U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





(Mark
One)


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


ACT
OF 1934





For the
year ended December
31, 2009








[ ] 
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the transition period from _____ to _____





Commission
file number 33-26787-D





ZYNEX,
INC.


(Name of
small business issuer in its charter)





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





9990 Park Meadows Dr Lone Tree,
      CO
            80124(Address
      of principal executive offices)
            (Zip
      Code)





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





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





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





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





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





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.     [X]
Yes          [  ]
No





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





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





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


Large
accelerated filer
[  ]           Accelerated
filer
[  ]               Non-accelerated
filer
[  ]               Smaller
reporting company [X]





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





The
aggregate market value of the 8,764,189 common shares held by non-affiliates of
the registrant was $8,238,338 computed by reference to the closing price of such
stock as listed on the OTC Bulletin Board on June 30, 2009. This computation is
based on the number of issued and outstanding shares held by persons other than
officers, directors and shareholders of 5% or more of the registrant's common
shares





As of
March 24, 2009, 30,497,318 shares of common stock are issued and
outstanding.





Documents
incorporated by reference: None.








CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION





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





When used
in this annual report, the terms the "Company," "Zynex", "we," "us," "ours," and
similar terms refer to Zynex, Inc., a Nevada corporation, and its wholly-owned
subsidiary, Zynex Medical, Inc.





-
2 -





TABLE
OF CONTENTS





FORM
10-K ANNUAL REPORT - FISCAL YEAR 2009





ZYNEX,
INC.





PART
      I
              PageItem
      1. Business
              3Item
      1A. Risk Factors
              12Item 1B. Unresolved
      Staff Comments
              19Item
      2. Property
              19Item
      3. Legal Proceedings
              19Item
      4. Submission of Matters to a Vote of Security Holders
              20PART
      IIItem
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities
              20Item
      6. Selected Financial Data
              21Item
      7. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
              21Item
      7A. Quantitative and Qualitative Disclosures About Market
    Risk
              27Item
      8. Financial Statements and Supplementary Data
              27Item
      9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosures
              28Item
      9A(T). Controls and Procedures
              28Item
      9B. Other Information
              28PART
      IIIItem
      10. Directors, Executive Officers and Corporate Governance
              29Item
      11. Executive Compensation
              31Item
      12. Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
              34Item
      13. Certain Relationships and Related Transactions, and Director
      Independence
              36Item
      14. Principal Accountant Fees and Services
              37PART
      IVItem
      15. Exhibits Financial Statement Schedules
              37
 
 
  -
3 -





PART
I





ITEM
1. BUSINESS





History





On
February 11, 2004, Zynex, Inc. (formerly called Zynex Medical Holdings, Inc.) a
Nevada corporation, acquired 100% of the common stock of Zynex Medical,
Inc., a privately held Colorado corporation ("Zynex Medical") engaged in the
development, assembly and marketing of electrotherapy
products.  In consideration for receiving 100% of the common
stock of Zynex Medical, Zynex issued 19,500,000 shares of common stock
to Thomas Sandgaard, the sole shareholder of Zynex Medical prior to the
transaction. Immediately after the transaction, Mr. Sandgaard owned
approximately 88.5 percent of Zynex common stock. For accounting purposes,
Zynex Medical was treated as the acquiring corporation.





Zynex is
the parent company of Zynex Medical. Zynex Medical designs, manufactures and
markets FDA cleared medical devices for the electrotherapy and stroke
rehabilitation markets. The business of Zynex Medical commenced in 1996 and was
initially the importing and marketing of European-made electrotherapy
devices.  The Company's headquarters are located in Lone Tree,
Colorado.





Current
Business





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





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





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





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





Our Zynex
produced electrotherapy products, the IF8000, IF8100, TruWave, E-Wave and
TruWave Plus, are marketed through physicians and therapists primarily by our
independent contractor sales representatives, some of whom receive additional
compensation to serve as Regional Sales Managers. We also employ inside sales
personnel for the NeuroMove. The NeuroMove is marketed directly to end-user
patients and physicians who specialize in stroke and SCI
rehabilitation.





To
increase revenues, we added experienced sales representatives in 2006 through
2009.   Commencing in the fourth quarter of 2009, the Company
began adding an additional 25 sales representatives..





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





-
4 -


The
Company is forming two new subsidiaries which will have as their purposes to
create, develop and market new products for hospitals and clinics with the use
of technology in the Company’s existing product portfolio.  The
subsidiaries are intended to be part of a long-term path of growth, both
domestically and internationally.  Currently, the Company plans on the
development of devices for monitoring in the cardiovascular area and for
diagnosing neurological issues.  These devices are under
development.  The management of the Company also intends to use the
new subsidiaries as a platform of potential strategic acquisitions of businesses
involved in the cardiovascular monitoring and neurological diagnosis
industries.  The Company expects no revenue from these units for at
least two years.





Effective
in 2013, to our knowledge, there will be under the U.S. health reform law a 2.3%
excise tax on the first sale of medical devices, with certain
exceptions.  The Company is considering the impact on the Company of
the new law and this excise tax.





Products




The
Company received most of its revenue in 2009 from the sale and rental of
transcutaneous electrical nerve stimulation (“TENS”), interferential (“IF”) and
neuromuscular electrical stimulation (“NMES”) devices and consumable
supplies.  Revenue from the sale and rental of the NeuroMove is a
small part of our total revenue.





We
currently market and sell six Zynex-produced products and resell seven products
purchased from others, all as indicated below:





Product Name
            DescriptionOur ProductsIF
      8000
            Combination
      IF and NMES device.IF
      8100
            An
      easier to use, fixed program version of the IF8000.E-Wave
            Dual
      Channel NMES DeviceTruWave
            Dual
      Channel TENS DeviceNM
      900
            NeuroMove.
      Electromyography (EMG) triggered Electrical Stimulation
    DeviceTruWave
      Plus
            Dual
      Channel combination TENS, NMES and IF
Device





Resale ProductsConti4000
            Electrical
      Stimulation Device for Incontinence TreatmentValuTENS
            Dual
      Channel TENS DeviceDCHT
            Cervical
      Traction DeviceLHT
            Lumbar
      Traction DeviceLSO
            Lumbar
      Support DeviceElectrodes
            Supplies,
      re-usable for delivery of electrical current to the
bodyBatteries
            Supplies,
      for use in electrotherapy products





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5 -





Pain Management and
Control





Standard
electrotherapy is a clinically proven and medically accepted alternative
modality to manage acute and chronic pain.  Electrical stimulation has
been shown to reduce most types of local pain, such as tennis elbow, neck or
lower back pain, arthritis, and others. The devices used to accomplish this are
commonly described as in the TENS family of devices.  Electrotherapy
is not known to have any negative side effects, a significant advantage over
most pain relief medications. The benefits of electrotherapy can include: pain
relief, increased blood flow, reduced edema, prevention of venous thrombosis,
increased range-of-motion, prevention of muscle disuse atrophy, and reduced
urinary incontinence.





Electrotherapy
introduces an electrical current applied through surface electrodes. The
electrical current "distorts" a pain signal on its way to the central nervous
system and the brain, thus reducing the pain. Additionally, by applying higher
levels of electricity muscles contract and such contraction may assist in the
treatments mentioned above.





Numerous
clinical studies have been published over several decades showing the
effectiveness of TENS for pain relief. Zynex has developed three products in the
TENS category that have been cleared by the FDA: the TruWave, a digital TENS
device, and the IF8000 and upgraded IF8100 IF 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. The TruWave
Plus is capable of delivering the traditional TENS as one of its
modalities.


Stroke and Spinal Cord
Injury Rehabilitation





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





According
to information published by the American Heart Association in 2010, there is an
estimated 6.4 million stroke survivors in the U.S., a population that is
estimated to be growing by about 9% or 600,000 per year.  Stroke is a
leading cause of serious, long term disability in the United States according to
a survey of the US Bureau of the Census.





Because
there has not been an overall SCI incidence study since the 1970s and many cases
are unreported as such, definitive statistics are not available. However, the
National Spinal Cord Injury Statistical Center reports that in 2008, living U.S.
victims range between 229,000 and 306,000 and the National Spinal Cord Injury
Statistical Center estimates 12,000 new survivors each year.





In most
cases, the survivors and their caregivers for both stroke and SCI victims
believe they must live with the disability for the rest of their lives, and this
inability to move one or more extremities has, we believe, a substantial
negative psychological impact on the survivor's recovery potential. By using the
NeuroMove as recommended, we believe the patient has a viable opportunity to
achieve improvement beyond their current physical plateau and that such positive
results will be a major contributor to the recovery process. The NeuroMove has
also been proven in clinical studies to show beneficial effects when combined
with physical therapy.





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


-
6 -





NeuroMove Clinical
Review





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





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





Because
the NeuroMove increases the likelihood and reduces the time required for
noticeable physical improvement as compared to traditional therapies used
without the NeuroMove, we believe it can have positive effects in reducing
society's annual stroke and SCI victim cost. The American Heart Association
estimated that in 2010 alone, stroke costs would total more than $73 billion
dollars. Similar data for SCI victims has not been compiled but the National
Spinal Cord Injury Statistical Center estimates lifetime per victim costs range
from $0.5 million to $3.1 million depending on age and the type of injury.
NeuroMove related cost savings will come from reduced physical therapy, less
medication, fewer post stroke accidents, less hospitalization and
rehabilitation, more motivated patients, less support personnel and equipment,
and reduced productivity loss.





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





Muscle related
problems





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





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





Post-op
recovery





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





-
7 -





Our
Markets




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





The
domestic and international markets for stroke and SCI rehabilitation technology
are in the initial stages of development. According to information published in
the American Heart Association “Heart Disease and Stroke Statistics – 2010
Update”, with approximately 6.4 million stroke survivors, growing approximately
8% a year, and approximately 229,000 - 306,000 SCI survivors, growing
approximately 12,000 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:





Ÿ
            Often,
      time for collection of initial payment from insurance carriers can range
      from 30 days to many months and considerably longer for many attorney,
      personal injury and worker's compensation cases. Such delayed payment
      impacts the Company's cash flow and can slow its
      growth.  Collections are also impacted by whether effective
      contacts are made by our billing and collections department with the
      insurance carriers.Ÿ
            Prior
      to payment, the third party payers often make significant payment
      "adjustments or discounts".Ÿ
            Some
      insurance companies do not as a matter of policy cover some of our
      products, which can result in the denial of payment or a demand for
      refund.Ÿ
            For
      marketing reasons, we typically do not require any payments from patients
      and instead look only to insurers.Ÿ
            The
      stroke and SCI markets have demonstrated that many patients and their
      caregivers will privately pay for the NeuroMove.





Sales
Strategies




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





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





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


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8 -





Product Assembly and
Processing




Our
product assembly strategy consists of the following elements:





Ÿ
            At
      all times, comply with relevant regulatory requirements and
      regulations.Ÿ
            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.Ÿ
            Test
      all units 100% in a real-life, in-house environment to help ensure the
      highest possible quality, patient safety, and reduce the cost of warranty
      repairs.





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





Our
significant suppliers as of March 2010 are:





Axelgaard Manufacturing Co., LTD,
Fallbrook, CA, US


Battery Warehouse Direct, Barrington,
IL US


Byers
Peak, Wheat Ridge, CO, US


Spectramed, Mount Vernon, OH,
US





See Note
10 to the Consolidated Financial Statements regarding the Company’s primary
supplier of electrotherapy products.





Our
employees develop the software used in our products.





Revenue:




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





More than
a majority of our revenue is derived from patients with private health insurance
carriers with insurance plans, typically known as HMO or PPO, on behalf of their
insureds.  The balance of the revenue is received from Medicare and
Medicaid, worker's compensation agencies, attorneys representing injured
patients, hospitals, U.S. and international distributors. Patients associated
with one private health insurance carrier account for approximately 23% of our
2009 net revenue. Patients associated with a second private health
insurance carrier account for approximately 13% of our 2009 net
revenue.
 
 More than
a majority of our revenue depends upon recurring revenue.  Recurring
revenue results from renting our products typically for two to five
months.  In terms of sales of products, our primary source of
recurring revenue is the sale of surface electrodes and batteries sent to
existing patients each month. The electrodes transmit the electrical charge from
the device to the patient and are an essential component of the treatment
modality.





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


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9 -





Products Purchased For
Resale




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





Intellectual
Property




We
believe that our products contain certain proprietary software. In the future,
we may seek patents for advances to our existing products and for new products
as they are developed.  A patent application for NeuroMove technology
was withdrawn during 2008, and we currently own no patents.





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





We
utilize non-disclosure and trade secret agreements with employees and third
parties to protect our proprietary information.





Regulatory Approval And
Process





All our
products are classified as Class II (Medium Risk) devices by the Food and Drug
Administration (FDA), and clinical studies with our products are considered to
be NSR (Non-Significant Risk Studies). Our business is governed by the FDA, and
all products typically require 510(k) market clearance before they can be put in
commercial distribution. Section 510(k) of the Federal Food, Drug and Cosmetics
Act, is available in certain instances for Class II (Medium Risk) products. It
requires that before introducing most Class II devices into interstate commerce,
the company introducing the product must first submit information to the FDA
demonstrating that the device is substantially equivalent in terms of safety and
effectiveness to a device legally marketed prior to March 1976. When the FDA
determines that the device is substantially equivalent, the agency issues a
"clearance" letter that authorizes marketing of the product. We are also
regulated by the FDA's cGMP and QSR division (Quality Systems Regulation), which
is similar to the ISO9000 and the European EN46000 quality control regulations.
All our current products have obtained the requisite FDA clearance or (based on
management's interpretation of the regulations) are exempt from the FDA
clearance process.


In
September 2009, the Company obtained accreditation as a Medicare DMEPOS (Durable
Medical Equipment, Prosthetics, Orthotics, and Supplies) supplier, as required
to maintain its status as provider to Medicare and several private health
insurance companies. The accreditation was performed by the Compliance Team, one
of ten organizations certified to audit and accredit durable medical equipment
providers in the U.S.





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





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




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


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10 -





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:





Ÿ
            Those
      that prohibit the filing of false or improper claims for federal
      payment.Ÿ
            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:





Ÿ
            The
      referral of patients covered under Medicare, Medicaid and other
      federally-funded health care programs; orŸ
            The
      purchasing, leasing, ordering, or arranging for any goods, facility, items
      or service reimbursable under those
programs.





See
“Current Business” above for information on the U.S. health reform law enacted
in March 2010.





