The Company used the following assumptions to determine the fair value of stock option grants during the years ended December 31, 2007 and 2006:

 
2007
  
2006
Expected life
6.25 years
  
4 years
Volatility
114 - 123%
  
121.00%
Risk-free interest rate
3.9 – 4.7%
  
4.10%
Dividend yield
0%
  
0%

The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding and was calculated using the simplified method per the guidance of SAB 107 “Share Based Payment” (“SAB107”) for “plain vanilla” options.. The expected volatility is based on the historical price volatility of our common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents our anticipated cash dividend over the expected life of the stock options. The estimated average forfeiture rate for the year ended December 31, 2007 was 35% and for the year ended December 31, 2006 was 50%.

 
F - 20
 

ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


A summary of status of the Company’s non-vested shares as of and for the year ended December 31, 2007 is presented below:
             
         
Weighted
  
   
Shares
    
Average
  
   
Under
    
Grant Date
  
   
Option
    
Fair Value
  
             
Nonvested at January 1, 2007
     251,503     $
0.26
  
                 
Granted
     352,000     $ 0.68  
Vested
     (69,168 )   $ 0.26  
Forfeited
     (129,835 )   $ 0.26  
Nonvested at December 31, 2007
     404,500     $ 0.55  
                 

As of December 31, 2007, we had $155,386 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of approximately 4 years.

In addition, stock options to acquire 350,000 shares of common stock were granted to an employee prior to January 1, 2007, which were granted separate from the Option Plan.  Upon the employee’s termination in February 2007, options for 325,000 shares of common stock were vested and options for 25,000 shares of common stock were unvested and forfeited.  The options for 325,000 shares of common stock remain outstanding; these options have an exercise price of $0.22 and a term of 10 years, except options for 100,000 shares of common stock, which terminate in April 2010.


Note 6 - MAJOR SUPPLIERS

The Company purchased approximately 20% 2007 additions to inventory from one supplier and an additional 14% from a second supplier.  In 2006, the Company purchased approximately 14%, respectively, of its entire inventory purchases from one European supplier.  The Company has purchased 100% of its NeuroMove inventory from one supplier. Management believes that its relationships with these suppliers is strong, however, if necessary these relationships can be replaced. If the relationships were to be replaced, there may be a short term disruption to operations, a period of time in which products would not be available and additional expenses may be incurred.


Note 7 - EMPLOYMENT AGREEMENTS

On February 1, 2004, Zynex Medical, Inc. entered into a three-year employment agreement with the Company's President and Chief Executive Officer. The agreement expired January 31, 2007 and was automatically extended for an additional two-year period. The initial annual base salary under the agreement was $174,000 and may be increased annually at the board of director's discretion. The agreement also provides for a 50% annual bonus if annual net revenue exceeds $2.25 million, medical and life insurance, and a vehicle. The agreement contains a non-compete provision for the term of the agreement that extends for 24 months following termination of the agreement.


 
F - 21
 

ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


On January 1, 2005, the agreement was amended to provide an annual base salary of $144,000 and quarterly bonuses as follows:
 
Quarterly Revenue
Quarterly Bonus
$0 to $600,000
$ 0
$600,001 - $800,000
$ 10,000
$800,001 - $1,000,000
$ 25,000
$1,000,001 and greater
$ 50,000

The bonus amounts reflected in the above table shall be reduced by one-half if the Company sustains a net loss during the quarter. At December 31, 2007, the Company recorded a $100,000 accrual related to this bonus.

On May 31, 2005, Zynex Medical Holdings, Inc. entered into a compensation agreement with Peter J. Leveton, the Company's Chief Financial Officer to be effective as of April 18, 2005 (the "Effective Date"). Mr. Leveton’s employment with the Company was terminated on February 16, 2007. The agreement provided for a monthly salary of $2,250 per month. It also provided for an increase in the monthly salary of an additional $4,000 per month (the "First Raise") in the event (a) the Company obtained a line of credit of at least $250,000, or (b) the Company received third party equity or debt investment of at least $1,000,000, or (c) the Company had annual audited "positive net cash provided by operating activities" of at least $500,000, or (d) the Company underwent a liquidity event with a valuation of at least $10,000,000 (items (b) through (d) shall be referred to as "Raise Events"). Mr. Leveton met the standard for the First Raise and it was in effect. The agreement also provided for an additional increase in the monthly salary of $5,000 per month (the "Second Raise") in the event the Company undergoes a Raise Event. Mr. Leveton met the standard for the Second Raise in 2006, and it was in effect. The First Raise and Second Raise, once earned and vested, were paid in arrears with respect to each month of employment beginning as of the Effective Date through the month of vesting, and then were paid currently through the date of termination of Mr. Leveton's employment. Mr. Leveton and the Company entered into a Separation Agreement whereby Mr. Leveton agreed to extend payment of the previously earned portion of the second raise over the ten-month period January-October 2007 with interest at 8.25%.

Under the Agreement Mr. Leveton received stock options to purchase up to 350,000 shares of the Company's Common Stock. Such options had a ten-year term, except options for 100,000 shares which expire on April 17, 2010, and an exercise price equal to the fair market value of the Common Stock on the date of grant, April 18, 2005. Such options were subject to vesting as follows: 100,000 shares vested on the date of grant; 25,000 shares vested on June 30, 2005; and 25,000 shares vested as of the last day of each full calendar quarter beginning as of July 1, 2005 through March 31, 2007, provided that Mr. Leveton was employed as of such dates; and 50,000 shares vested upon a Raise Event which was completed in January, 2007. All unvested quarterly options would have immediately vested and become exercisable upon a liquidity event with a valuation of at least $10,000,000; provided the liquidity event occurred during Mr. Leveton's employment or if Mr. Leveton played an active, integral and key role in accomplishing such event, within 90 days of involuntary termination. All unvested options expired upon the termination of Mr. Leveton’s employment. As of February 16, 2007, Mr. Leveton’s termination date, 325,000 of the options had vested.

Effective February 19, 2007, the Company entered into a compensation arrangement with its new Chief Financial Officer, Fritz G. Allison. The arrangement provides for a monthly salary of $8,000 per month, before taxes, for the first three months and $10,000 per month, before taxes, thereafter; grant under the Company’s 2005 stock option plan of an option to purchase up to 100,000 shares of the Company’s common stock, with a ten year term starting February 19, 2007, an exercise price equal to $0.45 per share, the fair market value of the Company’s common stock on such date, and a vesting schedule of 25,000 shares vesting on the first anniversary of the date of grant and 25,000 shares vesting on each subsequent anniversary of the date of grant; a bonus payable in 2008 in the amount of $20,000 cash and an option grant for an additional 50,000 shares in the event (a) the Company’s net revenue meets a revenue target for 2007, (b) the Company has a positive net income for 2007, and (c) the Company does not have any restatements of its financial statements during 2007 and for any periods during 2007 or the year 2007 on or prior to the completion of the audit of the 2007 financial statements. Mr. Allison also received full health and dental insurance coverage through the Company.

 
F - 22
 

ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - RELATED PARTY TRANSACTIONS

The Company provides the President with two automobiles for personal use costing $2,287 per month.

NOTE 9 - SUBSEQUENT EVENTS

In January 2008, the Company notified warrant holders from the 2006 private placement that an event had occurred which accelerated the expiration date of the warrants.  In February 2008 the Company had received notices of exercise and payments from all the warrant holders notified.  The Company issued 1,740,000 shares of common stock to the warrant holders and received $678,600 in proceeds from them.  The Company is obligated to pay $67,860 to the two investment firms that originally aided in the 2006 private placement as fees related to the warrant exercise.

In January 2008, the Company defaulted on the monthly installment payable to the Lender.  As a result of this default, the Lender called the outstanding balances of both term loans payable to the Lender. The loans were paid off in February 2008. These loans were presented as a current liability at December 31, 2007.

In February 2008, the Company received a notice of exercise related to a warrant for 100,000 shares of common stock; 80,392 shares of common stock were issued in a cashless exercise.

In February 2008, the Company issued 2,000 shares of common stock to an employee for a cash payment of $2,618.

In March 2008, the Company received a notice of exercise related to options for 325,000 shares of common stock; 282,440 shares of common stock were issued in a cashless exercise.

In March 2008, the Company issued 7,750 shares of common stock to an individual for a cash payment of $10,145.

 

 
F - 23
 

 



Zynex Medical Holdings, Inc.
 
 
Consolidated Financial Statements
December 31, 2006
 
 


 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors
Zynex Medical Holdings, Inc.


We have audited the accompanying consolidated balance sheet of Zynex Medical Holdings, Inc. and subsidiary (the “Company”) as of December 31, 2006 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zynex Medical Holdings, Inc. and subsidiary as of December 31, 2006, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment.”
.


/s/ GHP Horwath, P.C.
GHP Horwath, P.C.

Denver, Colorado
April 16, 2007

 
FF - 1
 
 
Zynex Medical Holdings, Inc.
Consolidated Balance Sheet
December 31, 2006

ASSETS
  
 
  
Current Assets:
  
 
  
Cash and cash equivalents
 
$
265,197
  
Accounts receivable, less allowance for uncollectible
   
 
  
accounts of $1,100,000
   
1,337,873
  
Inventory
   
561,013
  
Deferred consulting fees
    
101,250
  
Deferred financing fees
   
60,402
  
Prepaid expenses
   
38,066
  
Deferred tax asset
   
55,000
  
Other current assets
   
11,250
  
 
    
 
  
 
    
 
  
Total current assets
   
2,430,051
  
 
    
 
  
Property and equipment, less accumulated
   
 
  
depreciation of $258,873
    
327,353
  
Deposits
   
10,940
  
 
    
 
  
 
    
 
  
 
    
 
  
 
  
$
2,768,344
  
 
    
 
  
 
    
 
  
LIABILITIES AND STOCKHOLDERS' EQUITY
    
 
  
Current Liabilities:
    
 
  
Notes payable
 
$
458,445
  
Loan from stockholder
   
42,830
  
Capital lease
   
15,655
  
Accounts payable
   
342,452
  
Accrued payroll and payroll taxes
   
152,844
  
Other accrued liabilities
   
119,745
  
 
    
 
  
Total current liabilities
   
1,131,971
  
         
Loan from stockholder, less current maturities
   
10,896
  
Notes payable, less current maturities
   
253,796
  
Capital lease, less current maturities
   
29,227
  
Long-term deferred tax liability
   
55,000
  
 
    
 
  
Total liabilities
   
1,480,890
  
 
    
 
  
Contingencies and Commitments
   
--
  
 
    
 
  
Stockholders' Equity:
    
 
  
Preferred stock, $.001 par value, 10,000,000 shares authorized,
   
--
  
no shares issued or outstanding
    
 
  
Common stock, $0.001, par value, 100,000,000 shares authorized,
   
26,311
  
26,310,911 shares issued and outstanding
    
 
  
Additional paid-in capital
   
2,435,859
  
Accumulated deficit
   
(1,174,716
)
 
    
 
  
 
    
 
  
Total stockholders' equity
   
1,287,454
  
 
    
 
  
 
  
$
2,768,344
  
 
See accompanying notes to financial statements.
 
