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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLORADO

Civil Action No. ______________________________

Stephen T. Hatch, derivatively, on behalf of ZYNEX, INC. f/k/a ZYNEX MEDICAL 

HOLDINGS, INC.,

Plaintiff,

v.

THOMAS SANDGAARD, 

FRITZ G. ALLISON,

TAYLOR SIMONTON, 

and MARY BETH VITALE,

Defendants,

- and -

ZYNEX, INC., f/k/a ZYNEX MEDICAL HOLDINGS, INC., a Nevada Corporation,

Nominal Defendant.

VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT

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Plaintiff Stephen T. Hatch, by his undersigned attorneys, for his verified shareholder 

derivative complaint, alleges upon information and belief, except as to allegations about himself, 

which are based upon personal knowledge, as follows:

1. This is a shareholder derivative action on behalf of nominal defendant Zynex, Inc. 

(formerly Zynex Medical Holdings, Inc.) (collectively “Zynex” or the “Company”), a Nevada 

corporation headquartered in Lone Tree, Colorado, seeking to recover for damages caused to the 

Company by its directors and/or senior officers who breached their fiduciary obligations to 

Zynex. The defendants are certain of the Company’s current and former officers and/or 

directors, including a majority of the Company’s board of directors at the time this complaint

was filed.

NATURE OF THE ACTION AND SUMMARY OF CLAIMS

2. Zynex engineers, manufactures, markets, and sells medical devices primarily in 

the United States for (i) electrotherapy pain relief and pain management and (ii) stroke and spinal 

cord injury rehabilitation. The Company’s medical device products are intended for pain 

management to reduce reliance on drugs and medications and to provide rehabilitation and 

increased mobility. Zynex’s medical device products purport to be cost effective when 

compared to traditional physical therapy, often resulting 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. Zynex’s medical device products are subject to Food and Drug 

Administration (“FDA”) regulation and approval. The Company’s products require a 

physician’s prescription, authorization, or order before they can be dispensed in the United 

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States. Zynex both sells and rents its products. During the period May 21, 2008 through March 

31, 2009 (the “Relevant Period”), a majority of Zynex’s revenue was derived from private health 

insurance carriers with insurance plans on behalf their insureds. The Company recognizes 

revenue when a product is shipped and the customer’s insurance is verified, and not when the 

Company actually receives payment by insurers or patients.

3. Zynex purported to experience dramatic growth during each of the first three 

quarters of fiscal year 2008, spurred primarily by an increase in prescriptions for rentals and 

purchases of the Company’s electrotherapy products. During the Relevant Period, the Company 

routinely touted the number of Zynex products ordered and the amount of top-line revenue 

recognized from those shipments. According to the Company, this increase in product orders 

resulted from an expansion of the Company’s sales force, greater awareness of the Company’s 

products by end-users and physicians, growing market penetration, and increased rental income 

from the greater number of Zynex products placed in use during prior periods.

4. On April 1, 2009, Zynex revealed that adjustments to the Company’s allowance 

for provider discounts, accounts receivable, and net revenues for the first three quarters of fiscal 

year 2008 necessitated restatement of the Company’s financial statements for such periods and 

that financial statements and press releases covering that period “should not be relied upon.” 

These financial results were included in quarterly reports on Forms 10-Q as well as in quarterly 

earnings press releases. Defendants made, approved, and falsely certified these earnings 

announcements and statements in breach of their fiduciary duties owed to Zynex.

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5. On April 15, 2009, Zynex filed a Form 10-K with the U.S. Securities & Exchange 

Commission (“SEC”) containing a restatement of the Company’s quarterly financial results for 

the first three quarters of fiscal year 2008, ended March 31, 2008, June 30, 2008, and September 

30, 2008.

6. The restatement resulted in a reduction of reported net revenues and related net 

accounts receivable of approximately $5.1 million. According to Zynex, the restatement was 

necessary “based on a re-evaluation of the estimated allowance for provider discounts that 

management believes should have been utilized in 2008.” The Company, admitting it applied 

improper provider discount rates, further stated that the “change in the provider discount rates is 

based on management’s analysis of business conditions, recent rates of collection and additional 

methodologies that the Company applied in estimating these rates at year end, which 

management believes are more accurate than previously applied rates during the quarterly 

periods in 2008. Zynex’s allowance for provider discounts is recorded to account for the risk of 

non-payment arising from reimbursements from insurance providers that are less than amounts 

claimed, amounts subject to patients’ deductibles and benefit denials.” In essence, during the 

first three quarters of fiscal year 2008, Zynex recorded and reported revenue on product 

shipments for which insurers had not authorized billing and for which insurers had never agreed 

to pay the amounts billed. Consequently, Zynex was only collecting a small fraction of the 

amounts billed and publicly reported as revenue.

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7. As a result of defendants’ actions, Zynex’s stock price traded at inflated levels 

during the Relevant Period – as high as $6.14. After the full truth emerged to the market, Zynex 

traded at approximately $0.50 per share. 