Employees




As of
December 31, 2009, we employed 97 full time employees (an increase from 76 as of
December 31, 2008). We also engage a number of independent contractors,
commission-only sales representatives. We believe our relations with all of our
employees and independent contractors are good. We are subject to the minimum
wage and hour laws and provide usual and customary employee benefits such as
vacation, sick leave and health and dental insurance.





-
11 -





ITEM
1A. RISK FACTORS





RISKS
RELATED TO OUR BUSINESS





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





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





·
            shortfalls
      in anticipated revenues or increases in
  expenses;





·
            the
      development of new products; or





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





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





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
inventory with sales representatives that are standard in the electrotherapy
industry, (b) the payment of commissions to salespersons based on sales or
rental orders prior to payments for the corresponding product by insurers and
whether or not there is a denial of any payment by an insurer, (c) the high
level of outstanding accounts receivable because of deferred payment practices
of third-party health payers, (d) the need for expenditures on improvements to
the Company’s internal billing processes, (e) the delayed cost recovery inherent
in rental transactions and (f) increased commitments resulting from the premises
lease signed in November 2009.





OUR
POTENTIAL COMPETITORS COULD BE LARGER THAN US AND HAVE GREATER FINANCIAL AND
OTHER RESOURCES THAN WE DO AND THOSE ADVANTAGES COULD MAKE IT DIFFICULT FOR US
TO COMPETE WITH THEM.





Competitors
to our products may have substantially greater financial, technical, marketing,
and other resources. Competition could result in price reductions, fewer orders,
reduced gross margins, and loss of market share. Our products are regulated by
the U.S. Food and Drug Administration. Competitors may develop products that are
substantially equivalent to our FDA cleared products, thereby using our products
as predicate devices to more quickly obtain FDA approval for their own. If
overall demand for our products should decrease it could have a materially
adverse affect on our operating results.  Substantial competition may
be expected in the future in the area of stroke rehabilitation that may directly
compete with our NeuroMove product.  These companies may use standard
or novel signal processing techniques to detect muscular movement and generate
stimulation to such muscles.  Other companies may develop
rehabilitation products that perform better and/or are less expensive than our
products.





-
12 -


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





The
market for our products is characterized by rapid change and technological
improvements. Failure to respond in a timely and cost-effective way to these
technological developments could result in serious harm to our business and
operating results. We have derived, and we expect to continue to derive, a
substantial portion of our revenues from creating products in the medical device
industry. As a result, our success will depend, in part, on our ability to
develop and market product offerings that respond in a timely manner to the
technological advances of our competitors, evolving industry standards and
changing patient preferences.





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





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





A
MANUFACTURER'S INABILITY TO PRODUCE OUR GOODS ON TIME AND TO OUR SPECIFICATIONS
COULD RESULT IN LOST REVENUE.





Third-party
manufacturers assemble and manufacture to our specifications most of our
products. The inability of a manufacturer to ship orders of our products in a
timely manner or to meet our quality standards could cause us to miss the
delivery date requirements of our customers for those items, which could result
in cancellation of orders, refusal to accept deliveries or a reduction in
purchase prices, any of which could have a material adverse affect on our
revenues. Because of the timing and seriousness of our business, and the medical
device industry in particular, the dates on which customers need and require
shipments of products from us are critical. Further, because quality is a
leading factor when customers, doctors, health insurance providers and
distributors accept or reject goods, any decline in quality by our third-party
manufacturers could be detrimental not only to a particular order, but also to
our future relationship with that particular customer.





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





We
compete with other companies for the production capacity of our manufacturers
and import quota capacity. Some of these competitors have greater financial and
other resources than we have, and thus may have an advantage in the competition
for production and import quota capacity. If we experience a significant
increase in demand, or if we need to replace an existing manufacturer, we may
have to expand our third-party manufacturing capacity. We cannot assure that
this additional capacity will be available when required on terms that are
acceptable to us or similar to existing terms, which we have with our
manufacturers, either from a production standpoint or a financial standpoint. We
enter into a number of purchase order commitments specifying a time for
delivery, method of payment, design and quality specifications and other
standard industry provisions, but do not have long-term contracts with any
manufacturer. None of the manufacturers we use produces our products
exclusively.





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





-
13 -


IF WE ARE
UNABLE TO RETAIN THE SERVICES OF MR. SANDGAARD OR IF WE ARE UNABLE TO
SUCCESSFULLY RECRUIT QUALIFIED MANAGERIAL AND SALES PERSONNEL HAVING EXPERIENCE
IN OUR BUSINESS, WE MAY NOT BE ABLE TO CONTINUE OUR OPERATIONS.





Our
success depends to a significant extent upon the continued service of Mr. Thomas
Sandgaard, our Chief Executive Officer. Loss of the services of Mr. Sandgaard
could have a material adverse effect on our growth, revenues, and prospective
business. We do not maintain key-man insurance on the life of Mr. Sandgaard. In
addition, in order to successfully implement and manage our business plan, we
will be dependent upon, among other things, successfully retaining and
recruiting qualified managerial and sales personnel having experience in
business. Competition for qualified individuals is intense. Various factors,
such as marketability of our products, our reputation and our liquidity, can
affect our ability to find, attract or retain sales personnel. There can be no
assurance that we will be able to find, attract and retain qualified new
employees and sales representatives and retain existing employees and sales
representatives.





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





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





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





·
            If
      customers are financially unable to purchase these
    products;





·
            If
      adverse patient events occur with the use of these products, generating
      adverse publicity;





·
            If
      we lack adequate resources to provide sufficient education and training to
      Zynex's customers; and





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





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





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.


-
14 -


WE MAY
INCUR SUBSTANTIAL EXPENSES AND MAY INCUR LOSSES.





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





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





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





We regard
our trademarks, our trade secrets and other intellectual property as an integral
component of our success. We rely on trademark law and trade secret protection
and confidentiality agreements with employees, customers, partners and others to
protect our intellectual property. Effective trademark and trade secret
protection may not be available in every country in which our products are
available. We currently own no patents. 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, our
business and operating results could be adversely affected. There has been
substantial litigation regarding patent and other intellectual property rights
in the medical device industry. The validity and breadth of claims covered in
medical technology patents involve complex legal and factual questions for which
important legal principles remain unresolved. Any litigation claims against us,
independent of their validity, may result in substantial costs and the diversion
of resources with no assurance of success. Intellectual property claims could
cause us to:





·
            Cease
      selling, incorporating, or using products that incorporate the challenged
      intellectual property,





·
            Obtain
      a license from the holder of the infringed intellectual property right on
      reasonable terms, if at all, and





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





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





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





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





·
            Build
      a sales force, including the need to quickly increase the number of sales
      representatives in order to meet internal projections for sales
      growth;





·
            Manage
      geographically dispersed
operations;


-
15 -








·
            Explore
      potential reseller and original equipment manufacturer (OEM) relationships
      and assure that reseller and OEMs provide appropriate educational and
      technical support;





·
            Promote
      frequent product use to increase sales of consumables:
  and,





·
            Enter
      into relationships with well-established distributors in foreign
      markets.





These
strategies could be costly and may impact our operating results.  If
these strategies do not generate increased revenue, the result will be increased
operating expenses greater than the revenue, resulting in a reduction of net
income or even a net loss.





OUR
BUSINESS COULD BE ADVERSELY AFFECTED BY RELIANCE ON SOLE SUPPLIERS.





Notwithstanding
our current multiple supplier approach, in the future certain essential product
components may be supplied by separate sole, or a limited group of, suppliers.
Most of our products and components are purchased through purchase orders rather
than through long term supply agreements and large volumes of inventory may not
be maintained. There may be shortages and delays in obtaining certain product
components. Disruption of the supply or inventory of components could result in
a significant increase in the costs of these components or could result in an
inability to meet the demand for our products. In addition, if a change in the
manufacturer of a key component is required, qualification of a new supplier may
result in delays and additional expenses in meeting customer demand for
products. These factors could affect our revenues and ability to retain our
experienced sales force.





WE MAY
NOT BE ABLE TO OBTAIN CLEARANCE OF A 510 (K) NOTIFICATION OR APPROVAL OF A
PRE-MARKET APPROVAL APPLICATION WITH RESPECT TO ANY PRODUCTS ON A TIMELY BASIS,
IF AT ALL.





If timely
FDA clearance or approval of new products is not obtained, our business could be
materially adversely affected. Clearance of a 510 (k) notification may also be
required before marketing certain previously marketed products, which have been
modified after they have been cleared. Should the FDA so require, the filing of
a new 510(k) notification for the modification of the product may be required
prior to marketing any modified devices.





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





To
determine whether adequate compliance has been achieved, the FDA may inspect our
facilities at any time. Such compliance can be difficult and costly to achieve.
Our compliance status may change due to future changes in, or interpretations
of, FDA regulations or other regulatory agencies. Such changes may result in the
FDA withdrawing marketing clearance or requiring product recall. In addition,
any changes or modifications to a device or its intended use may require us to
reassess compliance with Good Manufacturing Practices guidelines, potentially
interrupting the marketing and sale of products. Failure to comply with
regulations could result in enforceable actions, including product seizures,
product recalls, withdrawal of clearances or approvals, and civil and criminal
penalties.





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





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


-
16 -





WE NEED
TO EVALUATE THE EFFECTS ON OUR BUSINESS OF THE U.S. HEALTH REFORM LAW OF MARCH
2010, WHICH MAY BE IN PART BENEFICIAL AND IN PART DETRIMENTAL.





The new
health law in the U.S. may broaden in the future the population with health
insurance, thus possibly encouraging use of our products.  However, we
have not yet evaluated the direct and indirect effects of the new law on, among
other things, (a) the health insurance companies and Medicare that pay for
patients’ use of our products, (b) third-party payors’ policies, procedures and
coverage for our products and (c) the amounts which the these third-party payors
will pay for patients’ use of our products.  Effective in 2013, there
will be under the U.S. health reform law a 2.3% excise tax on the first sale of
medical devices, with certain exceptions.  We do not know if this tax,
to the extent applicable to any of our products and transactions, can be passed
on to the third-party payors.





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 payors 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 included 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 bythe 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.





In
addition, in 2003, the Centers for Medicare and Medicaid Services, or CMS made
effective an interim final regulation implementing "inherent reasonableness"
authority, which allows adjustments to payment amounts for certain “outlier”
items and services covered by Medicare when the existing payment amount is
determined to be "grossly excessive" or "grossly deficient " The regulation
lists factors that may be used to determine whether an existing reimbursement
rate is grossly excessive or grossly deficient and to determine what is a
realistic and equitable payment amount. The regulation remains in effect after
the enactment of the Medicare Modernization Act, although the new legislation
precludes the use of inherent reasonableness authority for payment amounts
established under competitive bidding. Medicare and Medicaid accounted for
approximately 6% of our total sales and rental income for 2009. 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.





-
17 -


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





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





OUR
PRINCIPAL OFFICER OWNS A CONTROLLING INTEREST IN OUR VOTING STOCK AND INVESTORS
WILL NOT HAVE ANY VOICE IN OUR MANAGEMENT.





Our Chief
Executive Officer and a director, Thomas Sandgaard, beneficially owns
approximately 60.0% of our outstanding common stock as of March 27, 2010. 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.





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





For the
four years 2005 through 2008 we reported material weaknesses in internal control
over financial reporting.  We took remediation steps to eliminate
those material weaknesses but continue to have certain significant deficiencies
in such internal controls.  Any material weaknesses in the future
could result in financial statements with material errors or inaccuracies. 
If these types of problems occur in the future, in addition to any impact on our
stock price, they could also result in defaults under our line of credit and
could affect adversely our reputation, which collaterally could affect our
ability to retain sales personnel and business relationships with insurance
companies paying for our products and vendors.





ECONOMIC
CONDITIONS MAY ADVERSELY AFFECT US.





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





-
18 -


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





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




RISKS
RELATING TO OUR COMMON STOCK





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





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








ITEM
1B. UNRESOLVED STAFF COMMENTS





None








ITEM
2. PROPERTIES





In
December 2009, the Company began moving its headquarters, office, plant and
warehouse to its current facility in Lone Tree, Colorado. The move was completed
in February, 2010. This space, consisting of 75,000 square feet, is leased under
a 69-month agreement, expiring in September 2015, at an annual operating expense
of approximately $1,440,000 plus, after the first year, property taxes and
common area maintenance expenses. The Company believes that this newly leased
property is sufficient to support its requirements until the lease expires. See
Note 7 to the Consolidated Financial Statements for information on this lease
and rental payments under it.








ITEM
3. LEGAL PROCEEDINGS





A lawsuit
was filed against the Company, its President and Chief Executive Officer and its
Chief Financial Officer on April 6, 2009, in the United States District Court
for the District of Colorado (Marjorie and David Mishkin v. Zynex,
Inc. et al.). On April 9 and April 10, 2009, two other lawsuits were
filed in the same court against the same defendants. These lawsuits allege
substantially the same matters and have been consolidated. The lawsuits refer to
the April 1, 2009 announcement of the Company that it would restate its
unaudited interim financial statements for the first three quarters of 2008. The
lawsuits purport to be a class action on behalf of purchasers of the Company’s
securities between May 21, 2008 and March 31, 2009. The lawsuits allege, among
other things, that the defendants violated Section 10 and Rule 10b-5 of the
Securities Exchange Act of 1934 by making intentionally or recklessly untrue
statements of material fact and/or failing to disclose material facts regarding
the financial results and operating conditions for the first three quarters of
2008. The plaintiffs ask for a determination of class action status, unspecified
damages and costs of the legal action.


-
19 -


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





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







ITEM
4. RESERVED








PART
II





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





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





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





PERIOD
            HIGH
            LOWYear
      ended December 31, 2008First
      Quarter
            $1.78
            $1.15Second
      Quarter
            $1.81
            $1.30Third
      Quarter
            $6.14
            $1.74Fourth
      Quarter
            $5.20
            $1.23Year
      ended December 31, 2009First
      Quarter
            $1.69
            $1.00Second
      Quarter
            $1.18
            $0.46Third
      Quarter
            $1.05
            $0.89Fourth
      Quarter
            $1.74
            $1.04





As of
March 24, 2010, there were 30,497,318 shares of common stock outstanding and
approximately 230registered holders of
our common stock.





The
Company has never paid any cash dividends on our capital stock and does not
anticipate paying any cash dividends on the common shares in the foreseeable
future. The Company intends to retain future earnings to fund ongoing operations
and future capital requirements of our business. Any future determination to pay
cash dividends will be at the discretion of the Board of Directors (the "Board")
and will be dependent upon our financial condition, results of operations,
capital requirements and such other factors as the Board deems
relevant.  The Company’s revolving line of credit with CapitalSource
contains a prohibition on cash dividends on the Company’s stock.