FF - 2

 
Zynex Medical Holdings, Inc.
Consolidated Statements of Operations
Years ended December 31,

 
  
2006
  
2005
  
 
          
 
  
 
  
 
  
 
  
 
  
 
  
Net sales and rental income
 
$
2,556,809
  
$
2,098,408
  
Cost of sales and rentals
   
303,719
    
116,519
  
 
    
 
    
 
  
Gross profit
   
2,253,090
    
1,981,889
  
 
    
 
    
 
  
Operating expenses:
    
 
    
 
  
Selling, general and administrative, including
    
 
    
 
  
common stock and warrants issued for consulting services
    
 
    
 
  
of $203,500 and $49,289, respectively
   
2,326,793
    
1,717,575
  
Depreciation
   
94,009
    
64,798
  
Loss on disposal of equipment
   
--
    
--
  
 
    
 
    
 
  
 
    
2,420,802
    
1,782,373
  
 
    
 
    
 
  
(Loss) income from operations
   
(167,712
)
  
199,516
  
 
    
 
    
 
  
Other income (expense):
    
 
    
 
  
Interest income
   
1,370
    
234
  
Interest expense
   
(155,492
)
  
(37,320
)
Other income
    
1,464
    
138,634
  
 
    
 
    
 
  
 
    
(320,370
)
  
301,064
  
 
    
 
    
 
  
Provision (benefit) for income taxes
   
--
    
--
  
 
    
 
    
 
  
 
    
 
    
 
  
Net (loss) income
 
$
(320,370
)
$
301,064
  
 
    
 
    
 
  
 
    
 
    
 
  
Basic and diluted net (loss) income per common share
 
$
(0.01
)
$
0.01
  
 
    
 
    
 
  
Weighted average number of shares outstanding
    
 
    
 
  
 
    
 
    
 
  
Basic
   
24,026,988
    
23,117,042
  
 
    
 
    
 
  
Diluted
   
24,026,988
    
23,506,011
  

See accompanying notes to financial statements.

FF - 3

 
Zynex Medical Holdings, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,

 
 
  
2006
  
2005
  
 
  
 
  
 
  
Cash flows from operating activities:
  
 
  
 
  
Net income (loss)
 
$
(320,370
)
$
301,064
  
Adjustments to reconcile net income (loss) to net cash used in operating activities:
    
 
    
 
  
Depreciation
   
94,009
    
64,798
  
Provision for losses in accounts receivable
   
386,518
    
429,407
  
Amortization of deferred consulting and financing fees
   
108,816
    
--
  
Issuance of common stock and warrants for consulting services
   
46,000
    
95,789
  
Issuance of warrants for loan financing
   
--
    
1,842
  
Amortization of discount on note payable
    
38,670
    
--
  
Amortization of beneficial conversion feature
    
3,533
    
--
  
Employee stock compensation expense
    
20,110
    
--
  
Changes in operating assets and liabilities:
             
Accounts receivable
   
(1,029,501
)
  
(934,209
)
Inventory
    
(71,782
)
  
(169,533
)
Deferred tax asset
    
(55,000
)
  
--
  
Prepaid expenses
   
(2,252
)
  
--
  
Refundable income taxes
   
7,586
    
4,105
  
Other current assets
   
(9,818
)
  
8,322
  
Other assets
   
--
    
2,730
  
Accounts payable
    
94,566
    
101,887
  
Accrued liabilities
   
150,455
    
(33,265
)
Deferred tax liability
    
55,000
    
--
  
               
Net cash used in operating activities
    
(483,460
)
  
(127,063
)
               
Cash flows from investing activities:
              
Purchases of equipment
    
(151,586
)
  
(106,079
)
               
Net cash used in investing activities
    
(151,586
)
  
(106,079
)
               
Cash flows from financing activities:
    
 
    
 
  
Payments on notes payable and capital lease
   
(208,275
)
  
(166,183
)
Proceeds from sale of common stock, net
    
604,476
    
--
  
Proceeds from loans payable
   
446,563
    
400,000
  
Proceeds from loans from stockholder
   
146,900
   
99,136
 
Repayment of loans from stockholder
   
(108,154
)
  
(84,156
)
 
    
 
    
 
  
Net cash provided by financing activities
   
881,510
    
248,797
  
 
    
 
    
 
  
Increase in cash and cash equivalents
   
246,464
    
15,655
  
 
    
 
    
 
  
Cash and cash equivalents at beginning of period
    
18,733
    
3,078
  
 
    
 
    
 
  
Cash and cash equivalents at end of period
 
$
265,197
  
$
18,733
  
 
    
 
    
 
  
Supplemental cash flow information:
    
 
    
 
  
Interest paid
 
$
56,706
  
$
28,513
  
Income taxes paid
   
--
    
--
  
Non-cash investing and financing activities -
    
 
    
 
  
Common stock and warrants issued in exchange for deferred consulting fees
    
157,500
    
32,289
  
Common stock and warrants issued in exchange for financing fees
    
48,677
    
--
  
Warrants issued in connection with note payable
   
80,310
    
--
  
Deferred loan financing fees
   
32,000
    
--
  
Accounts payable converted into a note payable
   
25,881
    
--
  
Issuance of common stock in satisfaction of payable
   
8,281
    
--
  
Conversion feature of note payable
    
8,593
    
--
  
 
              
 
See accompanying notes to financial statements.


FF - 4

 
Zynex Medical Holdings, Inc.
Consolidated Statements of Stockholders' Equity
 
  
 
  
 
  
Additional
  
 
  
 
  
 
  
Number
  
 
  
Paid in
  
Accumulated
  
 
  
 
  
of Shares
  
Amount
  
Capital
  
Deficit
  
Total
  
 
  
 
  
 
  
 
  
 
  
 
  
December 31, 2004
   
23,070,377
  
$
23,070
  
$
1,335,233
  
$
(1,155,410
)
$
202,893
  
 
    
 
    
 
    
 
    
 
    
 
  
Net income
    
--
    
--
    
--
    
301,064
    
301,064
  
 
    
 
    
 
    
 
    
 
    
 
  
Common stock issued to consultants
   
129,044
    
129
    
46,371
    
--
    
46,500
  
 
    
 
    
 
    
 
    
 
    
 
  
Warrants issued for services
   
--
    
--
    
83,420
    
--
    
83,420
  
 
    
 
    
 
    
 
    
 
    
 
  
December 31, 2005
   
23,199,421
    
23,199
    
1,465,024
    
(854,346
)
  
633,877
  
                                 
 
    
 
    
 
    
 
    
 
    
 
  
Private placement of common stock, net of offering costs
   
2,429,475
    
2,430
    
602,046
    
--
    
604,476
  
 
    
 
    
 
    
 
    
 
    
 
  
Warrants granted upon issuance of note payable and for financing fee
   
--
    
--
    
107,537
    
--
    
107,537
  
 
    
 
    
 
    
 
    
 
    
 
  
Conversion feature of note payable
    
--
    
--
    
8,593
    
--
    
8,593
  
 
    
 
    
 
    
 
    
 
    
 
  
Issuance of common stock for financing fee
    
65,000
    
65
    
21,385
    
--
    
21,450
  
 
    
 
    
 
    
 
    
 
    
 
  
Issuance of common stock for consulting services
    
575,612
    
576
    
202,924
    
--
    
203,500
  
 
    
 
    
 
    
 
    
 
    
 
  
Issuance of common stock in satisfaction of payable
   
41,403
    
41
    
8,240
    
--
    
8,281
  
 
    
 
    
 
    
 
    
 
    
 
  
Employee stock compensation expense
    
--
    
--
    
20,110
    
--
    
20,110
  
 
    
 
    
 
    
 
    
 
    
 
  
Net loss
    
--
    
--
    
--
    
(320,370
)
  
(320,370
)
                                 
 
    
 
    
 
    
 
    
 
    
 
  
December 31, 2006
   
26,310,911
 
$
26,311
  
$
2,435,859
  
$
(1,174,716
)
$
1,287,454
  
 
    
 
    
 
    
 
    
 
    
 
  

See accompanying notes to financial statements.

 

FF - 5
 

ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS

Zynex Medical, Inc. was incorporated under the laws of the state of Colorado on March 3, 1998, under the name of "Stroke Recovery Systems, Inc." (SRSI). On October 1, 2003, Zynex Medical, Inc. acquired, through merger, the assets and liabilities of Dan Med, Inc. (DMI), a Colorado corporation under common control. The companies were merged in order to simplify the operating and capital structure of both companies. SRSI concurrently changed its name to Zynex Medical, Inc. Zynex Medical Holdings, Inc. (the “Company”) was created in February 2004 through a reverse acquisition.

At present, Zynex Medical, Inc. generates substantially all its revenue in North America from sales and rentals of its products to patients, dealers and health care providers. The amount of net revenue derived from Medicare and Medicaid programs for 2006 and 2005 is approximately 5% and 7% respectively.

The Company designs, assembles and commercializes a line of FDA cleared medical devices for the electrotherapy and stroke rehabilitation markets. The Company also purchases electrotherapy devices and supplies from other domestic and international suppliers for resale.

 
 
FF - 6

 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of Zynex Medical Holdings, Inc. and Zynex Medical, Inc. for all of the periods presented. All inter company balances and transactions have been eliminated in consolidation.

REVENUE RECOGNITION

Sales and rental income is recognized when a product has been medically prescribed and dispensed to a patient and, when applicable, a claim prepared by the Company has been filed with the patient's insurance provider. Product and rental income is recognized net of the estimated uncollectible percentage of sales as described below.

RESERVE FOR SALES RETURNS, ALLOWANCES AND COLLECTIBILITY

The Company maintains a reserve for sales allowances, returns and collectibility. Sales returns and allowances result from reimbursements from insurance providers that are less than amounts claimed, as provided by agreement, where the amount claimed by the Company exceeds the insurance provider's usual, customary and reasonable reimbursement rate and when units are returned because of benefit denial. The provision is provided for by reducing gross revenue by a portion of the amount invoiced during the relevant period. The amount of the reduction is estimated based on historical experience.

USE OF ESTIMATES

Preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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 financial statements are associated with collectibility of accounts receivable.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents are stated at cost. Cash equivalents consist of all highly liquid investments with maturities of three months or less when acquired.
 
 
FF - 7

 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FAIR VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK

The Company's financial instruments primarily consist of cash, receivables and payables for which current carrying amounts approximate fair value. Additionally, interest rates on outstanding borrowings are at rates that approximate market rates for borrowings with similar terms and average maturities. The fair value of the loan from stockholder is not practicable to estimate, due to the related party nature of the underlying transactions.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade receivables.

The Company has recorded trade receivables from business operations. Management regularly evaluates the collectibility of accounts receivable and believes that net receivables recorded as of December 31, 2006 to be collectible.