8. The current and former officers and directors of Zynex named herein owed

fiduciary duties of care and loyalty to the Company, including a duty to ensure that the Company 

maintained sufficient and effective internal controls over the Company’s financial reporting 

processes to maintain the accuracy of its reported financial results. Further, all of the defendants 

had the responsibility to ensure that truthful statements were made to shareholders and to act in 

the face of clear warning signs. As alleged herein, in utterly failing to do so, each defendant 

acted in bad faith, faces a substantial likelihood of liability for breach of fiduciary duty, and is 

therefore interested in the subject matter of this case. 

9. As was publicly revealed on November 3, 2008 in the Company’s Form 8-K filed 

with the SEC, prior to filing certain of the false financial statements alleged herein, defendants 

were already on notice that insurers had not authorized billing for certain of Zynex’s products 

and had never agreed to pay the amounts billed. The Company’s largest customer, Anthem Blue 

Cross and Blue Shield (“Anthem”), claimed that Zynex improperly billed and overcharged 

Anthem for Zynex products. The settlement eventually reached between Zynex and Anthem on 

November 18, 2008 caused the Company to set aside approximately $2 million in revenues 

through a $1 million direct refund to Anthem and Zynex’s agreement to not recognize $1 million 

of revenue for the rental of Zynex products to Anthem insureds for the third quarter of 2008. 

Notwithstanding this revelation, defendants failed to take the necessary steps to fix such 

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problems throughout the Company, even as the Company’s growth put more and more pressure 

on its internal controls. Indeed, following the Anthem settlement, defendants caused the 

Company to issue its third quarter of fiscal year 2008 financial results, yet again reporting 

unrecognizable and unrealistic revenue which would be subsequently restated in April 2009. 

Defendants also assured shareholders that the Company’s internal controls were adequate and 

sufficient, and that the Company’s financial statements were correct.

10. Thus, even while on notice of serious internal control problems and the need for 

dramatic improvements, defendants failed to promptly remediate the deficiencies known to them, 

leading to the restatement.

11. As a result of defendants’ breaches of fiduciary duties, Zynex disseminated nine 

months of false financial results. These false financial results have damaged Zynex’s credibility, 

as reflected in a $19 million market capitalization loss following the disclosure of the overstated 

net revenues and related net accounts receivable. In addition, the Company has also been 

exposed to significant reputational harm, as well as to substantial expenses and potentially 

massive liability arising out of a securities fraud class action filed in United States District Court 

in Colorado by purchasers of the Company’s securities during the financial reporting periods for 

which the Company’s results were restated.

12. Under these circumstances, a shareholder demand on the Zynex board of directors 

to bring the asserted claims would be futile, and is therefore excused. The directors further lack 

independence and would never act in a way that might threaten their substantial compensation, 

as alleged herein.

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13. This Court has subject matter jurisdiction under 28 U.S.C. § 1332(a)(1) because 

complete diversity exists between plaintiff and each defendant and the amount in controversy 

exceeds $75,000 exclusive of interest and costs. This action is not a collusive one designed to 

confer jurisdiction upon a court of the United States that it would not otherwise have.

JURISDICTION AND VENUE

14. This Court has jurisdiction over each defendant because each defendant is either a 

corporation that conducts business in and maintains operations in this District, a citizen of 

Colorado, or is an individual with sufficient minimum contacts with this District so as to render 

the exercise of jurisdiction permissible under traditional notions of fair play and substantial 

justice.

15. Venue is proper in this District pursuant to 28 U.S.C. § 1391(a) because Zynex 

maintains its principal place of business in this District, one or more of the defendants either 

resides in or maintains executive offices in this District, a substantial portion of the transactions 

and wrongs complained of herein occurred in this District, and defendants have received 

substantial compensation in this District by doing business here and engaging in numerous 

activities that had an effect in this District.

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Plaintiff Stephen T. Hatch

PARTIES

16. Plaintiff Stephen T. Hatch was a shareholder of Zynex during the Relevant 

Period, and since becoming a shareholder, plaintiff has continuously held such shares. Plaintiff 

is a citizen of Washington. See Verification, Exhibit 1.

Nominal Defendant Zynex

17. Nominal defendant Zynex is a Nevada corporation headquartered at 9990 Park 

Meadows Dr., Lone Tree, Colorado 80124. Zynex sells and rents electrotherapy, stroke, and 

spinal cord rehabilitation medical device products which require prescriptions. The Company’s 

shares are listed on the Over-The-Counter Bulletin Board under the symbol “ZYXI.” Zynex is 

named in this complaint as a nominal defendant. Currently, Zynex has more than 30 million 

shares outstanding.

18. At the time this complaint was filed, the Company’s board of directors had four 

members, a majority of whom are named as defendants herein.