Unregistered sales of common
stock





In
February 2009, 100,000 shares of common stock were issued for cash of $32,000
upon the exercise of stock options. In September 2009, 329,867 shares of common
stock were issued for cash of $105,557 upon the exercise of warrants. In October
2009, 100,000 shares of common stock were issued to a firm as non-cash
compensation, valued at $100,000. We made no general solicitation, and we
believe that the issuance of shares met the standards for purchases under an
exemption for a non-public offering or for an exchange of
securities.


-
20 -








During
2009, 72,660 shares of common stock were issued to individuals as non-cash
compensation for services rendered, valued at $87,950.  We made no
general solicitation, and we believe that the issuance of the shares met the
standards for purchases under an exemption for a non-public offering or did not
constitute a sale.





There
were there no stock repurchases by the Company during 2009 or 2008.





See Item
11, Executive Compensation, for information on the equity compensation plan of
the Company








ITEM
6. SELECTED FINANCIAL DATA





Not
applicable.








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





For 2009,
Zynex reported net revenue of $18,681,242, an increase of 59% from 2008 and net
income of $2,382,312, an increase of 2,047% from 2008.  The revenue
increase was primarily accomplished through recruitment of experienced sales
representatives over the last four years ended December 31, 2009.





The
increase in net income was primarily due to the increase in revenue in 2009.
There was also a significant impact in 2008, as a result of our not recognizing
revenues from the rental of certain devices to insureds of Anthem Blue Cross
Blue Shield during the third and fourth quarters due to a refund claim of Anthem
which was settled in November 2008. During 2009, the Company continued to place
devices with insureds of Anthem Blue Cross Blue Shield which were covered. See
Note 12 to the Consolidated Financial Statements in this Report.





The
incremental addition of industry-experienced sales representatives during 2006,
2007, 2008 and 2009 allowed us to increase our market presence and increase
orders during 2008 and 2009. As a result of the sales force expansion, our total
orders increased 26% from approximately 24,900 in 2008 to approximately 31,500
in 2009.  The level of orders for our products is significant in terms
of (1) rental income, which we anticipate receiving on a recurring basis over
the time which patients use our products, subject to our ability to collect the
rentals and the contractual adjustments by insurers, and (2) corresponding
recurring sales of electrodes and other supplies for the products.





The
Company does expect to see a seasonal impact on net revenue. The first quarter
of the calendar year is likely to be impacted by many patients having their
deductible period in the beginning of the calendar year. The Company may reduce
the estimate for collectibility in this period to properly estimate net
revenue.





RESULTS
OF OPERATIONS





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





Net Rental Revenue.
Net rental revenue for the year ended December 31, 2009, was $10,534,396, an
increase of $2,596,073 or 33% compared to $7,938,323 for the year ended December
31, 2008. The increase in net rental revenue for the year ended December 31,
2009 was due primarily to an increase in prescriptions (orders) for rentals of
the Company’s electrotherapy products and a greater number of products in use
during the 2009 year. Related reasons for the increase in net rental revenue are
indicated in “Net Sales and Rental Revenue” below. In addition, net rental
revenue slowed in the third and fourth quarter of 2008 because we did not
recognize revenues from the rental of certain devices to insureds of Anthem Blue
Cross Blue Shield during the quarters due to a refund claim of Anthem which was
settled in November 2008. As part of the settlement, the Company agreed to pay
Anthem $679,930 and forego unpaid claims in existence at June 30, 2008 of
$329,664. Substantially all of this $1,009,594 relates to and decreased net
rental revenue. See Note 12 to the Consolidated Financial Statements in this
Report.


-
21 -





Net
rental revenue for the year ended December 31, 2009 made up 56% of net sales and
rental revenue compared to 67% for the year ended December 31, 2008. The primary
reason for the decrease as a percentage of net sales and rental revenue was due
to the increase of net sales revenue for the reasons discussed
below.





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





Net Sales Revenue.
Net sales revenue for the year ended December 31, 2009, was $8,146,846, an
increase of $4,321,611 or 113% compared to $3,825,235 for the year ended
December 31, 2008. The increase in net sales revenue for the year ended December
31, 2009, compared to the year ended December 31, 2008 was due primarily to more
products in use generating sales of consumable supplies to users of the
Company’s products, a full year of selling batteries in 2009 compared to only
partial year battery sales in 2008, the addition of Lumbar Support products
which are complementary to the Company’s electrotherapy products and only sold,
not rented, as well as higher levels of products sold. The majority of net sales
revenue ($6,290,991 in 2009 and $3,492,367 in 2008) is derived from surface
electrodes and batteries sent to existing patients each month as consumable
supplies for our electrotherapy products. Other reasons for the increase in net
sales revenue are indicated in “Net Sales and Rental Revenue”
below.





Net sales
revenue for the year ended December 31, 2009 made up 44% of net sales and rental
revenue compared to 33% for the year ended December 31, 2008. The increase as a
percentage of net sales and rental revenue was due primarily to more products in
use generating sales of consumable supplies to users of the Company’s products
and other reasons indicated above for the increased sales.





Net Sales and Rental
Revenue. Net sales and rental revenue for the year ended December 31,
2009, was $18,681,242, an increase of $6,917,684 or 59% compared to $11,763,558
for the year ended December 31, 2008. The increase in net sales and rental
revenue for the year ended December 31, 2009, compared to the year ended
December 31, 2008 was due primarily to an increase in prescriptions (orders) for
rentals and purchases of the Company’s electrotherapy products and the resulting
greater number of products in use during 2009. The increased orders resulted
from the expansion of the industry-experienced sales force in 2006 through 2009,
and greater awareness of the Company's products by end users and physicians.
Products in use create recurring rental revenue and sales of consumable supplies
for those products. Results in 2008 were also significantly impacted by our not
recognizing revenues from the rental of certain devices to insureds of Anthem
Blue Cross Blue Shield during the third and fourth quarters due to a refund
claim of Anthem which was settled in November 2008.  See Note 12 to
the Consolidated Financial Statements in this Report.





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





As
indicated earlier in this Report, we introduced, during the fourth quarter
of 2009, a new product into our line of electrotherapy products. The product,
called TruWave Plus, is based upon the Company’s existing hardware platform.
TruWave Plus is capable of delivering three modalities of stimulation,
traditional Transcutaneous Electrical Nerve Stimulation (TENS), inferential, and
NeuroMuscular Electrical Stimulation (NMES), within the same product. We do not
know what reimbursement levels will be allowed by third party payors for sale or
rental of this new product and we do not know whether coverage will be denied
under any disallowance policies.
 
 Since the
fourth quarter of 2009, the Company has been in the process of engaging an
additional 25 industry-experienced sales representatives in major cities across
the United States. These additions are part of the growth plans of the
Company.





-
22 -


Net sales
and rental revenue by quarter were as follows.





2009
            
            
            2008First
      quarter
            
            $
            4,232,344
            
            
            $
            2,588,720Second
      quarter
            
            
            4,346,588
            
            
            
            3,040,460Third
      quarter  (see Note 12 to the Consolidated Financial
      Statements)
            
            
            4,690,715
            
            
            
            2,198,738Fourth
      quarter
            
            
            5,411,595
            
            
            
            3,935,640Total
      net sales and rental revenue
            
            $
            18,681,242
            
            
            $
            11,763,558





Gross Profit. Gross profit for the
year ended December 31, 2009, was $14,887,894 or 80% of net sales and rental
revenue compared to $9,523,924 or 81% in 2008.  The increase in gross
profit for the year ended December 31, 2009 as compared with the same period in
2008 is primarily because revenue increased from the year ended December 31,
2008. The decrease in gross profit percentage for the year ended December 31,
2009 as compared with the year ended December 31, 2008 is primarily from the
increase of net sales revenue as a percentage of net rental and sales revenue as
described above. Net sales revenue has a lower gross profit than net rental
revenue. This decrease was partially offset by the impact in 2008 of not
recognizing revenue from the rental of certain devices to insureds of Anthem
during the third quarter of 2008 which reduced net sales and rental revenue in
the third and fourth quarters of 2008.


Under the
terms of the provider settlement discussed above, the Company has agreed to
allow insureds of Anthem to continue to use the units for which we agreed to no
longer bill Anthem. These units were depreciated while in use with these
patients and the depreciation expense was included in Cost of Revenue even
though no revenue was being derived from those units. The Company does not
believe the depreciation expense for these units has significantly
impacted operations.
 
 Selling, General and
Administrative. Selling, general and administrative expense for the year
ended December 31, 2009, was $11,074,076, an increase of $1,859,328 or 20%
compared to $9,214,748 for the year ended December 31, 2008.  The increase
was primarily due to increases in sales representative commissions, payroll, and
legal expenses.  The increases were in part offset by lower office and
advertising costs. Commissions are based on orders and therefore increase at a
lesser rate than net revenue.





The year
ended December 31, 2009 included expenses related to the litigation discussed in
Note 13 of the financial statements included in this report. The Company has
expensed the expenditures in 2009 up to the deductible amount for legal costs
under the Company’s Directors and Officers Insurance and expects the remaining
defense costs to be covered by insurance.





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





In
November 2009, the Company entered into a Lease Agreement for office, plant and
warehouse space in Lone Tree, Colorado to serve as the Company’s headquarters.
Management anticipates that for accounting purposes the Company will have an
annual rental expense of approximately $1,440,000 throughout the term of the
lease. The Company recorded approximately $44,000 of expense for the new lease
in 2009. The Company had office rent expense of approximately $224,000 in 2009
and $281,000 in 2008.





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





Interest
expense for the year ended December 31, 2009, was $164,990, an increase of
$99,370 or 151% compared to $65,620 for the year ended December 31, 2008. The
increase in interest expense resulted primarily from the Company's borrowing
under the line of credit established in September 2008.


-
23 -








The gain
on value of a derivative liability of $171,530 for the year ended December 31,
2009, reflects a reduction in the fair value of certain outstanding warrants
(these warrants were exercised in September, 2009 and are no longer
outstanding). See “Derivative Warrant Liability” in Note 8 to
the Consolidated Financial Statements in this Report.





Income tax
expense.  We reported income tax expense in the amount of
$1,441,000 for the year ended December 31, 2009 compared to $160,000 for the
year ended December 31, 2008.  This is primarily due to our having
increased pre-tax income of $3,823,312 for the year ended December 31, 2009
compared to $270,952 of pre-tax income for the year ended December 31, 2008. The
increase in income before taxes was primarily due to increased revenue as
described above. The effective tax rate is 38% for the year ended December 31,
2009. The effective tax rate is a result of the federal rate of 34% and state
taxes (net of federal effect) of 4%.





LIQUIDITY
AND CAPITAL RESOURCES





Line
of Credit





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





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





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


Limited
Liquidity





We have
limited liquidity.  Our limited liquidity is primarily a result of (a)
the required high levels of inventory with sales representatives that are
standard in the electrotherapy industry, (b) the payment of commissions to
salespersons based on sales or rental orders prior to receiving payments for the
corresponding product by insurers, (c) the high level of outstanding accounts
receivable because of the deferred payment practices of third-party health
payors, (d) the need for expenditures to make improvements to the Company’s
internal billing processes (e) delayed cost recovery inherent in rental
transactions and (f) increased commitments resulting from the premises lease
signed in November 2009. Our growth results in higher cash needs.





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





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


-
24 -








The
availability of the line of credit depends upon our ongoing compliance with
covenants, representations and warranties in the agreement for the line of
credit and borrowing base limitations. Although the maximum amount of the line
of credit is $3,500,000, the amount available for borrowing under the line of
credit is subject to a ceiling based upon eligible receivables and other
limitations and may be less than the maximum amount.





There is
no assurance that our operations and available borrowings will provide enough
cash for operating requirements or for increases in our inventory of products as
needed for growth.  We have no arrangements for any additional
external financing of debt or equity, and we are not certain whether any such
financing would be available on acceptable terms.  Any additional debt
would require the approval of CapitalSource.





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





Cash
provided by operating activities was $3,648,024 for the year ended December 31,
2009 compared to $715,160 of cash used by operating activities for the year
ended December 31, 2008. The primary reasons for the increase in cash flow was
the increase to net income, collections on accounts receivable and reduced
increases to inventory in 2009 compared to 2008, offset by payments on accrued
liabilities.
 
 Cash used
in investing activities for the year ended December 31, 2009 was $943,901
compared to cash used in investing activities of $1,400,895 for the year ended
December 31, 2008. 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 used
in financing activities was $1,841,478 for the year ended December 31, 2009
compared with cash provided by financing activities of $2,116,055 for the year
ended December 31, 2008.  The primary financing uses of cash in 2009
were payments on the line of credit and notes payable partially offset by
proceeds from the sale of stock. The primary financing source of cash in 2008
were from proceeds from borrowings under the Marquette line of credit and the
sales of common stock partially offset by payments on notes
payable.


The
following table summarizes the future cash disbursements to which we are
contractually committed as of December 31, 2009.





Payments
Due by Period:


Significant Contractual
      Obligations
            
            Total
            
            
            1
      Year
            
            
            2-3
      Years
            
            
            4-5
      Years
            
            
            5+
      YearsNotes
      payable
            
            $
            --
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --
            
            
            $
            --Line
      of credit
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Anthem
      obligation
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Capital
      lease obligations
            
            
            127,077
            
            
            
            105,530
            
            
            
            15,816
            
            
            
            5,931
            
            
            
            --Operating
      leases
            
            
            8,832,569
            
            
            
            366,603
            
            
            
            3,384,717
            
            
            
            3,675,000
            
            
            
            1,406,250Total
      contractual cash obligations
            
            $
            8,959,646
            
            
            $
            472,133
            
            
            $
            3,400,533
            
            
            $
            3,680,931
            
            
            $
            1,406,250





In
November 2009, the Company entered into a Lease Agreement for office, plant and
warehouse space in Lone Tree, Colorado to serve as the Company’s headquarters.
The term of the Lease Agreement is 69 months; provided, however, that the Lease
Agreement may be terminated after 42 months upon payment of a termination fee as
set forth in the Lease Agreement. The Lease Agreement provides for a five year
renewal option at the then market rental rate. During the first year of the
Lease Agreement, the annual rental payment will be $300,000. In the second,
third, fourth and fifth years, the annual rental payment will be $1,650,000,
$1,725,000, $1,800,000, and $1,875,000, respectively. For months 61 through 69,
the total rental payment will be $1,406,250.