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.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. The Company removes the cost and the related accumulated depreciation from the accounts of assets sold or retired, and the resulting gains or losses are included in the results of operations. Depreciation is computed using the straight-line method. Cost and related estimated useful lives of property and equipment as of December 31, 2006 are as follows:
 
 
  
Cost
  
Useful lives
  
 
  
 
  
 
  
Office furniture and equipment
 
$
159,601
    
3-7 years
  
Rental inventory
   
366,036
   
5 years
  
Vehicles
   
59,833
   
5 years
  
Assembly equipment
   
757
   
7 years
  
 
    
586,227
    
 
  
Less accumulated depreciation
   
(258,874
)
  
 
  
Net
  
$
327,353
    
 
  

Repairs and maintenance costs are charged to expense as incurred.

SHIPPING COSTS

Shipping costs are included in cost of sales and rentals.
 
 
FF - 8


ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


STOCK-BASED COMPENSATION

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 expire no later than ten (10) years from the date of grant.

Effective January 1, 2006, the Company adopted Statement of Financial Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective method. SFAS 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award that is ultimately expected to vest during the period. SFAS 123R requires the stock compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the requisite service period, which in the Company’s case is the same as the vesting period). In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. Prior to our adopting SFAS 123R, we accounted for our employee stock-based compensation plans under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, generally no compensation expense was recorded when the terms of the award were fixed and the exercise price of the employee stock option equaled or exceeded the fair value of the underlying stock on the date of grant.

 
FF - 9

 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Had compensation cost for the Company's stock plan been determined based on fair value at the grant dates for awards under the plan consistent with the method prescribed under SFAS No. 123 for 2005, the Company's net income and net income per share would have changed to the pro forma amounts indicated below:
 
  
 
  
 
  
2005
  
 
      
 
  
 
  
 
  
 
  
Net income as reported
 
$
301,064
  
 
    
 
  
Total stock based employee compensation
   
 
  
expense determined under fair value
   
 
  
based method for all awards
   
(24,325
)
 
    
 
  
Net income, pro forma
 
$
276,739
  
 
    
 
  
 
    
 
  
Net income per share as reported
 
$
0.01
  
Net income per share pro forma
 
$
0.01
  
 
The fair value of options granted during 2006 and 2005 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
 
 
2006
2005
 
  
 
Expected dividend yield
0%
0%
Expected stock price volatility
121%
125%
Risk-free interest rate
4.10%
4.95%
Expected life of options
4 years
2 years
 
 

 
FF - 10

 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ADVERTISING

The Company expenses advertising costs as they are incurred. Advertising expenses for the years ended December 31, 2006 and 2005 totaled $146,814 and $92,949 respectively.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed when incurred. There were no research and development expenses for years ended December 31, 2006 and 2005.

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.

COMPREHENSIVE INCOME

There are no adjustments necessary to the net income (loss) as presented in the accompanying statement of operations to derive comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income."

SEGMENT REPORTING

In June 1997, SFAS 131, "Disclosure about Segments of an Enterprise and Related Information," was issued. Operating segments, as defined in the pronouncement, are components of an enterprise about which separate financial information is available and that are evaluated regularly by management in deciding how to allocate resources and assess performance. To date, the Company has only had one operating segment.

RECLASSIFICATIONS

Certain amounts in the 2005 financial statements have been reclassified to conform to the presentation used in 2006.

 
FF - 11
 


ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EARNINGS PER SHARE

The Company computes net earnings (loss) per share in accordance with SFAS No. 128, "Earnings per Share", which establishes standards for computing and presenting net 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 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. The effects of potential common stock equivalents have not been included in the computation of diluted net loss per share for the year ended December 31, 2006 as their effect is anti-dilutive.

The calculation of basic and diluted earnings per share for 2005 is as follows:

BASIC
  
2005
  
 
      
Net income applicable to common stockholders
 
$
301,064
  
     
 
  
 
    
 
  
Weighted average shares outstanding - basic
   
23,117,042
  
 
    
 
  
 
    
 
  
Net income per share - basic
 
$
0.01
  
 
    
 
  
 
    
 
  
DILUTED
    
 
  
 
    
 
  
Net income applicable to common stockholders
 
$
301,064
  
     
 
  
 
    
 
  
Weighted average shares outstanding - basic
   
23,117,042
  
 
    
 
  
 
    
 
  
Dilutive securities
   
388,969
  
 
    
 
  
 
    
 
  
Weighted average shares outstanding - diluted
   
23,506,011
  
 
    
 
  
Net income per share - diluted
  
$
0.01
  
 
 
FF - 12
 

ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment to FASB Statement No. 115”. This statement permits companies to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement of accounting for financial instruments. This statement applies to all entities, including not for profit. The fair value option established by this statement permits all entities to measure eligible items at fair value at specified election dates. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently assessing the impact adoption of SFAS No. 159 will have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of the adoption of SFAS No. 157 will have on its consolidated financial statements.

In September 2006, the SEC issued SAB No. 108 in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. In SAB No. 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The Company believes that complying with the interpretive guidance of SAB No. 108 will not have a material impact to its consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Upon adoption, the cumulative effect of applying the recognition and measurement provisions of FIN 48, if any, shall be reflected as an adjustment to the opening balance of retained earnings. The effective date of this interpretation is for fiscal years beginning after December 15, 2006. The Company is currently in the process of evaluating the impact of this interpretation on its consolidated financial statements.
 

FF - 13


ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 - NOTES PAYABLE AND LEASES

On October 5, 2005 Zynex received $400,000 under a three-year term loan agreement with Silicon Valley Bank, Santa Clara, California and Boulder, Colorado (the "Lender"). The loan bears interest at a per annum fixed rate of 7.84%. The loan is guaranteed by Zynex Chairman, President and Chief Executive Officer Thomas Sandgaard and is collateralized by a first perfected security interest in accounts, inventory, chattel paper, equipment, fixtures, general intangibles, including intellectual property and other assets. The Company is to repay the loan in 36 equal monthly payments of principal and interest. The loan includes financial covenants for minimum liquidity and minimum debt service coverage, which the Company is in compliance with as of December 31, 2006. In connection with the loan, the Lender was granted a seven-year warrant to purchase 50,000 shares of Zynex Common Stock at an exercise price of $0.71 per share.

On March 15, 2006 Zynex received $240,000 under a three-year term loan agreement with Silicon Valley Bank, Santa Clara, California and Boulder, Colorado (the "Lender"). The loan bears interest at a per annum fixed rate of 8.48%. The loan is guaranteed by Zynex Chairman, President and Chief Executive Officer Thomas Sandgaard and is collateralized by a first perfected security interest in accounts, inventory, chattel paper, equipment, fixtures, general intangibles, including intellectual property and other assets. The Company is to repay the loan in 36 equal monthly payments of principal and interest. The loan includes financial covenants for minimum liquidity and minimum debt service coverage, which the Company is in compliance with as of December 31, 2006.

On October 18, 2006, the Company entered into a loan transaction with Ascendiant Capital Group, LLC (an affiliate of Ascendiant Securities, LLC) and issued to Ascendiant Capital (a) a secured Note in the total principal amount of $275,000 (the "Note") and (b) a five-year warrant to purchase a total of 429,867 shares of our common stock at a fixed exercise price of $0.39 per share. The warrants were valued at the date of grant at $113,437 using the Black-Scholes option-pricing model. The relative fair value of the warrants ($80,310) was accounted for as a discount applied against the face amount of the note. The discount is being amortized over the term of the promissory note. At December 31, 2006, the Company had amortized $33,016 of the discount as additional interest expense. The Note is convertible into common stock at a fixed conversion price of $0.32 per share. The conversion of the note is deemed to be beneficial as the note converts to common stock at $0.32 per share and the estimated fair value of the common stock was determined to be $0.33 per share on the date the transaction was entered into. The intrinsic value of the beneficial conversion feature of $8,593 is being amortized as additional interest expense over the term of the note. Net proceeds of approximately $206,000 from the transaction have been or will be used for general working capital.

The principal and interest on the Note are due in one lump sum on April 18, 2007. However, we may extend the maturity date so that the outstanding principal balance and accrued and unpaid interest become due and payable in six equal monthly installments beginning on the original maturity date and ending on October 18, 2007. Interest on amounts outstanding under the Note are at the rate of 15% per annum through January 17, 2007, 18% per annum from January 18, 2007 to the original maturity date, and, if the maturity date is extended, 21% from the original maturity date to the extended maturity date. Events of default include, among other things, a failure to make payment of principal or interest due under the note and the occurrence of any event of default under an obligation for borrowed money in excess of $50,000. The note is secured by a second priority security interest in all of our assets. We issued the Note with an original issue discount of 5%, and on October 18, 2006 we made a non-refundable prepayment of interest through April 18, 2007. The effective interest rate on the note is 26%.

In connection with the Note, the Company issued 65,000 shares of common stock to Ascendiant Capital as a fee and granted a warrant to purchase 103,139 shares with an exercise price of $0.39 as a placement fee to Ascendiant Securities. The shares were valued at $21,450 (based on the closing market price of $0.33 per share at the date the transaction was closed) and the warrants were valued at $27,227 using the Black Scholes option-pricing model. The deferred financing fees are being amortized over the term of the Note. During the year ended December 31, 2006, $20,012 was expensed. In addition, $32,000 of financing fees paid at closing are being amortized over the six month term and $13,156 were expensed at year end.

We may prepay the convertible note in whole or part at any time provided all accrued but unpaid interest is included in any prepayment. We must redeem the Note within two business days after (1) closing an equity or debt financing or series of such financings resulting in an aggregate gross cash proceeds of $1,000,000 or more within 12 months of the date of the Note or (2) the “Sale of Maker.”

Both the Note and warrant contain anti-dilution provisions. These provisions are not triggered by a decline in the stock price and include, with certain exclusions: in the case of the Note, the issuance of common stock, securities convertible into common stock or rights to acquire common stock at a price below $0.32 per share; and in the case of the warrant, the issuance of options or other rights to acquire common stock at below $0.39 per share. We have provided to Ascendiant Capital piggyback registration rights for the common stock underlying the Note and warrants and for the shares issued as the placement fee.

Ascendiant Capital, Silicon Valley Bank and the Company have entered into a subordination agreement dated October 17, 2006 in which the security interest and payment rights of the Note are made subordinate to our indebtedness to Silicon Valley Bank. The holder of the Note is not to demand payment or exercise any remedy relating to the Note until our indebtedness to Silicon Valley Bank is fully paid, except that we may pay Ascendiant Capital regularly scheduled payments of interest or principal pursuant to the terms of the Note so long as there is not an event of default under our loan and security agreement with the Bank.

 
FF - 14
 

 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
In November 2006, the Company issued a note payable in the amount of $25,881 in satisfaction of a payable due to a sales representative of the company. This note is unsecured and bears interest at 8.25%. Interest that accrues through March 31, 2007 is due and payable on that date. The note will then be paid in 12 equal payments, with the first payment due on April 1, 2007. 
 