-
25 -


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, 2009, these loans had been paid in full.
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, 2009,
this loan had been paid in full.  The loan from Mr. Sandgaard was used
for working capital purposes.





CRITICAL
ACCOUNTING POLICIES





Our
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America.





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





Use of Estimates:
Preparation of financial statements 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 financial statements are
associated with the allowance for provider discounts and uncollectible accounts
receivable, the reserve for obsolete and damaged inventory, share-based
compensation and income taxes.





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





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





-
26 -


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





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





Share-based
Compensation:  The Company accounts for stock-based
compensation through recognition of the cost of employee services received in
exchange for an award of equity instruments 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. The stock compensation expense is 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).





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





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





The
Company does not have an accrual for uncertain tax positions as of December 31,
2009 and 2008.  The Company files income tax returns in the U.S. and
various state jurisdictions, and there are open statutes of limitations for
taxing authorities to audit the Company’s tax returns from 2006 through the
current period.








ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.








ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The
consolidated financial statements, the notes thereto, and the report thereon of
GHP Horwath, P.C. dated March 31, 2010, are filed as part of this report
starting on page F-1 below.








-
27 -


ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.





None.








ITEM
9A(T). CONTROLS AND PROCEDURES.





Disclosure Controls and
Procedures





The
Company under the supervision and with the participation of the Company’s
management, including the Company’s Chief Executive Officer and Chief Financial
Officer, performed an evaluation of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures as of December 31,
2009.  Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of December 31, 2009.





Management’s Report on
Internal Control over Financial Reporting





Our management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in the Securities Exchange Act of 1934 Rule
13a-15(f). A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Our Chief Executive Officer and Chief
Financial Officer conducted an evaluation of theeffectiveness of our
internal control over financial reporting based on the framework in Internal
Control - Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO Framework").  Our
Chief Executive Officer and Chief Financial Officer, based upon their
evaluation, concluded that internal control over financial reporting was
effective as of December 31, 2009. This annual report does not include an
attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s independent registered public
accounting firm pursuant to temporary rules of the SEC that permit the Company
to provide only management’s report on internal control in this annual
report.





Changes in Internal Control
Over Financial Reporting





There was
no change in our internal control over financial reporting during the quarter
ended December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.








ITEM
9B. OTHER INFORMATION.





None.





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28 -








PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The
following table and paragraphs that follow, provides information concerning each
of the Company's directors including specific experience, qualifications,
attributes or skills that led the board to conclude that such person should
serve as director and other executive officers at March 25, 2010:





DirectorName
            Age
            Since
            Position or OfficeThomas
      Sandgaard
            51
            1996
            President,
      Chief Executive Officer, Director and ChairmanTaylor
      Simonton
            65
            2008
            Director,
      Chair of Audit CommitteeMary
      Beth Vitale
            56
            2008
            Director,
      Member of Audit CommitteeFritz
      G. Allison
            50
            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. Sandgaard founded the Company’s
business and has been a director since the business was acquired by the Company.
ValuedSkills:  Mr. Sandgaard has an in-depth knowledge of the
industry, the history and the operations of the Company. Mr. Sandgaard has a
long-standing commitment to the Company and  is the driving force as
to the Company and its strategies.





Taylor
Simonton was elected to the Board in October 2008.  Principal Occupation:
Mr. Simonton spent 35 years at PricewaterhouseCoopers LLP, including 23 years as
an audit partner in the firm’s Accounting and Business Advisory Services
practice before retiring in 2001. While serving in the PricewaterhouseCoopers
National office from 1998 to 2001, Mr. Simonton was a member of the Risk &
Quality Group that handled all auditing and accounting standards, SEC, corporate
governance, risk management and quality matters for the firm. Prior to that, Mr.
Simonton participated in the firm’s Partner International Program for three
years, during which time he assisted Colombian companies in-country with
capital-raising activities in the United States, consulted to major companies
and coordinated IPO assistance and advised on due diligence and SEC regulatory
matters. Other
Directorships: Until February 2007, Mr. Simonton served on the Board of
Directors of Fischer Imaging Corporation, a public company that designed,
manufactured and marketed specialty medical imaging systems, and served as its
Audit Committee chair and, at various times, as a member of each of its
Compensation, Governance and Special Investigation (chair) Committees. Since
October 2005, Mr. Simonton currently serves on the Audit Committee (chair
October 2005 – June 2009) and Nominating & Governance Committee of Red Robin
Gourmet Burgers, Inc., a public company that is a casual dining restaurant chain
focused on serving high quality gourmet burgers in a family-friendly atmosphere.
Since June 2008, he has been the Lead Director and Chair of the Audit and
Valuation Committees of Keating Capital, Inc., a publicly reporting closed-end
investment fund.  Other Information:
Mr. Simonton is well versed in corporate governance; he holds a Certificate of
Director Education from the Corporate Directors Institute of the National
Association of Corporate Directors (“NACD”). He also currently serves as the
President of the Colorado Chapter of NACD since August 2008 and serves on that
chapter’s board of directors.  In addition, he was admitted as an expert
witness in accounting, auditing and corporate governance in United States
District Court, District of Colorado, in March 2009. He holds an active CPA
license and is deemed to be an “audit committee financial expert”.  He has
been interviewed or quoted in two issues of Corporate Board Member Magazine in
2008 and 2009. During his thirty-five years with PriceWaterhouseCoopers, he
assisted, audited or consulted to dozens of companies in a variety of
industries, including medical device companies, and has experience in many
aspects of business . In addition, his eight years of service on public company
boards of directors includes strategic planning, executive compensation,
acquisitions and divestitures and other matters.  Valued Skills:Mr
Simonton’s substantial accounting, financial and Board experience. He is also
an“audit
committee financial expert”.


-
29 -





Mary Beth
Vitale was elected to the Board in October 2008.  Principal
Occupation:  Ms. Vitale is a co-founder of Pellera, a strategic
communications and business development firm started in 2001. Ms. Vitale is a
general management executive with 25 years experience in the telecommunications
and consumer products industries. Previously, she had served as President, CEO
and Chairman of the Board of WestwindMedia.com, President and COO of RMI.NET,
and President-western states for AT&T. She was also a Commissioner on former
Colorado Governor Bill Owens' Commission for Science and Technology. Other Directorships:
Ms. Vitale previously served on the Board of Intrado, Inc., a publicly-traded
technology company, from 1999 to 2004, sitting on the Audit, Compensation and
Corporate Governance committees, and on the Board of RMI.Net, a publicly traded
national e-business and convergent communications company from 1997 to 2000,
sitting on the Audit Committee. Since January 2005, Ms Vitale has been a
director of CoBiz Financial Inc., a public company which is a diversified
financial holding company headquartered in Denver, Colorado and includes among
its businesses a full-service business banking institution serving Colorado and
Arizona. Ms. Vitale has been Chair of the Audit Committee of CoBiz Financial
since May, 2006. Ms. Vitale is currently the Treasurer of the Colorado Chapter
of the NACD. Valued
Skills: Ms. Vitale has substantial management, marketing and Board
experience. She is also an “audit committee financial
expert”.


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





Mr.
Sandgaard is not an independent director as defined in rules of the NASDAQ Stock
Market.  Mr. Simonton and Ms. Vitale are independent directors as
defined in rules of the NASDAQ Stock Market.  We have an Audit
Committee consisting of Mr. Simonton, Chair, and Ms. Vitale.  The
Board of Directors has designated Mr. Simonton and Ms. Vitale each as an “audit
committee financial expert” within the meaning of the applicable SEC
rules.





We do not
have procedures by which a security holder may recommend director nominees to
our Board of Directors.





Code of
Ethics





The
Company has adopted a written code of ethics for each employee, including its
Chief Executive Officer and Chief Financial Officer.  The code also
applies to agents and representatives of the Company, including the Board of
Directors, sales representatives and consultants.


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30 -





ITEM
11. 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 recorded for services to
the Company in all capacities during the years ended December 31, 2009 and
December 31, 2008:





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
            
            2009
            216,000
            210,000
            0
            0
            0
            0
            34,389(1)
            460,389Chief
      Executive Officer
            
            2008
            144,000
            175,000
            0
            0
            0
            0
            44,296(1)
            363,296Fritz
      G. Allison
            
            2009
            152,500
            0
            0
            8,724
            0
            0
            6,576(2)
            167,800Chief
      Financial
            
            2008
            132,000
            0
            0
            7,704
            0
            0
            4,667(2)
            143,371Officer







(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 fair value on the grant date of stock options
granted in accordance with ASC topic 718 (formerly FASB 123R).  See
Note 4 of Consolidated Financial Statements.





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 could be increased annually at
the board of directors’ discretion. The agreement also provided for a 50% annual
bonus if annual net revenue exceeded $2.25 million, medical and life insurance,
and a vehicle. The agreement contained a non-compete provision for the term of
the agreement and 24 months following termination of the agreement.





The
agreement was amended in 2005 to provide an annual base salary of $144,000 and
quarterly bonuses. The agreement was amended again in July 2009 to provide an
annual base salary of $288,000 and quarterly bonuses as follows:


Bonus
      Factor:
            
            Quarterly
      Bonus AmountCash
      Collections: Actual vs. BudgetedLess
      than 100%
            $
      0Equal
      or greater than 100%
            $
      20,000EBITDA:
      Actual vs. BudgetedLess
      than 100%
            $
      0Equal
      or greater than 100%
            $
      20,000


-
31 -


In 2009,
Mr. Sandgaard earned $120,000 of bonus under the employment agreement. In
addition, the Board of Directors of the Company awarded Mr. Sandgaard a cash
bonus of $90,000 for his significant contributions to the Company in 2009. In
determining the bonus amount, the Board of Directors took into account the
Company’s achievements during 2009 including, among other things, that the
Company: (i) has been certified by Medicare; (ii) is presently debt free; (iii)
conducted a successful move to the Company’s new headquarters; and (iv) is
expanding its number of sales representatives.





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; a 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.
Mr. Allison also receives full health and dental insurance coverage through the
Company.





Effective
September 16, 2008 the Company modified the compensation arrangements with Mr.
Allison to the following: A base salary of $12,500 per month, before taxes and a
bonus payable in 2008 in the form of an option grant for an additional 5,000
shares in the event one of the Company’s 10-K and 10-Q reports is filed on or
before the due date and without extension. The target for 2008 was not met.
Effective August 2009, the Company modified the compensation arrangements with
Mr. Allison to the following:  A base salary of $13,000 per month,
before taxes.





Outstanding
Equity Awards at 2009 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, 2009:





Number
      of
              Securities
              Underlying
              Unexercised
              Options
              (#)
            Number
      of
              Securities
              Underlying
              Unexercised
              Options
              (#)
            Equity
              Incentive
              Plan Awards:
              Number
      of
              Securities
              Underlying
              Unexercised
              Unearned
              Options
            Option
              Exercise
            Option
              ExpirationName
            Exercisable
            Unexercisable
            (#)
            Price
            DateThomas
      Sandgaard
            --
            --
            --
            --
            --Fritz
      G. Allison (1)
            50,000
            50,000
            --
            $0.45
            February
      17, 2017Fritz
      G. Allison (1)
            1,000
            1,000
            --
            $0.85
            June
      30, 2017Fritz
      G. Allison (1)
            1,000
            1,000
            --
            $1.32
            September
      30, 2017Fritz
      G. Allison (1)
            1,000
            1,000
            --
            $1.28
            December
      31, 2017Fritz
      G. Allison (1)
            500
            1,500
            --
            $1.48
            March
      31, 2018Fritz
      G. Allison (1)
            500
            1,500
            --
            $1.70
            June
      30, 2018Fritz
      G. Allison (1)
            --
            6,000
            --
            $1.00
            June
      3, 2019Fritz
      G. Allison (1)
            --
            2,000
            --
            $0.95
            September
      1, 2019Fritz
      G. Allison (1)
            --
            2,000
            --
            $1.08
            October
      1, 2019





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32 -


____________





(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 participates in the 2005 Stock Option Plan discussed
below. Other options under the Plan vest over a four-year period.





Director
Compensation





The
following table shows the annual and other compensation of the non-employee
directors at December 31, 2009 for services to the Company for
2009.





Director Compensation
      for 2009Name
            Fees
      Earned
              or
      Paid in Cash
              ($)
            Stock
              Awards
              ($)
      (1)
            Option
              Awards
              ($)
      (1)
            Non-Equity
              Incentive
      Plan
              Compensation
              ($)
            Non-Qualified
              Deferred
              Compensation
              Earnings
              ($)
            All
      Other
              Compensation
              ($)
            Total
              ($
      )Taylor
      Simonton
            21,000
            30,000(2)
            -
            -
            -
            -
            51,000Mary
      Beth Vitale
            14,500
            20,000(2)
            -
            -
            -
            -
            34,500





(1)
              Amounts
      shown in the columns “Stock Awards” and “Option Awards” reflect the grant
      date fair value computed in accordance with ASC Topic 718.  The
      stock awards reflect the market price on the date of the
      award.




(2)
            Mr.
      Simonton as Chair of the Audit Committee received $30,000 of shares of the
      Company for directors meetings held in 2009, and Ms. Vitale received
      $20,000 in shares of the Company for meetings during
  2009.





The
standard compensation for non-employee directors for 2009, as adopted by the
Board of Directors in January 2009, is:  (1) $1,000 cash ($1,500
in the case of the Chair of the Audit Committee) plus $5,000 ($7,500 in the case
of the Chair of the Audit Committee) of shares of Zynex common stock for each of
four quarterly Board meetings in person and for each of four quarterly Audit
Committee meetings in person, with these amounts being paid for both a quarterly
Audit Committee and a quarterly Board meeting held on or about the same day as
if they were one meeting (the number of shares of common stock resulting from
these dollar amounts is based upon the closing price of the common stock on the
date of the meeting); (2) $1,000 ($1,500 in the case of the Chair of the
Audit Committee) cash for each other Board meeting or Audit Committee meeting in
person, with these amounts being paid for both an Audit Committee and a Board
meeting held on or about the same day as if they were one meeting; and
(3) $500 cash for any telephonic Board meeting or telephonic meeting of the
Audit Committee.





The
following table summarizes information with respect to each non-employee
director’s outstanding stock options at December 31, 2009:





Name
            
            Number
      of Securities Underlying Unexercised Options
              #
              Exercisable
            
            Number
      of Securities Underlying Unexercised Options
              #
              Unexercisable
            
            Option
              Exercise
              Price
              $
            
            Option
              Expiration
              DateTaylor
      Simonton
            
            12,000
            
            -
            
            5.10
            
            October
      5, 2018Mary
      Beth Vitale
            
            12,000
            
            -
            
            5.10
            
            October
      5, 2018





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33 -


ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.





The
following table contains certain information regarding beneficial ownership of
the Company's common stock as of March 24, 2009 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 Summary Compensation 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.





Number
      of Shares
            
            PercentBeneficially
            
            OfName
            Class of Stock
            Owned
            (1)
            ClassTaylor
      Simonton
            Common
            47,196
            (3)
            --Mary
      Beth Vitale
            Common
            35,463
            (3)
            --Thomas
      Sandgaard
            Common
            18,175,500
            (5)
            59.6%9990
      Park Meadows DrLone
      Tree, CO  80124Fritz
      Allison
              9990
      Park Meadows Dr
              Lone
      Tree, CO  80124
            Common
            79,000
            (2)
            --Other 5% Beneficial OwnersIntana
      Management, LLC(4)
            Common
            2,834,723
            (4)
            9.3%All
      Directors andNamed
      Executive OfficersAs
      a Group
            Common
            18,337,159
            
            59.9%





_____________





(1) 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 March 24, 2010. 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.





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





(3)
12,000 of these shares are subject to stock options held by the
director.





(4) Based
on Schedule 13G amendment filed jointly by Intana Management,
LLC and Intana Capital Master Fund Ltd. on February 16, 2010,
indicating shared voting and dispositive power by Intana
Management of 2,834,723 shares and shared voting and dispositive
power by Intana Capital Master Fund Ltd. Management of 2,588,589
shares.





(5) In
September 2009, Mr. Sandgaard gifted 70,000 shares of common stock to various
family members but who are not considered immediate-family.





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34 -





EQUITY
COMPENSATION PLAN INFORMATION





The
following table provides information as of December 31, 2009 about shares of
common stock available for issuance under the Company's equity incentive
plans.





Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights
            
            Weighted
      Average Exercise Price
            
            Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans (excluding securities reflected in column
      (a))Plan Category
            (a)
            
            (b)
            
            (c)Plans
      Approved by Shareholders (1), (2)
            1,387,250
            
            $1.10
            
            1,495,000





(1)  All
of these listed securities are available for issuance under the Zynex, Inc. 2005
Stock Option Plan, approved by the Board of Directors on January 3,
2005.





(2)  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 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.





(3)   See
“Director Compensation” above for information on stock options granted in 2008
as a sign-on bonus for the non-employee directors.





For
information on the options held by Mr. Allison, see "Employment Agreements –
Fritz G. Allison" in Item 11 above.





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35 -





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





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





We employ
Mr. Sandgaard’s wife in a full time position as Billing Manager.  In
addition, we employ Mr. Sandgaard’s two children.  The following table
sets forth their compensation for services rendered in 2009 and
2008:





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
              ($)(2)
            Total
              ($)Birgitte
      Sandgaard
            
            2009
            152,500
            50,000
            0
            8,724
            0
            0
            0
            211,224Billing
      Manager
            
            2008
            120,000
            0
            0
            7,704
            0
            0
            0
            127,704Joachim
      Sandgaard
            
            2009
            54,584
            0
            0
            8,724
            0
            0
            6,576
            69,884Information
              Services
            
            2008
            21,763
            0
            0
            2,912
            0
            0
            0
            24,675Martin
      Sandgaard
            
            2009
            19,613
            0
            0
            8,724
            0
            0
            0
            28,337Payment
              Application
              Specialist
            
            2008
            4,298
            0
            0
            0
            0
            0
            0
            4,298





_________________





(1)           The
Option Awards represents fair value on the grant date of stock options granted
to each of the named related parties in accordance with ASC Topic 718. See Note
4 of Consolidated Financial Statements.





(2)           The
Company provides health insurance to full time employees.





See
information on the repayment of notes previously issued to Mr. Sandgaard as
described under “Limited Liquidity” in Item 7, Management’s Discussion and
Analysis of Financial Condition and Operating Results.


-
36 -





ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
following presents fees for professional services rendered by the Company’s
independent registered public accounting firm (GHP Horwath, P.C.) for each of
the years ended December 31, 2009 and December 31, 2008.





GHP
      Horwath, P.C,2009
            
            
            2008Audit
      Fees
            
            $118,100
            
            $
            110,000Audit
      Related Fees
            
            -
            
            
            -Tax
      Fees
            
            
            8,000
            
            
            11,000All
      Other Fees
            
            
            -
            
            
            -Total
            
            $
            126,100
            
            $
            121,000





The tax
related services provided by GHP Horwath, P.C. consisted of preparation and
filing of the Company's Federal and state tax returns.





The Audit
Committee’s policy is to pre-approve all audit and non-audit services provided
by the independent registered public accounting firm.  Pre-approval
will generally be provided for up to one year, and any pre-approval will be
detailed as to the particular service or category of services.





GHP
Horwath, P.C. served as the Company's independent registered public accounting
firm for the fiscal years ended December 31, 2009 and 2008, and has served as
such auditors since December 2005.








PART
IV





ITEM
15. EXHIBITS FINANCIAL STATEMENT SCHEDULES





Consolidated
Financial Statements:





Report of
Independent Registered Public Accounting Firm


Consolidated
Balance Sheets as of December 31, 2009 and 2008


Consolidated
Statements of Operations for the years ended December 31, 2009 and
2008


Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008


Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2009
and 2008


Notes to
Consolidated Financial Statements





-
37 -


Exhibits:





Exhibit
              Number
            Description3.1
            Amended
      and Restated Articles of Incorporation of Zynex, Inc., incorporated by
      reference toExhibit
      10.1 of the Current Report on Form 8-K filed with the Commission on
      October 7, 2008.3.2
            Amended
      and Restated Bylaws of Zynex, Inc., incorporated by reference to Exhibit
      10.2 ofthe
      Company’s Current Report on Form 8-K filed with the Commission on October
      7, 2008.4.1
            Subscription
      Agreement, dated as of June 4, 2004, by and among the Company, Alpha
      CapitalAktiengesellschaft,
      Stonestreet Limited Partnership, Whalehaven Funds Limited,
      GreenwichGrowth
      Fund Limited and Ellis International Limited, Inc., incorporated by
      reference toExhibit
      4.1 of the Company's registration statement filed on Form SB-2, filed July
      6, 2004.4.2
            Form
      of A Common Stock Purchase Warrant, incorporated by reference to Exhibit
      4.2 of theCompany'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 theCompany'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 theCompany'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 the Company, Alpha
      CapitalAktiengesellschaft,
      Stonestreet Limited Partnership, Whalehaven Funds Limited,
      GreenwichGrowth
      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
      onForm
      SB-2, filed July 6, 2004.4.6
            Form
      of Securities Purchase Agreement, incorporated by reference to Exhibit
      10.1 of theCompany’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 theCompany’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
      QuarterlyReport
      on Form 10-QSB, filed August 18, 2006.





-
38 -





Exhibit
              Number
            Description10.1
            Acquisition
      Agreement, dated as of January 27, 2004, by and among Zynex
      MedicalHoldings,
      Inc., Zynex Medical, Inc. and Thomas Sandgaard, incorporated by
      referenceto
      Exhibit 10 of the Company’s Current Report on Form 8-K, filed February 20,
      2004.10.2
            Thomas
      Sandgaard Employment Agreement, incorporated by reference to Exhibit
      10.2of
      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 the Company's Annual report
    onForm
      10-K filed April 15, 2005.10.4
            Amendment
      to Thomas Sandgaard Employment Agreement dated July 1,
    2009,incorporated
      by reference to Exhibit 10.2 of the Company's Quarterly report
      onForm
      10-Q filed August 14, 2009.10.5
            Multi-Tenant
      Lease, dated January 20, 2004, by and between First Industrial,
      L.P.,a
      Delaware limited partnership and the Company, incorporated by reference
      toExhibit
      10.4 of the Company's Annual report on Form 10-K filed April 15,
      2005.10.6
            Sublease,
      dated October 31, 2007 between the Company and Jones/NCTI,
      Inc.,incorporated
      by reference to Exhibit 10.1 of the Company’s Current
    Reporton
      Form 8-K filed November 16, 2007.10.7
            2005
      Stock Option Plan , incorporated by reference to Exhibit 10.5 of
      theCompany’s
      Annual report on Form 10-K filed April 15, 2005.10.8
            Promissory
      Note dated March 1, 2006 to Thomas Sandgaard, Incorporated
    byreference
      to Exhibit 10.1 of the Company’s Quarterly Report on Form
      10-QSBfiled
      August 17, 200610.9
            Promissory
      Note dated March 1, 2006 to Thomas Sandgaard, Incorporated
    byreference
      to Exhibit 10.2 of the Company’s Quarterly Report on Form
      10-QSBfiled
      August 17, 200610.10
            Promissory
      Note dated June 30, 2006 to Thomas Sandgaard, Incorporated
    byreference
      to Exhibit 10.3 of the Company’s Quarterly Report on Form
      10-QSBfiled
      August 17, 200610.11
            Convertible
      Secured Promissory Note dated October 18, 2006 by the
    Companyincorporated
      by reference to Exhibit 10.1 of the Company’s Current Report
      onForm
      8-K filed October 18, 2006.10.12
            Warrant
      dated October 18, 2006 by the Company to Ascendiant Capital Group,
      LLC,incorporated
      by reference to Exhibit 10.2 of the Company’s Current Report
      onForm
      8-K filed October 18, 2006.10.13
            Security
      Agreement between Ascendiant Capital Group, LLC and the
      Company,incorporated
      by reference to Exhibit 10.3 of the Company’s Current Report
      onForm
      8-K filed October 18, 2006.


-
39 -





Exhibit
              Number
            Description10.14
            Subordination
      Agreement dated October 17, 2006 among Ascendiant Capital
      Group,LLC,
      Silicon Valley Bank and the Company, incorporated by reference to
      Exhibit10.4
      of the Company’s Current Report on Form 8-K filed October 18,
      2006.10.15
            Letter
      Agreement, dated May 3, 2007 with Ascendiant Capital Group,
      LLC,incorporated
      by reference to Exhibit 10.1 of the Company’s Quarterly
      report  onForm
      10-QSB filed May 18, 2007.10.16
            Amendment
      to Warrant between the Company and Ascendiant Capital Group,
      LLC,Dated
      September 14, 2009, incorporated by reference to Exhibit 4.1 of the
      Company’sQuarterly
      Report on Form 10-Q filed November 16, 2009.10.17
            Promissory
      Note dated May 16, 2007 by the Company to Thomas
  Sandgaard,incorporated
      by reference to Exhibit 10.1 of the Company’s Current Report
      onForm
      8-K filed June 29, 2007.10.18
            Promissory
      Note dated June 15, 2007 by the Company to Thomas
    Sandgaard,incorporated
      by reference to Exhibit 10.2 of the Company’s Current Report
      onForm
      8-K filed June 29, 2007.10.19
            Promissory
      Note dated September 30, 2007 by the Company to Thomas
      Sandgaard,incorporated
      by reference to Exhibit 10.1 of the Company’s Current Report
      onForm
      10-QSB filed November 19, 2007.10.20
            Form
      of Indemnification Agreement for directors and executive officers (October
      2008),incorporated
      by reference to Exhibit 10.3 of the Company’s Current Report on Form
      8-Kfiled
      with the Commission on October 7, 2008.10.21
            Loan
      and Security Agreement, dated September 22, 2008, among the Company
      andMarquette
      Business Credit, Inc., d/b/a Marquette Healthcare Finance and Schedule
      Athereto,
      incorporated by reference to Exhibit 10.1 of the Company’s Current Report
      onForm
      8-K filed with the Commission on September 24, 2008.10.22
            Promissory
      Note, dated September 22, 2008, of the Company incorporated by
      referenceto
      Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with
      theCommission
      on September 24, 2008.10.23
            Pledge
      Agreement, dated September 22, 2008, between the Company and Marquette
      Business Credit, Inc., d/b/a Marquette Healthcare Finance, incorporated by
      reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K
      filed with the Commission on September 24, 2008.10.24
            Validity
      Guaranty, dated September 22, 2008, between Thomas Sandgaard and Marquette
      Business Credit, Inc., d/b/a Marquette Healthcare Finance, incorporated by
      reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K
      filed with the Commission on September 24, 2008.10.25
            Subordination
      Agreement, dated September 22, 2008, among Thomas Sandgaard, the Company,
      and Marquette Business Credit, Inc., d/b/a Marquette Healthcare Finance,
      incorporated by reference to Exhibit 10.5 of the Company’s Current Report
      on Form 8-K filed with the Commission on September 24,
    2008.





-
40 -





Exhibit
              Number
            Description10.26
            Business
      Associate Agreement, dated September 22, 2008, among the Company, and
      Marquette Business Credit, Inc., d/b/a Marquette Healthcare Finance,
      incorporated by reference to Exhibit 10.6 of the Company’s Current Report
      on Form 8-K filed with the Commission on September 24,
    2008.10.27
            Letter
      Agreement dated April 7, 2009 with Marquette Healthcare Finance
      incorporatedby
      reference to Exhibit 10.35 of the Company’s Annual Report on Form 10-K
      filedApril
      15, 200910.28
            Amendment
      No. 1 to Loan and Security Agreement effective December 1, 2008, between
      Marquette Healthcare Finance and the Company, incorporated by reference to
      Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed May 15,
      2009.10.29
            Amendment
      No. 2 to Loan and Security Agreement effective December 1, 2008, between
      Marquette Healthcare Finance and the Company, incorporated by reference to
      Exhibit 10.1 of the Company’s Current Report on Form 8-K filed May 6,
      2009.10.30
            Lease
      Agreement, dated November 12, 2009, between Zynex Medical Inc. and Spiral
      Lone Tree, LLC, incorporated by reference to Exhibit 10.1 of the Company’s
      Current Report on Form 8-K filed November 12, 2009.10.31
            Guarantee
      Agreement, dated November 12, 2009, among Zynex Medical Inc., Zynex, Inc.
      and Spiral Lone Tree, LLC, incorporated by reference to Exhibit 10.2 of
      the Company’s Current Report on Form 8-K filed November 12,
      2009.10.32
            Revolving
      Credit and Security Agreement, dated March 19, 2010, among Zynex, Inc.,
      Zynex Medical Inc. and CapitalSource Bank, incorporated by reference to
      Exhibit 10.1 of the Company’s Current Report on Form 8-K filed March 23,
      2010.14
            The
      Company’s Code of Conduct and Business Ethics, incorporated by reference
      toExhibit
      10.4 of the Company’s Current Report on Form 8-K filed with the
      Commissionon
      October 7, 2008.21
            List
      of Subsidiaries, incorporated by reference to Exhibit 21 of the Company’s
      Annual Report on Form 10-KSB, filed April 15, 2005.23
            Consent
      of Independent Registered Public Accounting Firm.24
            Power
      of Attorney.31.1
            Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
      asAdopted
      Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.31.2
            Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
      asAdopted
      Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.32.1
            Certification
      Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant
      to Section 906 of the Sarbanes-Oxley Act of
  2002.