Notes payable at December 31, 2006 consisted of the following:

Note payable to a bank, principal and interest payments of $12,531 due on a monthly
  
 
  
basis through September, 2008. Annual interest rate of 7.84%, collateralized
  
 
  
by accounts, inventory, chattel papers, equipment, fixtures, and general intangibles,
 
 
  
Including intellectual property. The note is guaranteed by the President and
  
 
  
Chief Executive Officer and largest shareholder
  
$
255,825
  
 
    
 
  
Note payable to a bank, principal and interest payments of $7,559 due on a monthly
        
basis through March, 2009. Annual interest rate of 8.48%, collateralized
        
by accounts, inventory, chattel papers, equipment, fixtures, and general intangibles,
       
Including intellectual property. The note is guaranteed by the President and
        
Chief Executive Officer and largest shareholder
    
185,108
  
 
    
 
  
Motor vehicle contract payable in 60 monthly
    
 
  
installments of $1,351, annual interest at
    
 
  
15.1%, secured by automobile.
   
30,877
  
         
Note payable to a sales representative of the Company, principal and interest
   
 
  
payments of $2,239 due in 12 equal installments from April 1, 2007 through
       
March 31, 2008, annual interest at 8.25%, unsecured.
    
25,881
  
 
    
 
  
Note payable to Ascendiant Capital due in one single payment on April 18, 2007,
    
 
  
which may be extended to October 18, 2007, annual interest at 15% through January
    
 
  
17, 2007 and 18% through original maturity date, secured by all assets.
    
214,550
  
 
    
 
  
Total
   
712,241
  
 
    
 
  
 
    
 
  
Less current maturities
   
(458,445
)
 
    
 
  
Long-term maturities
 
$
253,796
  
 
Future maturities of the notes payable are as follows:
 
Year ending December 31,
 
 
 
 
 
 
 
                 2007
 
$
458,445
 
                 2008
 
 
227,426
 
                 2009
 
 
26,370
 
 
 
 
 
 
 
 
$
712,241
 
 
 
FF - 15
 
 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 2005 Mr. Sandgaard loaned the Company $99,136, of which $14,980 was outstanding on December 31, 2005. Effective March 1, 2006 this previously non-interest bearing loan 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, 2006, $8,755 of this amount remained outstanding

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, 2006, $35,206 of this amount remained outstanding The remaining $96,900 was represented by 8.25% demand notes and will be repaid as the Company's cash position and its financing covenants allow. As of December 31, 2006, $9,765 of this amount remained outstanding. The loans from Mr. Sandgaard were used for working capital purposes

Future maturities of these loans are as follows:
Year ending December 31,
  
 
  
                 2007
  
$
42,830
  
                 2008
    
10,896
  
                
        
 
    
 
  
 
  
$
53,726
  
 
The Company has commitments under various operating and capital leases that are payable in monthly installments. As of December 31, 2006, future minimum lease payments under non-cancelable operating and capital leases are as follows:
 
 
  
Capital
 
Operating
  
 
  
Lease
 
Leases
  
 
  
 
  
 
  
2007
 
$
18,869
  
$
100,375
  
2008
   
18,869
    
98,159
  
2009
    
12,579
    
16,428
  
               
               
 
    
 
    
 
  
Total future minimum lease payments
 
$
50,317
  
$
214,962
  
 
    
 
    
 
  
Less amount representing interest
   
5,435
    
 
  
 
    
 
    
 
  
Present value of net minimum lease
    
 
    
 
  
payments
   
44,882
    
 
  
Less current portion
   
(15,655
)
  
 
  
 
    
 
    
 
  
Long-term capital lease obligation
 
$
29,227
    
 
  
 
Rent expense under operating leases for 2006 and 2005 was $122,206 and $116,691, respectively.
 
 
FF - 16


ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - INCOME TAXES

There are no federal or state income taxes for the years ended December 31, 2006 and 2005.

A reconciliation of income tax computed at the U.S. statutory rate of 35% to the effective income tax rate is as follows:
 
 
 
2006
 
2005
 
 
 
  
 
  
 
Statutory rate
 
 
(35
)%
 
35
%
State taxes
 
 
(5
)%
 
5
%
Permanent differences
 
 
10
%
 
6
%
Basis difference in property and equipment
 
 
1
%
 
(5
)%
Net operating loss carryover and other
 
 
29
%
 
(41
)%
 
 
 
  
 
 
    
Combined effective rate
 
 
0
%
 
0
%

The tax effects of temporary differences that give rise to deferred tax assets (liabilities) at December 31, 2006 are as follows:

Current deferred tax assets:
       
Accrued expenses
 
$
52,000
  
Accounts receivable
   
408,000
  
Inventory
   
6,000
  
Net operating loss carry forwards
   
74,000
  
     
540,000
  
Valuation allowance
   
(485,000
)
         
Net current deferred tax asset
 
$
55,000
  
 
    
 
  
Long-term deferred tax liabilities:
    
 
  
Property and equipment
 
$
55,000
  
         
Net long-term deferred tax liability
 
$
55,000
  


 
FF - 17

 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SFAS 109 requires that all deferred tax balances be determined using the tax rates and limitations expected to be in effect when the taxes will actually be paid or recovered. Consequently, the income tax provision will increase or decrease in the period in which a change in tax rate or limitation is enacted. As of December 31, 2006, the Company had total deferred tax assets of $540,000 and deferred tax liabilities of $55,000. The Company recorded a valuation allowance in the amount of $485,000 at December 31, 2006, against the amount by which deferred tax assets exceed deferred tax liabilities. The valuation reserve at December 31, 2006 has been provided due to the uncertainty of the amount of future taxable income. The Company provides a valuation allowance in the full amount of its deferred tax assets that exceed deferred tax liabilities because under the criteria of SFAS No. 109, the Company does not have a basis to conclude that it is more likely than not that it will realize the deferred tax assets.

The Company has accumulated net operating loss carry forwards of approximately $191,000 (net of loss carry forwards of $246,174 utilized in 2006). To the extent not used, the net operating loss carry forwards expire in varying amounts beginning in 2024 through 2025. As of December 31, 2006, all identified deferred tax assets, by the amount that they exceed deferred tax liabilities, are reduced by a valuation allowance. Therefore, any additional operating loss carry forwards not recognized would not result in a benefit in the provision for income taxes due to the uncertainty of future realization of those additional loss carry forwards.


NOTE 5 - Stockholders' Equity, Common Stock and Warrants

On November 3, 2006, the Company entered into a twelve-month consulting services agreement with Ascendiant Capital, in which this party agreed to advise the Company in business and financial matters for the twelve-month term of the agreement. Compensation consisted of 150,000 shares of the Company’s restricted common stock with a market value of approximately $67,500 (based on the closing market price of $0.45 per share at the date the transaction was entered into). The deferred cost is being amortized on a straight-line basis over the twelve-month period from the date of the agreement. During the year ended December 31, 2006, $11,250 was expensed.

On July 1, 2006, the Company entered into a twelve-month agreement with a consultant for investor relations services. Compensation consists of (a) a monthly fee of $8,000 cash and either $4,000 cash or 13,333 shares and (b) 300,000 of the Company’s restricted common stock with a market value of approximately $90,000 (based on the closing market price of $0.30 per share at the date the transaction was entered into). In October 2006, the client renegotiated its agreement with the consultant to exclude the $8,000 cash payment. In November, the number of shares to be issued as part of the monthly retainer was reduced to 10,000 per month, effective October 1. During the year ended December 31, 2006, 69,999 shares were issued under the agreement with a fair market value of $21,000. The deferred cost of $90,000 is being amortized on a straight-line basis over the twelve-month period from the date of the agreement. During the year ended December 31, 2006, $45,000 was expensed.
 

 
FF - 18
 

ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
During 2006, in terms of unregistered sales of securities, the Company (a) sold 2,175,000 shares of common stock, and five-year warrants to purchase a total of 1,740,000 shares of common stock at $0.32 per share, to accredited investors in a non public offering, (b) issued 254,475 shares to investment bankers responsible for the non public offering, issued to the provider of the convertible $275,000 bridge loan five-year warrants to purchase a total of 429,867 shares of common stock at $0.39 per share and a fee of 65,000 shares of common stock, (d) issued to the investment banker for the loan five-year warrants to purchase a total of 103,139 shares of common stock at $0.39 per share, (e) issued 150,000 shares to the investment banker responsible for such loan for future consulting services and (f) issued 425,612 shares to investor relations firms for services rendered including 55,613 shares with a total market value of $25,000 were issued to the Wall Street Group in return for investor relations services. In these issuances, the Company made no general solicitation, the Company believes that purchasers of the securities were accredited investors, the Company believes that the investment bankers, lender and investor relations firms were accredited investors or met the standards for a purchaser is a non-public offering, and the Company relied upon an exemption from securities registration for a non-public offering.

During the year ended December 31, 2005, the Company issued 312,500 warrants to purchase common stock with a fair market value of $41,250, 129,044 shares of unregistered common stock with a total market value of $46,500 and paid $6,250 to The Wall Street Group in return for investor relations services. The Company also issued (a) 8,333 warrants to purchase common stock at a fair market value of $2,870 to a financial consultant for preparation of financial projections and introduction to Silicon Valley Bank; (b) 50,000 warrants to purchase common stock with a fair market value of $22,100 to Silicon Valley Bank in connection with their September 2005, $400,000 term loan; (c) and 100,000 warrants to purchase common stock with a fair market value of $17,200 to an investment banking firm for services rendered. The agreement with The Wall Street Group ended in April 2006. The $22,100 additional compensation to Silicon Valley Bank is being amortized over the three-year term of the agreement, and $12,892 has been deferred at December 31, 2006.
 
On June 4, 2004, the Company sold 685,715 shares of common stock to five investors at $1.75 per share. The proceeds realized from the sale were $897,789, net of offering expenses and the fair value of Broker Warrants issued. In connection with the sales, the Company granted Class A Warrants to purchase an additional 342,859 shares of common stock at $1.75 per share, Class B Warrants to purchase an additional 685,715 shares of common stock at $2.00 per share, Class C Warrants to purchase 22,858 shares of common stock at $.01 per share and Broker Warrants to purchase 45,715 shares of common stock at $.01 per share. The fair value of the Broker Warrants was $132,198 at June 4, 2004 using the Black-Scholes option-pricing model.

The Class B, Class C and Broker's Warrants expire on June 4, 2009. The Class A Warrants expired February 20, 2006. The Company's registration statement, filed July 16, 2004 on Form SB-2/A, became effective July 20, 2004 and a First Amendment on Form SB-2/A became effective June 7, 2005.

Upon exercise of the warrants, the Company is required to pay Warrant Exercise Compensation equal to 10 percent of the cash proceeds payable to the Company. The Company is further required to issue one Broker's Warrant for each 10 shares of Class A, Class B and Class C Warrants exercised by the subscribers.
 
 
FF - 19
 

ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On September 27, 2004, the Company issued options to acquire 1,900,000 shares of common stock to a financial consulting firm in exchange for consulting services provided in connection with the Company's reverse acquisition, private placement and ongoing investor relations. The options, which expire September 26, 2009, permit the purchase of common stock in quantities and at prices set forth as follows:

Number of Shares
Price Per Share
 
 
100,000
$0.40
400,000
$1.75
200,000
$2.00
200,000
$2.25
200,000
$2.50
200,000
$2.75
200,000
$3.00
200,000
$3.50
200,000
$4.00

Also during 2004, the Company issued 120,000 warrants to purchase common stock for five years to two consultants and one employee; 110,000 of these warrants are exercisable at $3.00 per share and 10,000 are exercisable at $0.55 per share.
 
During 2006 and 2005, the Company also issued common stock and common stock warrants to consultants and debtors - see Note 3 - Notes payable and leases.
 
FF - 20
 

 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options:

On January 3, 2005 the Company established the 2005 Stock Option Plan (the "Option Plan") and 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 expire 10 years from the date of grant.

A summary of the Option Plan is as follows:
                       
 
        
Weighted
Weighted
 
 
Weighted
Weighted
  
         
average
average
 
 
average
average
  
 
        
exercise
grant date
 
 
exercise
grant date
  
 
  
Shares
    
price
fair value
Shares
 
price
fair value
  
 
          
 
 
 
 
 
  
Outstanding, beginning of year
 
176,670
  
$
0.42
0.20
 
0
 
$
0
0
 
Granted
 
146,000
  
$
0.28
0.21
 
279,670
 
$
0.34
0.24
 
 
  
 
  
 
 
 
 
 
 
 
 
 
 
Expired or forfeited
 
36,000
  
$
0.40
0.31
 
103,000
 
$
0.32
0.25
 
Exercised
 
0
  
 
0
0
 
0
 
 
0
0
 
 
  
 
  
 
 
 
 
 
 
 
 
 
 
Outstanding, end of year
  
286,670
  
$
0.34
0.27
 
176,670
 
$
0.42
0.20
 
 
  
 
  
 
 
 
 
 
 
 
 
 
 
Options exercisable at
  
 
  
 
 
 
 
 
 
 
 
 
 
end of year
 
35,168
  
 
0.40
0.32
 
0
 
 
0
0
 

The following table summarizes information about stock options outstanding as of December 31, 2006:

Options Outstanding
 
                                                   Options Exercisable
 
 
 
 
 
 
 
 
 
Remaining
 
 
 
 
Exercise
Number of   
contractual
 
  
Number of  
Exercise
prices
options      
life (years)
 
  
options     
price
 
 
 
 
  
 
 
 
 
 
 
  
 
 
$0.30
82,000
8.00
 
  
20,500
$0.30
$0.23
12,000
8.25
 
  
3,000
$0.23
$0.50
16,000
8.50
 
  
4,000
$0.50
$0.57
12,670
8.50
 
  
3,168
$0.50
$0.75
18,000
8.75
 
  
4,500
$0.75
$0.27
122,000
9.50
 
      
$0.33
24,000
9.75
 
  
 
  
 
 
 
 
 
 
 
 
286,670
 
 
 
35,168
 
 

 
FF - 21


ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 6 - MAJOR SUPPLIERS

During 2006 and 2005, the Company purchased approximately 14% and 10%, respectively, of its entire inventory purchases from one European supplier and 100% of its NeuroMove inventory from one supplier. Management believes that its relationships with these suppliers is strong, however, if necessary these relationships can be replaced. If the relationships were to be replaced, there may be a short term disruption to operations, a period of time in which products would not be available and additional expenses may be incurred.


Note 7 - EMPLOYMENT AGREEMENTS

On February 1, 2004, Zynex Medical, Inc. entered into a three-year employment agreement with the Company's President and Chief Executive Officer. The agreement expired January 31, 2007 and, the agreement was automatically extended for an additional two-year period. The initial annual base salary under the agreement was $174,000 and may be increased annually at the board of director's discretion. The agreement also provides for a 50% annual bonus if annual net revenue exceeds $2.25 million, medical and life insurance, and a vehicle. The agreement contains a non-compete provision for the term of the agreement that extends for 24 months following termination of the agreement.

On January 1, 2005, the agreement was amended to provide an annual base salary of $144,000 and quarterly bonuses as follows:
 
Quarterly Revenue
Quarterly Bonus
$0 to $600,000
$ 0
$600,001 - $800,000
$ 10,000
$800,001 - $1,000,000
$ 25,000
$1,000,001 and greater
$ 50,000

The bonus amounts reflected in the above table shall be reduced by one-half if the Company sustains a net loss during the quarter.

 
FF - 22


ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
.

On May 31, 2005, Zynex Medical Holdings, Inc. entered into a compensation agreement with Peter J. Leveton, the Company's Chief Financial Officer to be effective as of April 18, 2005 (the "Effective Date"). Mr. Leveton’s employment with the Company was terminated on February 16, 2007. The agreement provided for a monthly salary of $2,250 per month. It also provided for an increase in the monthly salary of an additional $4,000 per month (the "First Raise") in the event (a) the Company obtained a line of credit of at least $250,000, or (b) the Company received third party equity or debt investment of at least $1,000,000, or (c) the Company had annual audited "positive net cash provided by operating activities" of at least $500,000, or (d) the Company underwent a liquidity event with a valuation of at least $10,000,000 (items (b) through (d) shall be referred to as "Raise Events"). Mr. Leveton met the standard for the First Raise and it was in effect. The agreement also provided for an additional increase in the monthly salary of $5,000 per month (the "Second Raise") in the event the Company undergoes a Raise Event. Mr. Leveton met the standard for the Second Raise in 2006, and it was in effect. The First Raise and Second Raise, once earned and vested, were paid in arrears with respect to each month of employment beginning as of the Effective Date through the month of vesting, and then were paid currently through the date of termination of Mr. Leveton's employment. Mr. Leveton and the Company entered into a Separation Agreement whereby Mr. Leveton agreed to extend payment of the previously earned portion of the second raise over the ten-month period January-October 2007 with interest at 8.25%.

Under the Agreement Mr. Leveton received stock options to purchase up to 350,000 shares of the Company's Common Stock. Such options shall have a ten year term, and an exercise price equal to the fair market value of the Common Stock on the date of grant, April 18, 2005. Such options are subject to vesting as follows: 100,000 shares vest on the date of grant; 25,000 shares vest on June 30, 2005, provided that Mr. Leveton is employed as of such date; and 25,000 shares vest as of the last day of each full calendar quarter beginning as of July 1, 2005 through March 31, 2007, provided that Mr. Leveton is employed as of such date; and 50,000 shares vest upon a Raise Event if Mr. Leveton is employed as of such dates or if Mr. Leveton played an active, integral and key role in accomplishing such event, and such event occurred within 30 days of voluntary termination or within 90 days of involuntary termination. All unvested quarterly options immediately vest and become exercisable upon a liquidity event with a valuation of at least $10,000,000; provided the liquidity event occurs during Mr. Leveton's employment or if Mr. Leveton played an active, integral and key role in accomplishing such event, within 90 days of involuntary termination. Except in the case of a liquidity event described above, all unvested options will expire upon the voluntary or involuntary termination of employment. As of February 16, 2007, 325,000 of the options had vested.
 
FF - 23

 
ZYNEX MEDICAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - RELATED PARTY TRANSACTIONS

The Company provides the President with two automobiles for personal use costing $2,287 per month.

NOTE 9 - SUBSEQUENT EVENT

In February 2007 there was a change in the Chief Financial Officer position.

Effective February 19, 2007, the Company entered into a compensation arrangement with its new Chief Financial Officer, Fritz G. Allison. The arrangement provides for a monthly salary of $8,000 per month, before taxes, for the first three months and $10,000 per month, before taxes, thereafter; grant under the Company’s 2005 stock option plan of an option to purchase up to 100,000 shares of the Company’s common stock, with a ten year term starting February 19, 2007, an exercise price equal to $0.45 per share, the fair market value of the Company’s common stock on such date, and a vesting schedule of 25,000 shares vesting on the first anniversary of the date of grant and 25,000 shares vesting on each subsequent anniversary of the date of grant; a bonus payable in 2008 in the amount of $20,000 cash and an option grant for an additional 50,000 shares in the event (a) the Company’s net revenue meets a revenue target for 2007, (b) the Company has a positive net income for 2007, and (c) the Company does not have any restatements of its financial statements during 2007 and for any periods during 2007 or the year 2007 on or prior to the completion of the audit of the 2007 financial statements. Mr. Allison also received full health and dental insurance coverage through the Company.

 
FF - 24

 

 

 
Zynex, Inc. and Subsidiary
 
 
Condensed Consolidated Financial Statements
(Unaudited)
 
Period Ended June 30, 2008
 
 


 
 
 

 
ZYNEX, INC AND SUBSIDIARY
  
CONDENSED CONSOLIDATED BALANCE SHEETS
  
   
December 31,
    
June 30,
  
   
2007
    
2008
  
ASSETS
        
(Unaudited)
  
Current Assets:
            
Cash and cash equivalents
   $ -     $ 189,620  
Accounts receivable, net of allowance for provider discounts and
                
   doubtful accounts of $5,901,724 and $11,138,196, respectively
     4,475,932       7,950,946  
Inventory
     937,694       1,482,452  
Deferred financing fees
     5,525       -  
Prepaid expenses
     34,795       68,189  
Deferred tax asset
     210,000       390,000  
Other current assets
     47,715       57,600  
                 
Total current assets
     5,711,661       10,138,807  
                 
Property and equipment, less accumulated
                
 depreciation of $412,315 and $515,124
     932,222       1,299,366  
Deposits
     21,286       21,286  
                 
    $ 6,665,169     $ 11,459,459  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Current Liabilities:
                
Bank overdraft
   $ 89,347     $ -  
Notes payable
     252,573       14,750  
Loan from stockholder
     118,451       106,248  
Capital lease
     17,932       25,558  
Accounts payable
     817,429       965,352  
Income taxes payable
     910,000       1,985,000  
Accrued payroll and payroll taxes
     213,935       286,262  
Other accrued liabilities
     498,709       666,747  
                 
Total current liabilities
     2,918,376       4,049,917  
                 
Loan from stockholder, less current maturities
     20,332       3,582  
Notes payable, less current maturities
     6,732       1,386  
Capital lease, less current maturities
     12,189       -  
Long-term deferred tax liability
     90,000       75,000  
                 
Total liabilities
     3,047,629       4,129,885  
                 
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,
                
 26,831,113 and 29,132,796 shares issued and outstanding
     26,831       29,133  
Additional paid-in capital
     2,634,075       3,298,604  
Retained earnings
     956,634       4,001,837  
                 
Total shareholders' equity
     3,617,540       7,329,574  
                 
    $ 6,665,169     $ 11,459,459  

See accompanying notes to financial statements

 
FFF - 1
 



ZYNEX, INC. AND SUBSIDIARY
  
CONSOLIDATED STATEMENTS OF OPERATIONS
  
(UNAUDITED)
  
             
   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
   
2007
    
2008
    
2007
    
2008
  
                         
Net rental income
   $ 965,064     $ 3,487,496     $ 1,768,126     $ 6,077,542  
Net sales income
     540,143       1,560,139       1,073,812       2,711,121  
Net rental and sales income
     1,505,207       5,047,635       2,841,938       8,788,663  
                                 
Cost of rentals
     68,155       113,209       93,803       216,228  
Cost of sales
     131,549       165,003       224,581       518,698  
Cost of rentals and sales
     199,704       278,212       318,384       734,926  
                                 