-
41 -





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.





ZYNEX,
      INC.Date: March 31,
      2010
            By:
            /s/
      Thomas SandgaardThomas
      SandgaardPresident,
      Chairman and Chief Executive
Officer





Date: March 31,
      2010
            By:
            /s/
      Fritz G. AllisonFritz
      G. Allison,
              Chief
      Financial Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Date
            Name and Title
            
            SignatureMarch
      31, 2010
            Thomas
      Sandgaard,
            )Director,
            )President
      and Chief
            )Executive
      Officer
            )
            /s/ Fritz G. Allison)
            Fritz
      G. Allison, for himselfMarch
      31, 2010
            Fritz
      G. Allison,
            )
            and
      as Attorney-in-Fact for theChief
      Financial
            )
            named
      directors who togetherOfficer
            )
            constitute
      all of the members)
            of
      the Board of Directors andMarch
      31, 2010
            Taylor
      Simonton,
            )
            for
      the named OfficerDirector
            ))March
      31, 2010
            Mary
      Beth Vitale,
            )Director
            )








-
42 -













Zynex,
Inc.






Consolidated
Financial Statements


December
31, 2009 and 2008











F
- 1





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











Board of
Directors


Zynex,
Inc.








We have
audited the accompanying consolidated balance sheets of Zynex, Inc. and
subsidiary (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the years then ended. 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 the Company as of December
31, 2009 and 2008, and the results of their operations and their cash flows for
each of the years then ended, in conformity with accounting principles generally
accepted in the United States of America.














/s/ GHP Horwath,
P.C.


GHP
Horwath, P.C.





Denver,
Colorado


March 31,
2010





F
- 2


Zynex,
Inc.


Consolidated
Balance Sheets


December
      31,
            
            
            December
      31,2009
            
            
            2008ASSETSCurrent
      Assets:Cash
            
            $
            862,645
            
            
            $
            -Accounts
      receivable, net
            
            
            5,039,023
            
            
            
            5,614,996Inventory
            
            
            2,033,790
            
            
            
            2,209,600Prepaid
      expenses
            
            
            139,475
            
            
            
            73,324Deferred
      tax asset
            
            
            864,000
            
            
            
            648,000Other
      current assets
            
            
            76,852
            
            
            
            70,032Total
      current assets
            
            
            9,015,785
            
            
            
            8,615,952Property
      and equipment, net
            
            
            2,717,924
            
            
            
            2,096,394Deposits
            
            
            166,250
            
            
            
            -Deferred
      financing fees
            
            
            30,000
            
            
            
            71,650$
            11,929,959
            
            
            $
            10,783,996LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Bank
      overdraft
            
            $
            -
            
            
            $
            112,825Line
      of credit
            
            
            -
            
            
            
            1,780,701Current
      portion of notes payable and other obligations
            
            
            95,216
            
            
            
            37,358Loans
      from stockholder
            
            
            -
            
            
            
            24,854Accounts
      payable
            
            
            1,126,543
            
            
            
            1,037,205Income
      taxes payable
            
            
            905,343
            
            
            
            670,000Accrued
      payroll and payroll taxes
            
            
            425,902
            
            
            
            292,562Other
      accrued liabilities
            
            
            787,926
            
            
            
            1,511,126Total
      current liabilities
            
            
            3,340,930
            
            
            
            5,466,631Notes
      payable and other obligations, less current portion
            
            
            20,070
            
            
            
            115,287Deferred
      rent liability
            
            
            543,663
            
            
            
            -Deferred
      tax liability
            
            
            539,000
            
            
            
            428,000Total
      liabilities
            
            
            4,443,663
            
            
            
            6,009,918Stockholders’
      Equity:Preferred
      stock; $.001 par value, 10,000,000 shares authorized,no
      shares issued or outstanding
            
            
            -
            
            
            
            -Common
      stock, $.001 par value, 100,000,000 shares authorized,30,497,318
      (2009) and 29,871,041 (2008) shares issued and outstanding
            
            
            30,497
            
            
            
            29,871Paid-in
      capital
            
            
            4,356,878
            
            
            
            3,676,621Retained
      earnings
            
            
            3,098,921
            
            
            
            1,067,586Total
      stockholders’ equity
            
            
            7,486,296
            
            
            
            4,774,078$
            11,929,959
            
            
            $
            10,783,996





See accompanying notes to consolidated
financial statements.


F
- 3


Zynex,
Inc.


Consolidated
Statements of Operations


Years
Ended December 31,


2009
            
            
            2008Net
      revenue:Rental
            
            $
            10,534,396
            
            
            $
            7,938,323Sales
            
            
            8,146,846
            
            
            
            3,825,23518,681,242
            
            
            
            11,763,558Cost
      of revenue:Rental
            
            
            1,564,149
            
            
            
            736,957Sales
            
            
            2,229,199
            
            
            
            1,502,6773,793,348
            
            
            
            2,239,634Gross
      profit
            
            
            14,887,894
            
            
            
            9,523,924Selling,
      general and administrative expense
            
            
            11,074,076
            
            
            
            9,214,748Income
      from operations
            
            
            3,813,818
            
            
            
            309,176Other
      income (expense):Interest
      income
            
            
            4,129
            
            
            
            424Interest
      expense
            
            
            (164,990
            )
            
            
            (65,620
            )Other
      (expense) income
            
            
            (1,175
            )
            
            
            26,972Gain
      on value of derivative liability
            
            
            171,530
            
            
            
            -9,494
            
            
            
            (38,224
            )3,823,312
            
            
            
            270,952Income
      tax expense
            
            
            1,441,000
            
            
            
            160,000Net
      income
            
            $
            2,382,312
            
            
            $
            110,952Net
      income per share:Basic
            
            $
            0.08
            
            
            $
            
            *Diluted
            
            $
            0.08
            
            
            $
            
            **
      Less than $0.01 per shareWeighted
      average number of commonshares
      outstanding:Basic
            
            
            30,122,486
            
            
            
            28,988,648Diluted
            
            
            30,374,360
            
            
            
            30,623,924








See
accompanying notes to consolidated financial statements.


F
- 4


Zynex,
Inc.


Consolidated
Statements of Cash Flows


Years
Ended December 31,


2009
            
            
            2008Cash
      flows from operating activities:Net
      income
            
            $
            2,382,312
            
            
            $
            110,952Adjustments
      to reconcile net income to net cash provided by (used
      in)operating
      activities:Depreciation
      expense
            
            
            677,407
            
            
            
            424,452Provision
      for provider discounts
            
            
            57,262,662
            
            
            
            29,052,562Provision
      for losses in accounts receivable (uncollectibility)
            
            
            596,000
            
            
            
            393,000Amortization
      of deferred consulting and financing fees
            
            
            60,794
            
            
            
            12,039Gain
      on value of derivative liability
            
            
            (171,530
            )
            
            
            -Issuance
      of stock for consulting services
            
            
            187,949
            
            
            
            95,821Provision
      for obsolete inventory
            
            
            267,000
            
            
            
            204,000Deferred
      rent expense
            
            
            43,663
            
            
            
            -Gain
      on disposal of equipment
            
            
            -
            
            
            
            (26,972
            )Employee
      stock based compensation expense
            
            
            169,225
            
            
            
            164,547Deferred
      tax benefit
            
            
            (105,000
            )
            
            
            (100,000
            )Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (57,282,689
            )
            
            
            (30,584,626
            )Inventory
            
            
            (91,190
            )
            
            
            (1,475,906
            )Prepaid
      expenses
            
            
            (66,151
            )
            
            
            (38,529
            )Other
      current assets
            
            
            (17,249
            )
            
            
            (22,317
            )Accounts
      payable
            
            
            89,338
            
            
            
            224,774Accrued
      liabilities
            
            
            (589,860
            )
            
            
            1,091,043Income
      taxes payable
            
            
            235,343
            
            
            
            (240,000
            )Net
      cash provided by
      (used in) operating activities
            
            
            3,648,024
            
            
            
            (715,160
            )Cash
      flows from investing activities:Proceeds
      from disposal of equipment
            
            
            -
            
            
            
            47,000Deposits
            
            
            11,286
            
            
            
            -Purchases
      of equipment
            
            
            (955,187
            )
            
            
            (1,447,895
            )Net
      cash used in investing activities
            
            
            (943,901
            )
            
            
            (1,400,895
            )Cash
      flows from financing activities:(Decrease)
      increase in bank overdraft
            
            
            (112,825
            )
            
            
            23,478Net
      (payments on) borrowings from line of credit
            
            
            (1,780,701
            )
            
            
            1,783,957Deferred
      financing fees
            
            
            (30,000
            )
            
            
            (56,878
            )Payments
      on notes payable and capital leases
            
            
            (37,358
            )
            
            
            (305,791
            )Repayments
      of loans from stockholder
            
            
            (24,854
            )
            
            
            (113,929
            )Issuance
      of common stock
            
            
            144,260
            
            
            
            785,218Net
      cash (used in) provided by financing activities
            
            
            (1,841,478
            )
            
            
            2,116,055Net
      increase in cash and cash at end of period
            
            $
            862,645
            
            
            $
            -Supplemental
      cash flow information:Interest
      paid
            
            $
            102,569
            
            
            $
            27,629Income
      taxes paid (including interest and penalties)
            
            $
            1,310,910
            
            
            $
            500,000Supplemental
      disclosure of non-cash investing and financing activities:Equipment
      acquired through capital lease
            
            $
            -
            
            
            $
            165,754Increase
      in deposit and deferred rent
            
            $
            156,250
            
            
            $
            -Increase
      in leasehold improvements and deferred rent
            
            $
            343,750
            
            
            $
            -





See
accompanying notes to consolidated financial statements.


F
- 5





Zynex,
Inc.


Consolidated
Statements of Stockholders' Equity




Common
      Stock
            
            
            Paid-in
            
            
            RetainedShares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            TotalJanuary
      1, 2008
            
            
            26,831,113
            
            
            $
            26,831
            
            
            $
            2,634,075
            
            
            $
            956,634
            
            
            $
            3,617,540Issuance
      of common stock:for
      option exercise
            
            
            724,707
            
            
            
            725
            
            
            
            126,275
            
            
            
            -
            
            
            
            127,000for
      warrant exercise
            
            
            251,870
            
            
            
            252
            
            
            
            (252
            )
            
            
            -
            
            
            
            -for
      warrant call, net of offering costs
            
            
            1,920,351
            
            
            
            1,920
            
            
            
            604,799
            
            
            
            -
            
            
            
            606,719for
      option exercise from 2005 plan
            
            
            94,000
            
            
            
            94
            
            
            
            33,771
            
            
            
            -
            
            
            
            33,865for
      cash
            
            
            13,500
            
            
            
            14
            
            
            
            17,620
            
            
            
            -
            
            
            
            17,634for
      employee incentive
            
            
            5,000
            
            
            
            5
            
            
            
            7,395
            
            
            
            -
            
            
            
            7,400for
      consulting services
            
            
            30,500
            
            
            
            30
            
            
            
            88,391
            
            
            
            -
            
            
            
            88,421Employee
      stock-based compensation expense
            
            
            -
            
            
            
            -
            
            
            
            164,547
            
            
            
            -
            
            
            
            164,547Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            110,952
            
            
            
            110,952December
      31, 2008
            
            
            29,871,041
            
            
            
            29,871
            
            
            
            3,676,621
            
            
            
            1,067,586
            
            
            
            4,774,078Cumulative
      effect of change in accounting principle - January 1, 2009
      reclassification of equity-linked financial instrument to derivative
      liability
            
            
            -
            
            
            
            -
            
            
            
            (87,085
            )
            
            
            (350,977
            )
            
            
            (438,062
            )Derecognition
      of derivative liability
            
            
            -
            
            
            
            -
            
            
            
            266,534
            
            
            
            -
            
            
            
            266,534Issuance
      of common stock:for
      option exercise
            
            
            100,000
            
            
            
            100
            
            
            
            31,900
            
            
            
            -
            
            
            
            32,000for
      option exercise from 2005 plan
            
            
            23,750
            
            
            
            24
            
            
            
            6,679
            
            
            
            -
            
            
            
            6,703for
      warrant amendment and services
            
            
            100,000
            
            
            
            100
            
            
            
            99,900
            
            
            
            -
            
            
            
            100,000for
      consulting services
            
            
            72,660
            
            
            
            72
            
            
            
            87,877
            
            
            
            -
            
            
            
            87,949for
      warrant exercise
            
            
            329,867
            
            
            
            330
            
            
            
            105,227
            
            
            
            -
            
            
            
            105,557Employee
      stock-based compensation expense
            
            
            -
            
            
            
            -
            
            
            
            169,225
            
            
            
            -
            
            
            
            169,225Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,382,312
            
            
            
            2,382,312December
      31, 2009
            
            
            30,497,318
            
            
            $
            30,497
            
            
            $
            4,356,878
            
            
            $
            3,098,921
            
            
            $
            7,486,296





See
accompanying notes to consolidated financial statements.


F
- 6


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008





(1)
ORGANIZATION AND
NATURE OF BUSINESS





Zynex,
Inc. (a Nevada corporation) and its wholly-owned subsidiary, Zynex Medical, Inc.
(a Colorado corporation) are collectively referred to as the “Company”. The
Company’s headquarters are located in Lone Tree, Colorado.





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.





In 2009
and 2008, the Company generated substantially all of 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 2009 and 2008 was approximately 6% and 9%
respectively.








(2)
SIGNIFICANT ACCOUNTING
POLICIES





PRINCIPLES
OF CONSOLIDATION





The
accompanying consolidated financial statements include the accounts of Zynex,
Inc. and Zynex Medical, Inc. All intercompany balances and transactions have
been eliminated in consolidation.