Gross profit
     1,305,503       4,769,423       2,523,554       8,053,737  
                                 
Operating Expenses:
                                
Selling, general and administrative, including
                          
common stock and warrants issued for
                                
consulting services of $39,375 in 2007
     725,102       2,076,900       1,503,689       3,633,167  
                                 
                                 
Income from operations
     580,401       2,692,523       1,019,865       4,420,570  
                                 
Other income (expense):
                                
Interest income
     -       210       -       1,071  
Interest expense
     (98,553 )     (7,722 )     (220,636 )     (23,639 )
Gain on disposal of leased equipment
     -       27,201       -       27,201  
                                 
      481,848       2,712,212       799,229       4,425,203  
                                 
Income tax expense
     130,300       860,000       216,000       1,380,000  
                                 
Net income
   $ 351,548     $ 1,852,212     $ 583,229     $ 3,045,203  
                                 
Net income per common and
                                
common equivalent share
                                
Basic
   $ 0.01     $ 0.06     $ 0.02     $ 0.11  
                                 
Diluted
   $ 0.01     $ 0.06     $ 0.02     $ 0.10  
                                 
                                 
Weighted average number of shares
                                
outstanding
                                
Basic
     26,427,002       29,132,219       26,369,277       28,424,838  
                                 
Diluted
     27,823,336       30,277,702       27,250,434       29,976,696  

See accompanying notes to financial statements

 
FFF - 2
 


ZYNEX, INC AND SUBSIDIARY
  
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
  
(UNAUDITED)
  
               
 
              
   
Number
    
Common
    
Additional
Paid in Capital
    
Retained
Earnings
    
Total
  
   
of Shares
    
Stock
  
                               
January 1, 2008
     26,831,113     $ 26,831     $ 2,634,075     $ 956,634     $ 3,617,540  
Issuance of common stock for option exercise
     282,440       283       (283 )     -       -  
Issuance of common stock for warrant call, net of offering costs
     1,920,351       1,920       604,799       -       606,719  
Issuance of common stock for warrant exercise
     80,392       80       (80 )     -       -  
Issuance of common stock for cash
     13,500       14       17,620       -       17,634  
Issuance of common stock for employee incentive
     5,000       5       7,395       -       7,400  
Employee stock option expense
     -       -       35,078       -       35,078  
Net income, six months ended June 30, 2008
     -       -       -       3,045,203       3,045,203  
                                         
June 30, 2008
     29,132,796     $ 29,133     $ 3,298,604     $ 4,001,837     $ 7,329,574  
                                         

See accompanying notes to financial statements
FFF - 3

 
ZYNEX, INC. AND SUBSIDIARY
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
  
(UNAUDITED)
  
   
Six Months Ended
  
   
June 30,
  
   
2007
    
2008
  
Cash flows from operating activities:
            
Net income
   $ 583,229     $ 3,045,203  
Adjustments to reconcile net income to net cash used in
                
operating activities:
                
Depreciation
     62,497       159,655  
Provision for losses in accounts receivable (bad debts)
     244,121       755,908  
Provision for provider discounts
     2,545,505       7,889,712  
Amortization of deferred consulting and financing fees
     132,610       5,525  
Issuance of common stock and warrants for services,
                
interest, loan fees and employee incentive
     69,173       7,400  
Provision for obsolete inventory
     24,000       24,000  
Amortization of discount on note payable
     56,548       -  
Amortization of beneficial conversion feature
     3,904       -  
Gain on disposal of equipment
     -       (27,201 )
Employee stock based compensation expense
     13,368       35,078  
Deferred tax benefit
     (330,000 )     (195,000 )
Changes in operating assets and liabilities:
                
Accounts receivable
     (3,740,571 )     (12,120,634 )
Inventory
     (151,212 )     (568,758 )
Prepaid expenses
     31,198       (33,394 )
Other current assets
     (9,700 )     (9,885 )
Accounts payable
     102,097       147,923  
Accrued liabilities
     2,613       240,365  
Income taxes payable
     546,000       1,075,000  
                 
Net cash provided by operating activities
     185,380       430,897  
                 
Cash flows from investing activities:
                
Proceeds from disposal of equipment
     -       47,000  
Purchases of equipment
     (185,191 )     (546,597 )
                 
Net cash used in investing activities
     (185,191 )     (499,597 )
                 
Cash flows from financing activities:
                
Decrease in bank overdraft
     -       (89,347 )
Payments on notes payable and capital lease
     (301,199 )     (247,733 )
Proceeds from loans from stockholder
     74,000       -  
Repayments of loans from stockholder
     (17,133 )     (28,953 )
Issuance of common stock for cash, net
     -       624,353  
                 
Net cash (used in) provided by financing activities
     (244,332 )     258,320  
                 
Net (decrease) increase in cash and cash equivalents
     (244,143 )     189,620  
                 
Cash and cash equivalents at beginning of period
     265,197       -  
                 
Cash and cash equivalents at end of period
   $ 21,054     $ 189,620  
                 
Supplemental cash flow information:
                
Interest paid
   $ 21,882     $ 6,566  
Income taxes paid
           $ 500,000  
                 
Supplemental disclosure of non-cash investing
                
and financing activity:
                
Conversion of notes payable to common stock
   $ 99,175          
 
See accompanying notes to financial statements

 
FFF - 4
 


ZYNEX, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2008

(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, 2007.

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 June 30, 2008 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 and six months ended June 30, 2008 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.

The accompanying consolidated financial statements include the accounts of Zynex, Inc. and Zynex Medical, Inc. for all of the periods presented. All inter company balances and transactions have been eliminated in consolidation

(2)           SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

The Company’s policy for revenue recognition for the rental of products is to recognize revenue ratably over the products’ rental period. Rental revenue is shown net of the estimated discounts, which will be taken by healthcare payment providers.

The Company’s policy for revenue recognition for the sale of products is to recognize revenue when the product has been shipped and, when applicable, a claim prepared by the Company has been filed with the patient's insurance provider. Sales revenue is shown net of the estimated discounts, which will be taken by healthcare payment providers.

Revenue is recognized under rental agreements and product shipments only after the following criteria are met: (i) there exists adequate evidence of the transactions; (ii) delivery of goods has occurred or services have been rendered; and (iii) the price is not contingent on future activity; and (iv) collectibility is reasonably assured.

RESERVES FOR PROVIDER DISCOUNTS AND COLLECTIBILITY

The Company maintains reserves for provider discounts and collectibility. Provider discounts result from reimbursements from insurance providers that are less than amounts claimed, as provided by agreement, where the amount claimed by the Company exceeds the insurance provider's usual, customary and reasonable reimbursement rate and when units are returned because of benefit denial. The provision is provided for by reducing gross revenue by a portion of the amount invoiced during the relevant period. The amount of the reduction is estimated based on historical experience. The reserve for collectibility is the customary allowance for bad debts.


 
FFF - 5
 

At December 31, 2007 and June 30, 2008, the reserves for provider discounts and collectibility are as follows:

   
December 31, 2007
    
June 30, 2008
  
             
Reserve for provider discounts
   $ 5,455,724     $ 10,310,696  
Allowance for bad debts
     446,000       827,500  
                 
    $ 5,901,724     $ 11,138,196  


USE OF ESTIMATES

Preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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 financial statements are associated with collectibility of accounts receivable.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities" (“SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirements for FASB Statement No. 133, “Derivative Instruments and Hedging Activities” (“SFAS No. 133”). It requires enhanced disclosure about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments and related hedge items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for the Company as of January 1, 2009. The Company is currently assessing the impact of SFAS 161 on its financial position and results of operations.

RECLASSIFICATIONS

Certain amounts in the 2007 financial statements have been reclassified to conform to the presentation used in 2008.

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 June 30, 2008, the Company had a reserve balance for slow moving inventory of approximately $150,000 and approximately $126,000 at December 31, 2007.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. The Company removes the cost and the related accumulated depreciation from the accounts of assets sold or retired, and the resulting gains or losses are included in the results of operations. Depreciation is computed using the straight-line method. Through March 31, 2008, the Company recorded depreciation of all property and equipment in a separate line item within operating expenses. As rental inventory contributes directly to the revenue generating process, the Company reclassified the depreciation of rental inventory to cost of sales. The consolidated statement of operations for the six months ended June 30, 2008 has been reclassified to reflect this change. The consolidated statements of operations for the three and six months ended June 30, 2007 have been reclassified to conform to the presentation used in 2008. The amount of reclassification was not material to the consolidated statements of operations.

 
FFF - 6
 

Cost and related estimated useful lives of property and equipment as of December 31, 2007 and June 30, 2008 are as follows:
 
   
December 31, 2007
    
June 30, 2008
  
             
Office furniture and equipment
   $ 198,173     $ 143,708  
Rental inventory
     1,068,303       1,591,760  
Vehicles
     59,833       59,832  
Leasehold Improvements
     8,500       8,500  
Assembly equipment
     9,728       10,690  
      1,344,537       1,814,490  
Less accumulated depreciation
     (412,315 )     (515,124 )
Net
   $ 932,222     $ 1,299,366  

Repairs and maintenance costs are charged to expense as incurred.


(3)           EARNINGS PER SHARE

The Company computes net earnings (loss) per share in accordance with SFAS No. 128, "Earnings per Share", which establishes standards for computing and presenting net earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings 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 (loss) per share for the three months ended June 30, 2007 and 2008 and the six months ended June 30, 2007 and 2008 is as follows:

   
Three months ended June 30,
    
Six months ended June 30,
  
   
2007
    
2008
    
2007
    
2008
  
Basic:
                        
Net income
   $ 351,548     $ 1,852,212     $ 583,229     $ 3,045,203  
Weighted average shares outstanding - basic
     26,427,002       29,132,219       26,369,277       28,424,838  
Net income per share - basic
   $ 0.01     $ 0.06     $ 0.02     $ 0.11  
                                 
Diluted:
                                
Net income
   $ 351,548     $ 1,852,212     $ 583,229     $ 3,045,203  
Weighted average shares outstanding - basic
     26,427,002       29,132,219       26,369,277       28,424,838  
Dilutive securities
     1,396,334       1,145,483       881,157       1,551,858  
Weighted average shares outstanding - diluted
     27,823,336       30,277,702       27,250,434       29,976,696  
Net income per share - diluted
   $ 0.01     $ 0.06     $ 0.02     $ 0.10  



(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.


 
FFF - 7
 

For the three months ended June 30, 2008 and 2007, the Company recorded compensation expense related to stock options that decreased net income from operations and decreased net income by $25,185 and $4,912, respectively. For the six months ended June 30, 2008 and 2007, the Company recorded compensation expense related to stock options that decreased net income from operations and decreased net income by $35,078 and $13,368, respectively. The stock compensation expense was included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

For the three months ended June 30, 2008 the Company granted stock options to acquire 111,000 shares of common stock to employees at an exercise price ranging from $1.45 to $1.69 per share. The fair value of stock options at the date of grant during the three months ended June 30, 2008 ranged from $1.25 to $1.45. During the three months ended June 30, 2007 the Company granted stock options to acquire 28,000 shares of common stock at an exercise price of $0.42.

The Company used the following assumptions to determine the fair value of stock option grants during the three months ended June 30, 2007 and 2008: 

 
2007
2008
  
Expected life
7 years
6.25 years
  
Volatility
108%
112.66% - 114.47%
  
Risk-free interest rate
4.57%
3.09% - 3.77%
  
Dividend yield
0%
0%
  


The expected life 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 our common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents our anticipated cash dividend over the expected life of the stock options.

A summary of stock option activity under the Option Plan for the six months ended June 30, 2008 is presented below:

             
Weighted
    
         
Weighted
  
Average
    
   
Shares
    
Average
  
Remaining
Aggregate
  
   
Under
    
Exercise
  
Contractual
Intrinsic
  
   
Option
    
Price
  
Life
Value
  
                   
Outstanding at January 1, 2008
     496,000     $ 0.58          
                         
Granted
     207,000     $ 1.41          
Exercised
     --     $ --          
Forfeited
     (16,000 )   $ 1.37          
Outstanding at June 30, 2008
     687,000     $ 0.81  
8.26 Years
   $ 612,300  
                           
Exercisable at June 30, 2008
     144,500     $ 0.35  
7.85 Years 
   $ 194,890  
                           


 
FFF - 8
 

A summary of status of the Company’s non-vested shares as of and for the six months ended June 30, 2008 is presented below:

           
 
Nonvested
    
Weighted
  
 
Shares
    
Average
  
 
Under
    
Grant Date
  
 
Option
    
Fair Value
  
           
Non-vested at January 1, 2008
404,500
  
$
0.55
  
           
Granted
207,000
  
$
1.22
  
Vested
(53,000
)
$
0.35
  
Forfeited
(16,000
)
$
1.20
  
Non-vested at June 30, 2008
542,500
  
$
0.81
  
           

As of June 30, 2008, we had $273,573 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of approximately 4 years.


(5)         LOANS FROM STOCKHOLDER

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 June 30, 2008, $3,636 of this amount remained outstanding.   The remaining $96,900 was represented by 8.25% demand notes and is being repaid as the Company's cash position and its financing covenants allow. As of June 30, 2008, $1,089 of this amount remained outstanding. 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 June 30, 2008, $26,302 and $15,519 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.  Accrued interest not paid is added to the principal. As of June 30, 2008, $63,284 remains outstanding. The loan from Mr. Sandgaard was used for working capital purposes.


(6)           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 effective income tax rate is reevaluated each reporting period. As of June 30, 2008, the Company has estimated its expected effective income tax rate applicable for the year is 31%, which is the statutory rate decreased by the effect of deductible expenses. Therefore, during the three and six months ended June 30, 2008 the Company recorded a provision for income taxes of $860,000 and $1,380,000. During the three and six months ended June 30, 2007, the Company recorded a provision for income taxes of $130,300 and $216,000.



 
FFF - 9
 

(7)      NOTES PAYABLE

At January 1, 2008, the Company had $228,215 outstanding under two term loan agreements with a bank.  In January 2008, the Company defaulted on the monthly installment payable to this bank and as a result, the bank called the outstanding balances of both term loans. The loans were repaid in February 2008.

 
(8)      STOCKHOLDERS' EQUITY, COMMON STOCK AND WARRANTS
 
In January 2008, the Company notified warrant holders from the 2006 private placement that an event had occurred which accelerated the expiration date of the warrants.  In February 2008 the Company had received notices of exercise and payments from all the warrant holders notified.  The Company issued 1,740,000 shares of common stock to the warrant holders and received $678,600 in proceeds from their exercise.  The Company is obligated to pay $71,881 to the two investment firms that originally aided in the 2006 private placement as fees related to the warrant exercise.  The Company was also obligated to issue 180,351 shares of common stock to the two investment firms that originally aided in the 2006 private placement as fees related to the warrant exercise.  In April 2008, the Company issued 180,531 shares of common stock to these two investment firms.

In February 2008, the Company received a notice of exercise related to a warrant for 100,000 shares of common stock; 80,392 shares of common stock were issued in a cashless exercise.

In February 2008, the Company issued 2,000 shares of common stock to an employee for a cash payment of $2,618.

In March 2008, the Company received a notice of exercise related to options for 325,000 shares of common stock; 282,440 shares of common stock were issued in a cashless exercise.

In March 2008, the Company issued 7,750 shares of common stock to an individual for a cash payment of $10,145.

In April 2008, the Company issued 5,000 shares of common stock to an employee as a non-cash compensation amount.

In May 2008, the Company issued 2,250 shares of common stock to an individual for a cash payment of $2,831.

In May 2008, the Company issued 1,500 shares of common stock to an individual for a cash payment of $2,040.

For stock warrants or options granted to non-employees, the Company measures fair value of the equity instruments utilizing the Black-Scholes method if that valuation method results in a more reliable measurement than the fair value of the consideration or the services received. For stock granted to non-employees, the Company measures fair value of the shares issued utilizing the market price of the shares on the date the transaction takes place. The Company amortizes such costs over the related period of service.


(9)     SUBSEQUENT EVENTS
 
In July 2008, the Company received notices of exercise related to options for 400,000 shares of common stock; 141,295 shares of common stock were issued in cashless exercises.

In July 2008, the Company received notices of exercise related to the 2005 employee stock options for 7,000 shares of common stock; 7,000 shares of common stock were issued in exchange for cash and notes receivable.
 
 
FFF - 10
 
 
PART II INFORMATION NOT REQUIRED IN PROSPECTUS

 
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth an itemization of all estimated expenses, all of which we will pay, in connection with the issuance and distribution of the securities being registered:
 

NATURE OF EXPENSE
  
AMOUNT
  
SEC Registration fee
    $ 200  
Accounting fees and expenses
     10,000  
Legal fees and expenses
     20,000  
Printing and related expenses
     5,000  
TOTAL
    $ 35,200 *
____________
 
     *    Estimated.

Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Articles of Incorporation and Bylaws of the Company provide for indemnification of our directors and certain officers for liabilities and expenses that they may incur in such capacities. In general, our directors and certain officers are indemnified with respect to actions taken in good faith and in a manner such person believed to be in our best interests, and with respect to any criminal action or proceedings, actions that such person has no reasonable cause to believe were unlawful. Furthermore, the personal liability of our directors is limited as provided in our Articles of Incorporation.
 
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.


Item 15. RECENT SALES OF UNREGISTERED SECURITIES

Except as set forth below, there were no sales of unregistered securities by Zynex, Inc., during the past three years:
 
During the year ended December 31, 2005, the Company issued 312,500 warrants to purchase common stock with a fair market value of $41,250, 129,044 shares of unregistered common stock with a total market value of $46,500 and paid $6,250 to The Wall Street Group in return for investor relations services. The Company also issued (a) 8,333 warrants to purchase common stock at a fair market value of $2,870 to a financial consultant for preparation of financial projections and introduction to Silicon Valley Bank; (b) 50,000 warrants to purchase common stock with a fair market value of $22,100 to Silicon Valley Bank in connection with their September 2005, $400,000 term loan; (c) and 100,000 warrants to purchase common stock with a fair market value of $17,200 to an investment banking firm for services rendered.
 

 
II - 1
 


During 2006, in terms of unregistered sales of securities, the Company (a) sold 2,175,000 shares of common stock, and five-year warrants to purchase a total of 1,740,000 shares of common stock at $0.32 per share, to accredited investors, (b) issued 254,475 shares to investment bankers, (c) issued to the provider of the convertible $275,000 bridge loan five-year warrants to purchase a total of 429,867 shares of common stock at $0.39 per share and a fee of 65,000 shares of common stock, (d) issued to the investment banker for the loan five-year warrants to purchase a total of 103,139 shares of common stock at $0.39 per share, (e) issued 150,000 shares to the investment banker responsible for such loan for future consulting services and (f) issued 425,612 shares to investor relations firms for services rendered.
 
During the third quarter of 2007, the Company issued 49,524 shares of common stock from the exercise of then outstanding warrants at an exercise price of $0.01 per share, and 1,238 shares of common stock at $0.95 per share in cash. These warrants were originally issued in June 2004.
 
During the fourth quarter of 2007, the Company issued 9,524 shares of common stock from the exercise of then outstanding warrants at an exercise price of $0.01 per share. These warrants were originally issued in June 2004.

During the first quarter of 2008, the Company received a notice of exercise related to a warrant for 100,000 shares of common stock; 80,392 shares of common stock were issued in a cashless exercise.

During the first quarter of 2008, the Company issued 2,000 shares of common stock to an employee for a cash payment of $2,618.

During the first quarter of 2008, the Company received a notice of exercise related to options for 325,000 shares of common stock; 282,440 shares of common stock were issued in a cashless exercise.
 
    During the first quarter of 2008, the Company issued 7,750 shares of common stock to an individual for a cash payment of $10,145.

In April 2008, the Company issued 5,000 shares of common stock to an employee as a non-cash compensation amount.

In May 2008, the Company issued 2,250 shares of common stock to an individual for a cash payment of $2,831.

In May 2008, the Company issued 1,500 shares of common stock to an individual for a cash payment of $2,040.

In the above issuances, the Company made no general solicitation, the Company believes that purchasers of the securities were accredited investors, the Company believes that the investment bankers, lender and investor relations firms were accredited investors or met the standards for a purchaser is a non-public offering, and the Company relied upon an exemption from securities registration for non-public offerings.


 
II - 2
 

Item 16. EXHIBITS

The following exhibits are included as part of this Form S-1.

Exhibit
Number
Description
   
3.1
Articles of Incorporation of Ibonzi.com, Inc, incorporated by
 
reference to Exhibit 3.1 of the Company's Current Report on
 
Form 8-K, filed January 31, 2002.
   
3.2
Articles of Merger of Ibonzi.com, Inc. with and into
 
Ibonzi.com, to effect a migratory merger, incorporated by
 
reference to Exhibit 2.1 of the Current Report on Form 8-K,
 
filed January 31, 2002.
   
3.3
Amendment to Articles of Incorporation of Ibonzi.com, Inc.,
 
changing the company's name to China Global Development, Inc.,
 
by reference to Exhibit 3.2 of the Company's Current
 
Report on Form 8-K, filed January 31, 2002.
   
3.4
Certificate of Correction to Amendment to Articles of
 
Incorporation, incorporated by reference to Exhibit 3.3 of the
 
Company's Current Report on Form 8-K, filed January 31, 2002.
   
3.5
Amendment to the Articles of Incorporation, changing the
 
Company's name to Arizona Ventures, Inc. and effecting a 1:10
 
reverse split of common stock, incorporated by reference to
 
Exhibit 3.5 of the Company's registration statement filed on
 
Form SB-2, filed July 6, 2004.
   
3.6
Amendment to the Articles of Incorporation, changing the
 
Company's name to Fox River Holdings, Inc., incorporated by
 
reference to Exhibit 3.6 of the Company's registration
 
statement filed on Form SB-2, filed July 6, 2004.
   