USE OF
ESTIMATES





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





REVENUE
RECOGNITION AND ALLOWANCES FOR PROVIDER DISCOUNTS AND
COLLECTIBILITY





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





F
- 7


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008








(2)
SIGNIFICANT ACCOUNTING
POLICIES (continued)








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





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





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





At
December 31, 2009 and 2008, the allowance for provider discounts and
uncollectible accounts are as follows:





2009
            
            
            2008Allowance
      for provider discounts
            
            $
            26,511,415
            
            
            $
            12,544,123Allowance
      for uncollectible accounts receivable
            
            
            1,435,000
            
            
            
            1,203,000$
            27,946,415
            
            
            $
            13,747,123





F
- 8


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008








(2)
SIGNIFICANT ACCOUNTING
POLICIES (continued)








Changes
in the allowance for uncollectible accounts receivable for the years ended
December 31, 2009 and 2008 are as follows:


2009
            
            
            
            2008Balances,
      beginning of year
            
            $
            13,747,123
            
            
            $
            5,901,724Additions
      debited to net sales and rental revenue
            
            
            57,858,662
            
            
            
            29,445,562Write-offs
      credited to accounts receivable
            
            
            (43,659,370
            )
            
            
            (21,600,163
            )$
            27,946,415
            
            
            $
            13,747,123





RECLASSIFICATIONS





Certain
minor reclassifications in the 2008 financial statements have been made to
conform to the 2009 presentation.





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, 2009 and 2008, the
Company had a reserve for obsolete and damaged inventory of approximately
$597,000 and $330,000, respectively.





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. As rental inventory
contributes directly to the revenue generating process, the Company classifies
the depreciation of rental inventory to cost of sales.





Cost,
accumulated depreciation and the related estimated useful lives of property and
equipment as of December 31, 2009 and 2008 are as follows:





2009
            
            
            2008
            
            Useful
      livesOffice
      furniture and equipment
            
            $
            563,075
            
            
            $
            329,389
            
            3-7 yearsRental
      inventory
            
            
            3,170,228
            
            
            
            2,466,412
            
            5
      yearsVehicles
            
            
            59,833
            
            
            
            59,833
            
            5
      yearsLeasehold
      Improvements
            
            
            369,935
            
            
            
            8,500
            
            2-6 yearsAssembly
      equipment
            
            
            10,690
            
            
            
            10,690
            
            7
      years4,173,761
            
            
            
            2,874,824Less
      accumulated depreciation
            
            
            (1,455,837
            )
            
            
            (778,430
            )$
            2,717,924
            
            
            $
            2,096,394





Repairs
and maintenance costs are charged to expense as incurred.


F
- 9


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008








(2)
SIGNIFICANT ACCOUNTING
POLICIES (continued)





SHIPPING
COSTS





Shipping
costs are included in cost of sales and rentals.





STOCK-BASED
COMPENSATION





The
Company accounts for stock-based compensation through recognition of the cost of
employee services received in exchange for an award of equity instruments 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. The stock
compensation expense is 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).





LEGAL
DEFENSE COSTS





The
Company  does not accrue
for  estimated  future  legal
and  related  defense costs,  if any, to be
incurred in  connection  with
outstanding  or  threatened litigation  and
other  disputed  matters but rather records such as period
costs when the services are rendered.





ADVERTISING





The
Company expenses advertising costs as they are incurred. Advertising expenses
for the years ended December 31, 2009 and 2008 totaled approximately $19,000 and
$136,000, respectively.





RESEARCH
AND DEVELOPMENT





Research
and development costs are expensed when incurred. Research and development
expense for the years ended December 31, 2009 and 2008, was approximately $3,000
and $20,000, respectively. 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.





The
Company does not have an accrual for uncertain tax positions as of December 31,
2009 and 2008.  The Company files income tax returns in the U.S. and
various state jurisdictions, and there are open statutes of limitations for
taxing authorities to audit the Company’s tax returns from 2006 through the
current period.





FOREIGN
CURRENCY TRANSACTIONS





Foreign
currency transaction gains and losses are included in other income (expense) in
the accompanying consolidated statements of operations. Foreign currency
transaction gains for the years ended December 31, 2009 and 2008 were
insignificant.


F
- 10


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008








(2)
SIGNIFICANT ACCOUNTING
POLICIES (continued)





RECENT
ACCOUNTING PRONOUNCEMENTS





In
June 2009, the Financial Accounting Standards Board (“FASB”) approved the
FASB Accounting Standards Codification (“the Codification”) as the single source
of authoritative nongovernmental GAAP. All existing accounting standard
documents, such as FASB, American Institute of Certified Public Accountants,
Emerging Issues Task Force and other related literature, excluding guidance from
the Securities and Exchange Commission (“SEC”), have been superseded by the
Codification. All other non-grandfathered, non-SEC accounting literature not
included in the Codification has become nonauthoritative. The Codification did
not change GAAP, but instead introduced a new structure that combines all
authoritative standards into a comprehensive, topically organized online
database. The Codification became effective for the period beginning
September 15, 2009, and impacts the Company’s financial statements, as all
references to authoritative accounting literature is now referenced in
accordance with the Codification.





On
January 1, 2009, the Company adopted new accounting guidance related to the
accounting for business combinations and related disclosures.  This
new guidance addresses the recognition and accounting for identifiable assets
acquired, liabilities assumed, and non-controlling interests in business
combinations.  The guidance also establishes expanded disclosure
requirements for business combinations.  The Company will apply this
new guidance to future business combinations, if any.





On
January 1, 2009, the Company also adopted new accounting guidance related to the
accounting for non-controlling (minority) interests in consolidated financial
statements.  This guidance establishes accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary, and requires that non-controlling interests in
subsidiaries be reported in the equity section of the controlling company’s
balance sheet.  It also changes the manner in which the net income of
the subsidiary is reported and disclosed in the controlling company’s income
statement.  Because the Company’s subsidiary is wholly-owned, there
are no non-controlling interests, and as a result, the adoption of this guidance
had no impact on the Company’s consolidated financial statements.





In May
2009, the FASB established general standards for accounting and disclosure of
events that occur after the balance sheet date but before the financial
statements are issued or are available to be issued. The pronouncement required
the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date, whether that date represents the date the
financial statements were issued or were available to be issued. In February
2010, the FASB amended this standard whereby SEC filers, like the Company, are
required by GAAP to evaluate subsequent events through the date its financial
statements are issued, but are no longer required to disclose in the financial
statements that the Company has done so or disclose the date through which
subsequent events have been evaluated.





In August
2009, the FASB provided clarification when measuring liabilities at fair value
of a circumstance in which a quoted price in an active market for an identical
liability is not available. A reporting entity is required to measure fair value
using one or more of the following methods: 1) a valuation technique that
uses a) the quoted price of the identical liability when traded as an asset
or b) quoted prices for similar liabilities (or similar liabilities when
traded as assets) and/or 2) a valuation technique that is consistent with
the preexisting fair value guidance. It also clarifies that when estimating the
fair value of a liability, a reporting entity is not required to adjust to
include inputs relating to the existence of transfer restrictions on that
liability. The adoption of this guidance did not have a material impact on the
Company’s consolidated financial statements.


F
- 11


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008








(2)
SIGNIFICANT ACCOUNTING
POLICIES (continued)





In
October 2009, the FASB issued an update to existing guidance on accounting for
arrangements with multiple deliverables. This update will allow companies to
allocate consideration received for qualified separate deliverables using
estimated selling price for both delivered and undelivered items when
vendor-specific objective evidence or third-party evidence is unavailable.
Additional disclosures discussing the nature of multiple element arrangements,
the types of deliverables under the arrangements, the general timing of their
delivery, and significant factors and estimates used to determine estimated
selling prices will be required. This guidance is effective prospectively for
interim and annual periods ending after June 15, 2010. The Company is
currently evaluating the impact this guidance may have, if any, on its
consolidated financial statement, but does not anticipate that this updated
guidance will have a material impact.








(3)
EARNINGS PER
SHARE





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





The
calculation of basic and diluted earnings per share for 2009 and 2008 is as
follows:





2009
            
            
            2008BASICNet
      income applicable to common stockholders
            
            $
            2,382,312
            
            
            $
            110,952Weighted
      average shares outstanding, basic
            
            
            30,122,486
            
            
            
            28,988,648Net
      income per share, basic
            
            $
            0.08
            
            
            $
            
            *DILUTEDNet
      income applicable to common stockholders
            
            $
            2,382,312
            
            
            $
            110,952Weighted
      average shares outstanding, basic
            
            
            30,122,486
            
            
            
            28,988,648Dilutive
      securities
            
            
            251,874
            
            
            
            1,635,276Weighted
      average shares outstanding, diluted
            
            
            30,374,360
            
            
            
            30,623,924Net
      income per share, diluted
            
            $
            0.08
            
            
            $
            
            *


* Less
than $0.01 per share





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


Anti-dilutive
shares as of December 31, 2009 and 2008, are as follows:


2009
            
            
            20082005
      Stock Option Plan
            
            
            393,500
            
            
            
            24,000Warrants
            
            
            -
            
            
            
            310,000





F
- 12


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008











(4)  STOCK-BASED COMPENSATION
PLANS





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





For the
years ended December 31, 2009 and 2008, the Company recorded compensation
expense related to stock options of $169,225 and $164,547, respectively. The
stock compensation expense was included in selling, general and administrative
expenses in the accompanying consolidated statements of operations.





For the
year ended December 31,
2009, the Company granted stock options to acquire 771,000 shares of common
stock to employees at exercise prices that ranged from $0.95 to $1.08 per share.
During the year ended December 31, 2008, the Company granted options to acquire
373,000 shares of common stock at exercise prices that ranged from $1.28 to
$1.70 per share.





The
Company used the following assumptions to determine the fair value of stock
option grants during the years ended December 31, 2009 and 2008:





2009
            2008Expected
      term
            6.25
      years
            6.25
      yearsVolatility
            115-117%
            112-118%Risk-free
      interest rate
            2.8-3.4%
            1.9-3.9%Dividend
      yield
            0%
            0%





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





A summary
of stock option activity under the Option Plan for the year ended December 31,
2009 is presented below:





WeightedWeighted
            
            AverageShares
            
            
            Average
            
            Remaining
            AggregateUnder
            
            
            Exercise
            
            Contractual
            IntrinsicOption
            
            
            Price
            
            Life
            ValueOutstanding
      at January 1, 2009
            
            
            732,500
            
            
            $
            1.15Granted
            
            
            771,000
            
            
            $
            1.01Exercised
            
            
            (23,750
            )
            
            $
            0.28Forfeited
            
            
            (92,500
            )
            
            $
            1.13Outstanding
      at December 31, 2009
            
            
            1,387,250
            
            
            $
            1.10
            
            7.0
      Years
            
            $
            212,738Exercisable
      at December 31, 2009
            
            
            283,750
            
            
            $
            1.15
            
            3.1
      Years
            
            $
            112,468





F
- 13


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008





(4)  STOCK-BASED COMPENSATION
PLANS (continued)





A summary
of status of the Company’s non-vested shares as of and for the year ended
December 31, 2009 is presented below:




Nonvested
              
              
              WeightedShares
              
              
              AverageUnder
              
              
              Grant
      DateOption
              
              
              Fair
      ValueNon-vested
      at January 1, 2009
              
              
              577,000
              
              
              $
              1.01Granted
              
              
              771,000
              
              
              $
              0.87Vested
              
              
              (156,750
              )
              
              $
              0.84Forfeited
              
              
              (87,750
              )
              
              $
              0.97Non-vested
      at December 31, 2009
              
              
              1,103,500
              
              
              $
              0.94


As of
December 31, 2009, the Company had approximately $635,000 of unrecognized
compensation cost related to stock options that will be recognized over a
weighted average period of approximately four years.








(5)  INCOME
TAXES





Income
tax expense consists of the following for the years ended December 31, 2009 and
2008:





2009
            
            
            2008Current
      tax expenseFederal
            
            $
            1,340,000
            
            
            $
            209,000State
            
            
            193,000
            
            
            
            24,000Penalties
      and interest
            
            
            13,000
            
            
            
            27,0001,546,000
            
            
            
            260,000Deferred
      tax benefitFederal
            
            
            (90,000
            )
            
            
            (56,000
            )State
            
            
            (15,000
            )
            
            
            (8,000
            )(105,000
            )
            
            
            (64,000
            )Decrease
      in valuation allowance
            
            
            --
            
            
            
            (36,000
            )$
            1,441,000
            
            
            $
            160,000








F
- 14


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008





(5)   INCOME TAXES
(continued)





A
reconciliation of income tax computed at the U.S. statutory rate of 34% to the
effective income tax rate is as follows:


2009
            
            2008Statutory
      rate
            
            
            34
            %
            34
            %State
      taxes
            
            
            4
            %
            4
            %Permanent
      differences
            
            
            -
            %
            19
            %Other
            
            
            -
            %
            2
            %Effective
      rate
            
            
            38
            %
            59
            %





The tax
effects of temporary differences that give rise to deferred tax assets
(liabilities) at December 31, 2009 and 2008 are as follows:


2009
            
            
            2008Current
      deferred tax assets:Accrued
      expenses
            
            $
            111,000
            
            
            $
            80,000Accounts
      receivable
            
            
            532,000
            
            
            
            446,000Inventory
            
            
            221,000
            
            
            
            122,000Net
      current deferred tax asset
            
            $
            864,000
            
            
            $
            648,000Long-term
      deferred tax liabilities:Property
      and equipment
            
            $
            (539,000
            )
            
            $
            (428,000
            )





At
December 31, 2008, income taxes payable included approximately $600,000 of
unpaid 2007 income taxes which were paid in 2009.








(6)  NOTES
PAYABLE





Marquette





Through
March 19, 2010, the Company had a loan agreement with Marquette Healthcare
Finance (“Marquette”) that provided Zynex with a revolving credit facility of up
to $3,000,000 (the “Loan”). The Loan Agreement included a number of affirmative
and negative covenants on the part of the Company, including Minimum EBITDA, a
Minimum Debt Service Coverage Ratio, a Minimum Current Ratio and a prohibition
on dividends on shares and purchases of any Company stock. The Company was in
compliance with these covenants at December 31, 2009. As of December 31, 2009,
the balance on the facility was $0 and maximum borrowings available were
$2,654,000 (remaining availability of $2,654,000). The Company exercised an
early termination right in this loan agreement effective March 19, 2010 and
replaced it with a loan agreement with CapitalSource Bank outlined
below.





CapitalSource





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


F
- 15


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008








(6)   NOTES PAYABLE
(continued)





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





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





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





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





F
- 16


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008





(6)   NOTES PAYABLE
(continued)





Upon the
occurrence of an Event of Default, the Lender may, without notice or demand,
terminate the Lender’s obligations to make additional advances under the Credit
Agreement, and upon that termination, all principal that the Lender had already
advanced to Zynex, and all accrued interest on that principal, would become due
and payable by Zynex immediately, and the Lender would have the right, among
other things, to foreclose on all of the assets of Zynex, including the stock of
Zynex Medical.