3.7
Amendment to the Articles of Incorporation, effecting a 1:40
 
reverse split of common stock, incorporated by reference to
 
Exhibit 3.7 of the Company's registration statement filed on
 
Form SB-2, filed July 6, 2004.
   
3.8
Amendment to the Articles of Incorporation, changing the
 
Company's name to Zynex Medical Holdings, Inc., incorporated by
 
reference to Exhibit 3.8 of the Company's registration
 
statement filed on Form SB-2, filed July 6, 2004.
   
3.9
Amendment to Articles of Incorporation, consisting of a Certificate of
 
Correction and a Certificate of Amendment, changing the Company’s name to
 
Zynex, Inc., incorporated by reference to Exhibit 3 of the Company’s Current
 
Report on Form 8-K, filed July 8, 2008.
   
3.10
Bylaws of the Company, incorporated by reference to Exhibit 3.4
 
of the Company's Current Report on Form 8-K, filed January 31,
 
2002.
   
4.1
Subscription Agreement, dated as of June 4, 2004, by and among
 
the Company, Alpha Capital Aktiengesellschaft, Stonestreet
 
Limited Partnership, Whalehaven Funds Limited, Greenwich Growth
 
Fund Limited and Ellis International Limited, Inc.,
 
incorporated by reference to Exhibit 4.1 of the Company's
 
registration statement filed on Form SB-2, filed July 6, 2004.


 
II - 3
 
 

   
4.2
Form of A Common Stock Purchase Warrant, incorporated by
 
reference to Exhibit 4.2 of the Company's registration
 
statement filed on Form SB-2, filed July 6, 2004.
   
4.3
Form of B Common Stock Purchase Warrant, incorporated by
 
reference to Exhibit 4.3 of the Company's registration
 
statement filed on Form SB-2, filed July 6, 2004.
   
4.4
Form of C Common Stock Purchase Warrant, incorporated by
 
reference to Exhibit 4.4 of the Company's registration
 
statement filed on Form SB-2, filed July 6, 2004.
   
4.5
Escrow Agreement, dated as of June 4, 2004, by and among Zynex
 
Medical Holdings, Inc., Alpha Capital Aktiengesellschaft,
 
Stonestreet Limited Partnership, Whalehaven Funds Limited,
 
Greenwich Growth Fund Limited, Ellis International Limited Inc.
 
and Grushko & Mittman, P.C., incorporated by reference to
 
Exhibit 4.5 of the Company's registration statement filed on
 
Form SB-2, filed July 6, 2004.
   
4.6
Form of Securities Purchase Agreement, incorporated by reference to
 
Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
 
January 30, 2007.
   
4.7
Form of Registration Rights Agreement, incorporated by reference to
 
Exhibit 10.2 of the Company’s Current Report on Form 8-K filed
 
January 30, 2007.
   
4.8
Form of Warrant, incorporated by reference to Exhibit 10.4 of the
 
Company’s Quarterly Report on Form 10-QSB, filed August 18, 2006.
   
5
Opinion re Legality
   
10.1
Acquisition Agreement, dated as of January 27, 2004, by and
 
among Zynex Medical Holdings, Inc., Zynex Medical, Inc. and
 
Thomas Sandgaard, incorporated by reference to Exhibit 10 of
 
Zynex Medical Holdings, Inc.'s Current Report on Form 8-K,
 
filed February 20, 2004.
   
10.2
Thomas Sandgaard Employment Agreement, incorporated by
 
reference to Exhibit 10.2 of the Company's registration
 
statement filed on Form SB-2, filed July 6, 2004.
   
10.3
Amendment to Thomas Sandgaard Employment Agreement dated
 
February 1, 2004, incorporated by reference to Exhibit 10.3 of
 
Zynex Medical Holdings, Inc.'s Annual report on Form 10-K
 
filed April 15, 2005.
   
10.4
Multi-Tenant Lease, dated January 20, 2004, by and between
 
First Industrial, L.P., a Delaware limited partnership and
 
Zynex Medical, Inc. a Colorado corporation , incorporated by
 
reference to Exhibit 10.4 of Zynex Medical Holdings, Inc.'s
 
Annual report on Form 10-K filed April 15, 2005.



 
II - 4
 
 

   
10.5
2005 Stock Option Plan , incorporated by reference to Exhibit
 
10.5 of Zynex Medical Holdings, Inc.'s Annual report on Form
 
10-K filed April 15, 2005.
   
10.6
Compensation Agreement dated as of April 18, 2005 between
 
Zynex Medical Holdings, Inc. and Peter J. Leveton,
 
incorporated by reference to Exhibit 10.1 of Zynex Medical
 
Holdings, Inc.'s Quarterly Report on Form 10-Q, filed August
 
12, 2005.
   
10.7
Loan and Security Agreement among Zynex Medical Holdings, Inc.,
 
Zynex Medical, Inc. and Silicon Valley Bank, dated
 
September 29, 2005, incorporated by reference to Exhibit 10.1
 
of Zynex Medical Holdings, Inc.'s Current Report on Form 8-K,
 
filed October 7, 2006.
   
10.8
Warrant to Purchase Stock from Zynex Medical Holdings, Inc. to
 
Silicon Valley Bank, incorporated by reference to Exhibit
 
10.2 of Zynex Medical Holdings, Inc.'s Current Report on
 
Form 8-K, filed October 7, 2006.
   
10.9
Unconditional Guaranty by Thomas Sandgaard for Silicon Valley
 
Bank, dated September 29, 2005, incorporated by reference to
 
Exhibit 10.3 of Zynex Medical Holdings, Inc.'s Current Report
 
on Form 8-K, filed October 7, 2006.
   
10.10
Default Waiver and First Amendment to Loan and Security
 
Agreement, dated March 6, 2006, incorporated by reference
 
to Exhibit 10.1 of Zynex Medical Holdings, Inc.'s Current
 
Report on Form 8-K, filed March 20, 2006.
   
10.11
Unconditional Guaranty by Thomas Sandgaard for Silicon Valley
 
Bank, dated March 6, 2006, incorporated by reference to
 
Exhibit 10.2 of Zynex Medical Holdings, Inc.'s Current Report
 
on Form 8-K, filed March 20, 2006.
   
10.12
Promissory Note dated March 1, 2006 to Thomas Sandgaard,
 
Incorporated by reference to Exhibit 10.1 of the Company’s
 
Quarterly Report on Form 10-QSB filed August 17, 2006
   
10.13
Promissory Note dated March 1, 2006 to Thomas Sandgaard,
 
incorporated by reference to Exhibit 10.2 of the Company’s
 
Quarterly Report on Form 10-QSB filed August 17, 2006.
   
10.14
Promissory Note dated June 30, 2006 to Thomas Sandgaard,
 
incorporated by reference to Exhibit 10.3 of the Company’s
 
Quarterly Report on Form 10-QSB filed August 17, 2006.
   
10.15
Promissory Note dated May 16, 2007 by Zynex Medical Holdings,
 
Inc., to Thomas Sandgaard incorporated by reference to Exhibit 10.1
 
of the Company’s Current Report on Form 8-K filed June 29, 2007.



 
II - 5
 



   
10.16
Promissory Note dated June 15, 2007 by Zynex Medical Holdings,
 
Inc., to Thomas Sandgaard incorporated by reference to Exhibit 10.2
 
of the Company’s Current Report on Form 8-K filed June 29, 2007.
   
10.17
Promissory Note dated September 30, 2007 by Zynex Medical Holdings,
 
Inc., to Thomas Sandgaard incorporated by reference to Exhibit 10.1
 
of the Company’s Quarterly Report on Form 10-QSB filed November 19, 2007.
   
10.18
Convertible Secured Promissory Note dated October 18, 2006 by
 
Zynex Medical Holdings, Inc., incorporated by reference to
 
Exhibit 10.1 of the Company’s Current Report on Form 8-K filed
 
October 18, 2006.
   
10.19
Warrant dated October 18, 2006 by Zynex Medical Holdings, Inc.
 
to Ascendiant Capital Group, LLC, incorporated by reference to
 
Exhibit 10.2 of the Company’s Current Report on Form 8-K filed
 
October 18, 2006.
   
10.20
Security Agreement between Ascendiant Capital Group, LLC and
 
Zynex Medical Holdings, Inc., incorporated by reference to
 
Exhibit 10.3 of the Company’s Current Report on Form 8-K filed
 
October 18, 2006.
   
10.21
Letter Agreement, dated May 3, 2007 with Ascendiant Capital
 
Group, LLC, incorporated by reference to Exhibit 10.1 of the
 
Company’s Quarterly Report on Form 10-QSB filed May 18, 2007.
   
10.22
Subordination Agreement dated October 17, 2006 among
 
Ascendiant Capital Group, LLC, Silicon Valley Bank and Zynex
 
Medical Holdings, Inc., incorporated by reference to Exhibit 10.4
 
of the Company’s Current Report on Form 8-K filed October 18, 2006.
   
10.23
Separation Agreement dated February 16, 2007 between Peter J. Leveton
 
and Zynex Medical Holdings, Inc. , incorporated by reference to Exhibit 10.19
 
of the Company’s Annual Report on Form 10-KSB filed April 17, 2007.
   
10.24
Sublease dated October 31, 2007 between Zynex Medical Holdings, Inc.,
 
and Jones/NCTI, Inc., incorporated by reference to Exhibit 10.1 of the
 
Company’s Current Report on Form 8-K filed November 16, 2007.
   
21
List of Subsidiaries, incorporated by reference to Exhibit 21 of Zynex Medical
 
Holdings, Inc.’s Annual Report on Form 10-KSB, filed April 15, 2005.
   
23.1
Consent of Independent Registered Public Accounting Firm.
   
23.2
Consent of Holland & Hart LLP (included in opinion filed as Exhibit 5)..

 

II - 6
 
 
Item 17. UNDERTAKINGS

(a) Rule 415 Offering. The undersigned registrant hereby undertakes to:
 
(1)  File, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:
 
(i)           Include any prospectus required by Section 10(a)(3) of the Securities Act;
 
(ii)           Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of the securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement, and
 
(iii)           Include any additional or changed material information on the plan of distribution.
 
(2)           For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.
 
(3)           File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
 
(b) Request for Acceleration of Effective Date.  Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
 
In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
 
(c) Reliance on Rule 430C. Each prospectus filed pursuant to Rule 424(b) of the Act as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
 

 
II - 7
 

 
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, in the City of Littleton, State of Colorado, on September 3, 2008.
 
 
 
ZYNEX, INC.
  
       
 
By:
/s/Thomas Sandgaard
  
   
Thomas Sandgaard, President,
Chief Executive Officer, and Director
  
       
       
 
     
       
 
By:
/s/ Fritz G. Allison
  
   
Fritz G. Allison, Chief Financial Officer
  
       
       


In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated.

SIGNATURE
TITLE
DATE
     
        /s/ Thomas Sandgaard
            President, Chief Executive Officer and Director
September 3, 2008
             Thomas Sandgaard
    
     
     
              /s/ Fritz G. Allison
            Chief Financial Officer
September 3, 2008
              Fritz G. Allison
    
 
 
 
II - 8