Notes
payable at December 31, 2009 and 2008, consisted of the following:





December
      31,
            
            
            December
      312009
            
            
            2008Note
      payable under revolving line of credit facility
            
            $
            --
            
            
            $
            1,780,701Motor
      vehicle contract payable in 60 monthly installments of
    $1,351;annual
      interest at 15.1%; collateralized by automobile; paid in
    2009
            
            
            --
            
            
            
            4,036Note
      payable to landlord for furniture payable in 25 monthly installments of
      $280; annual interest of 8.2%; secured by furniture; paid in
      2009
            
            
            --
            
            
            
            3,019Total
            
            
            --
            
            
            
            1,787,756Less
      current maturities
            
            
            --
            
            
            
            (1,787,756
            )Long-term
      maturities
            
            $
            --
            
            
            $
            --








(7)   LEASES





The
Company has commitments under various operating and capital leases that are
payable in monthly installments.





In
November 2009, the Company entered into a three-month license for the use of its
previous space in Littleton, Colorado. The license provides for monthly rent of
$26,014 through February 2010. The Company completed the move from this space in
February 2010.





In
November 2009, the Company entered into a lease of office, plant and warehouse
space in Lone Tree, Colorado, which expires in September 2015. The term of the
lease is 69 months; provided, however, that the lease may be terminated after 42
months upon payment of a termination fee. The lease provides for a five-year
renewal option at the then market rental rate. During the first year of the
lease, the annual rental payment will be $300,000. In the second, third, fourth
and fifth years, the annual rental payment will be $1,650,000, $1,725,000,
$1,800,000, and $1,875,000, respectively. For months 61 through 69, the total
rental payment will be $1,406,250. The Company anticipates that for accounting
purposes Zynex will have an annual rental expense of approximately $1,440,000
throughout the term of the lease. The lease includes a tenant allowance of
$500,000, which is included in deferred rent liability, to be used for the
security deposit of $156,250 and leasehold improvements.





F
- 17


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008





(7)LEASES
(continued)





As of
December 31, 2009, future minimum lease payments under non-cancelable operating
and capital leases are as follows:


Capital
            
            
            OperatingLeases
            
            
            Leases2010
            
            $
            105,330
            
            
            $
            366,6032011
            
            
            7,908
            
            
            
            1,659,7162012
            
            
            7,908
            
            
            
            1,725,0002013
            
            
            5,931
            
            
            
            1,800,0002014
            
            
            --
            
            
            
            1,875,000Thereafter
            
            
            --
            
            
            
            1,406,250Total
      future minimum lease payments
            
            $
            127,077
            
            
            $
            8,832,569Less
      amount representing interest
            
            
            (11,791
            )Present
      value of net minimum lease payments
            
            
            115,286Less
      current portion
            
            
            (95,216
            )Long-term
      capital lease obligation
            
            $
            20,070





Rent
expense under all operating leases for 2009 and 2008 was approximately $275,000
and $177,000, respectively








(8)   DERIVATIVE WARRANT LIABILITY
AND FAIR VALUE MEASUREMENTS





DERIVATIVE
WARRANT LIABILITY





The
Company follows the guidance found in the Derivative and Hedging, Contracts in
Entity’s Own Equity topic in the Codification, ASC 815-40-15. Paragraphs 15-5
through 15-8 specify that a contract that would otherwise meet the definition of
a derivative but is both (a) indexed to the Company’s own stock and (b)
classified in stockholders’ equity in the statement of financial position would
not be considered a derivative financial instrument. ASC 815-40-15 provides a
two-step model to be applied in determining whether a financial instrument or an
embedded feature is indexed to an issuer’s own stock and thus able to qualify
for the scope exception. The Company’s adoption of ASC 815-40-15 effective
January 1, 2009, resulted in the identification of certain warrants that were
determined to require liability classification because of certain provisions
that may result in an adjustment to their exercise price. Accordingly, these
warrants were retroactively reclassified as liabilities upon the effective date
of ASC 815-40-15. The result was a decrease in paid in capital as of January 1,
2009, of $87,085, a decrease in retained earnings of $350,978, and the
recognition of a liability of $438,062. In September 2009, the exercise price of
the warrants was modified and the underlying warrants were exercised (Note 9).
The liability was adjusted to fair value as of the date of the transaction,
resulting in a decrease in the liability and an increase in other income of
$171,530 for the year ended December 31, 2009. Upon the exercise of the
underlying warrants, the liability was settled resulting in an increase to
additional paid in capital of $266,532.





F
- 18


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008







(8)   DERIVATIVE WARRANT LIABILITY
AND FAIR VALUE MEASUREMENTS (continued)





The
Company used the Black-Scholes pricing model to calculate fair value of its
warrant liabilities. Key assumptions used to apply these models are as
follows:





September 17, 2009
            January 1, 2009Expected
      term
            2.00
      years
            2.75
      yearsVolatility
            115.3%
            115.7%Risk-free
      interest rate
            3.0%
            1.9%Dividend
      yield
            0%
            0%








FAIR
VALUE MEASUREMENTS





Accounting
standards define fair value as the price that would be received from selling an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, the Company considers the principal or most advantageous market in
which the Company would transact, and considers assumptions that market
participants would use when pricing the asset or liability, such as inherent
risk, transfer restrictions, and risk of non performance. Accounting standards
have established a fair value hierarchy that requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. A financial instrument’s categorization within the fair
value hierarchy is based upon the lowest level of input that is significant to
the fair value measurement. Accounting standards have established three levels
of inputs that may be used to measure fair value:





·
            Level 1: Quoted prices
      in active markets for identical assets and
  liabilities.


·
            Level 2: Observable
      inputs other than Level 1 prices such as quoted prices for similar assets
      or liabilities, quoted prices in markets with insufficient volume or
      infrequent transactions (less active markets), or model-derived valuations
      in which all significant inputs are observable or can be derived
      principally from or corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.


·
            Level 3: Prices or
      valuation techniques that require inputs that are both significant to the
      fair value measurement and unobservable (supported by little or no market
      activity).





FAIR
VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK





The
Company's financial instruments at December 31, 2009 include accounts receivable
and payable, for which current carrying amounts approximates fair value due to
their short term nature. Financial instruments at December 31, 2009 also include
notes payable, whose carrying value approximate fair value because interest
rates on outstanding borrowings are at rates that approximates market rates for
borrowings with similar terms and average maturities.





At
December 31, 2009, the Company has no financial assets or liabilities subject to
recurring fair value measurements.








(9)  STOCKHOLDERS'
EQUITY




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, 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.




F
- 19


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008








(9)   STOCKHOLDERS' EQUITY
(continued)




NON-EMPLOYEE
WARRANTS:





During
2009 and 2008, the Company has warrants outstanding. The following is a schedule
of activity with these warrants:





OtherClass
      B
            
            
            Class
      C
            
            
            WarrantsJanuary
      1, 2008
            
            
            685,715
            
            
            
            9,524
            
            
            
            2,896,154Granted
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            (457,143
            )
            
            
            (1,905
            )
            
            
            (2,193,139
            )Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -Expired
            
            
            -
            
            
            
            -
            
            
            
            -December
      31, 2008
            
            
            228,572
            
            
            
            7,619
            
            
            
            703,015Granted
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            (429,867
            )Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -Expired
            
            
            (228,572
            )
            
            
            (7,619
            )
            
            
            (110,000
            )December
      31, 2009
            
            
            -
            
            
            
            -
            
            
            
            163,148





The
exercise prices and expiration dates of the warrants outstanding at December 31,
2009 are as follows:





Price
            ExpirationNumber
            per
      share
            DateOther62,500
            $             0.32
            April
      11, 201050,000
            $             0.71
            September
      29, 201232,315
            $             0.39
            April
      11, 201110,000
            $             0.55
            March
      1, 20105,000
            $             0.45
            July
      28, 20103,333
            $             0.01
            July
      28, 2010163,148








NON-EMPLOYEE
STOCK OPTIONS:





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. In August 2008, the firm exercised options for
100,000 for which the Company received payment of $40,000. In October 2008, the
firm forfeited options for 600,000 shares in return for cashless exercise rights
on the remaining options.  In September 2009, the firm allowed the
remaining stock options to acquire 1,200,000 shares of common stock to
expire.





2009
COMMON STOCK ISSUANCES:





In
February 2009, 100,000 shares of common stock were issued for cash of $32,000
upon the exercise of stock options.


F
- 20


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008








(9)    STOCKHOLDERS' EQUITY
(continued)




In
September 2009, the Company and Ascendiant Capital Group, LLC (“Ascendiant”)
agreed that Ascendiant would exercise via cash payment, its remaining warrants
for 329,687 shares of common stock, the exercise price under the warrants would
be reduced from $0.39 to $0.32 and the Company would issue 100,000 shares of
common stock as consideration for the early exercise of the warrants and for
certain additional services of Ascendiant in lieu of any cash fees. In
accordance with such terms, the Company received a notice of exercise related to
the warrants and 329,687 shares of common stock were issued for cash of
$105,557. The Company issued 100,000 shares of common stock to Ascendiant in
November, 2009. The 100,000 shares of common stock were valued at $100,000
(based on the market price of the Company’s common stock on the date of the
grant).





During
last two quarters of 2009, 23,750 shares of common stock were issued for cash of
$6,703 upon the exercise of stock options under the 2005 Stock Option
Plan.





Between
January and December 2009, 72,660 shares of common stock were issued to
individuals as non-cash compensation for services rendered, valued at
approximately $87,950 (based on the market price of the Company’s common stock
on the date of the grants).





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, 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.


.





(10)  CONCENTRATIONS





The
Company sourced approximately 90% of its electrotherapy products from one
contract manufacturer in 2009 and 2008.  Management believes that its
relationships with 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.





The
Company had receivables from two private health insurance carriers at December
31, 2009 that made up approximately 18% and 13% of the net accounts
receivable.  The same two two private health insurance carriers made
up approximately 12% and 13% of net accounts receivable at December 31,
2008.





(11)  EMPLOYMENT
AGREEMENTS





Zynex
Medical, Inc. has an employment agreement as amended, with Mr. Sandgaard, the
Company's President and Chief Executive Officer. The agreement provided 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, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008








(11)  EMPLOYMENT AGREEMENTS
(continued)




The
agreement was amended in 2005 to provide an annual base salary of $144,000 and
quarterly bonuses. The agreement was amended again in July 2009 to provide an
annual base salary of $288,000 and quarterly bonuses as follows:





Bonus
      Factor:
            
            Quarterly
      Bonus AmountCash
      Collections: Actual vs. BudgetedLess
      than 100%
            $
      0Equal
      or greater than 100%
            $
      20,000EBITDA:
      Actual vs. BudgetedLess
      than 100%
            $
      0Equal
      or greater than 100%
            $
      20,000





In
January 2010, the Board of Directors of the Company awarded Mr. Sandgaard a cash
bonus of $90,000 for other significant contributions during 2009.





At
December 31, 2009 and 2008, the Company recorded a $90,000 and $75,000 accrual,
respectively, related to these bonus arrangements. The total bonus expense for
the years ended December 31, 2009 and 2008, was $210,000 and $175,000,
respectively.





Effective
February 19, 2007, the Company entered into a compensation arrangement with its
Chief Financial Officer, Fritz G. Allison. Effective September 2008, the Company
modified the compensation arrangements with Mr. Allison to the
following:  A base salary of $12,500 per month, before taxes.
Effective August 2009, the Company modified the compensation arrangements with
Mr. Allison to adjust the monthly base salary to $13,000 per month, before
taxes.








(12)  REFUND
CLAIM AND SETTLEMENT.





In 2008,
the Company received and settled a refund claim by Anthem Blue Cross Blue Shield
which originally concerned payments previously made by Anthem for certain
medical devices (the “devices”) rented or sold to insureds of Anthem by the
Company through July 31, 2008 the (“Provider Settlement”). In the Provider
Settlement, which was recorded in the third quarter of 2008, the Company agreed
to pay Anthem a total of $679,930 over 12 months and waive rights to payments of
outstanding billings for certain devices provided to Anthem’s insureds from
September 1, 2007 through September 30, 2008. Accounts receivable for these
billings were $329,664, net of contractual allowances, as of June 30, 2008.
Under the Provider Settlement, the Company made an initial payment of $17,770
and was to make a monthly payment of $55,180 on the first day of each month
commencing December 1, 2008 and ending November 1, 2009. In November 2009, the
Company made the final payment under the agreement.





The
Company recognized no revenue relating to these certain devices rented or sold
to insureds of Anthem since June 30, 2008 and discontinued providing those
devices to Anthem’s insureds. Under the terms of the Provider Settlement, the
Company has agreed to allow insureds of Anthem to continue to use the units for
which the Company agreed to no longer bill Anthem. These units were depreciated
while in use with these patients and the depreciation expense is included in
Cost of Revenue in the accompanying Consolidated Statements of
Operations.


Anthem
has been and continues to be one of the largest health insurers in terms of
payments to the Company for the rental and sale of its products. The Company
continues to have an agreement (terminable by either party upon advance notice)
with Anthem making the Company part of the Anthem network. Neither Anthem nor
the Company has indicated that it will terminate this agreement. The Company
also continues to provide its products to Anthem insureds, including products
which may be used to treat insureds with the same medical conditions as those
using devices subject to the claim.


F
- 22


ZYNEX, INC.





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


YEARS
ENDED DECEMBER 31, 2009 AND 2008








(13)  LITIGATION





A lawsuit
was filed against the Company, its President and Chief Executive Officer and its
Chief Financial Officer on April 6, 2009, in the United States District Court
for the District of Colorado (Marjorie and David Mishkin v. Zynex,
Inc. et al.). On April 9 and April 10, 2009, two other lawsuits were
filed in the same court against the same defendants. These lawsuits allege
substantially the same matters and have been consolidated. The lawsuits refer to
the April 1, 2009 announcement of the Company that it would restate its
unaudited financial statements for the first three quarters of 2008. The
lawsuits purport to be a class action on behalf of purchasers of the Company’s
securities between May 21, 2008 and March 31, 2009. The lawsuits allege, among
other things, that the defendants violated Section 10 and Rule 10b-5 of the
Securities Exchange Act of 1934 by making intentionally or recklessly untrue
statements of material fact and/or failing to disclose material facts regarding
the financial results and operating conditions for the first three quarters of
2008. The plaintiffs ask for a determination of class action status, unspecified
damages and costs of the legal action.





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





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