Individual Defendants

19. Defendant Thomas Sandgaard (“Sandgaard”) is Zynex’s Chief Executive Officer, 

Chairman of Zynex’s board of directors, and President. Sandgaard founded Zynex and has 

served in these roles since the Company’s inception in 1996. Sandgaard knowingly: (i) signed 

false financial statements that did not properly account for Zynex’s revenues; (ii) failed to 

maintain adequate internal controls with respect to Zynex’s accounting for revenue transactions; 

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and (iii) signed false statements with respect to Zynex’s internal controls over financial 

reporting. For fiscal year 2008, Sandgaard received cash and stock compensation of $363,296. 

For fiscal year 2009, Sandgaard received cash and stock compensation of $460,389. For fiscal 

year 2010, Sandgaard received cash and stock compensation of $345,454. Upon information and 

belief, Sandgaard is a citizen of Colorado.

20. Defendant Fritz G. Allison (“Allison”) served as Zynex’s Chief Financial Officer 

(“CFO”) since February 19, 2007 until resigning on August 23, 2010. Allison was Zynex’s CFO 

throughout the Relevant Period. Allison knowingly: (i) signed false financial statements that did 

not properly account for Zynex’s revenues; (ii) failed to maintain adequate internal controls with 

respect to Zynex’s accounting for revenue transactions; and (iii) signed false statements with 

respect to Zynex’s internal controls over financial reporting. For fiscal year 2008, Allison 

received cash and stock compensation of $143,371. For fiscal year 2009, Allison received cash 

and stock compensation of $167,800. For fiscal year 2010, Allison received cash and stock 

compensation of $174,583. Upon information and belief, Allison is a citizen of Colorado.

21. Defendant Taylor Simonton (“Simonton”) was appointed to the Zynex board of 

directors by Sandgaard in October 2008 and continues to serve as a director. Simonton is a 

member and Chair of the Audit Committee. The Company’s board of directors has designated 

Simonton as one of Zynex’s “audit committee financial experts” under SEC rules. Since joining 

the Zynex board of directors, Simonton knowingly: (i) reviewed and approved false financial 

statements that did not properly account for Zynex’s revenues; and (ii) reviewed and approved 

ineffective internal controls with respect to Zynex’s accounting for revenue transactions. For 

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fiscal year 2008, Simonton received cash and stock compensation of $51,536. For fiscal year 

2009, Simonton received cash and stock compensation of $51,000. For fiscal year 2010, 

Simonton received cash and stock compensation of $57,665. Upon information and belief, 

Simonton is a citizen of Colorado.

22. Defendant Mary Beth Vitale (“Vitale”) was appointed to the Zynex board of 

directors by Sandgaard in October 2008 and continues to serve as a director. Vitale is a member 

of the Audit Committee. The Company’s board of directors has designated Vitale as one of 

Zynex’s “audit committee financial experts” under SEC rules. Since joining the Zynex board of 

directors, Vitale knowingly: (i) reviewed and approved false financial statements that did not 

properly account for Zynex’s revenues; and (ii) reviewed and approved ineffective internal 

controls with respect to Zynex’s accounting for revenue transactions. For fiscal year 2008, 

Vitale received cash and stock compensation of $42,736. For fiscal year 2009, Vitale received 

cash and stock compensation of $34,500. For fiscal year 2010, Vitale received cash and stock 

compensation of $42,165. Upon information and belief, Vitale is a citizen of Colorado.

23. Defendants Sandgaard, Allison, Simonton, and Vitale are referred to herein as the 

“Individual Defendants.”

24. The Individual Defendants, by virtue of their positions as officers and/or directors 

of Zynex, and because of their ability to control the business and corporate affairs of the 

Company, owed the Company and its shareholders the fiduciary obligations of good faith, trust, 

loyalty, diligence, and due care, and the duty of full and candid disclosure of all material facts 

DUTIES OF THE INDIVIDUAL DEFENDANTS

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related thereto. The Individual Defendants were required to use their utmost ability to control 

and manage the Company in a fair, just, honest, and equitable manner. 

25. The Individual Defendants were required to act in furtherance of the best interests 

of the Company and its shareholders so as to benefit all shareholders equally and not in 

furtherance of their personal interest or benefit. Each director and officer of the Company owed

to Zynex and its shareholders the fiduciary duty to exercise good faith and diligence in the 

administration of the affairs of the Company and in the use and preservation of its property and 

assets, and the highest obligations of fair dealing.

26. The Individual Defendants, because of their positions of control and authority as 

directors and/or officers of Zynex, were able to and did, directly and/or indirectly, exercise 

control over the wrongful acts complained of herein. Because of their executive, managerial, 

and/or directorial positions with Zynex, each of the Individual Defendants possessed the 

authority to control the contents of its reports, press releases, and presentations to securities 

analysts and the investing public. The Individual Defendants were required to exercise 

reasonable care and prudent supervision over the dissemination of information concerning the 

business, operations, forecasts, and financial reporting of Zynex. 

27. Each of the Individual Defendants directly participated in the management of the 

Company and/or was involved in drafting, producing, reviewing, and/or disseminating certain of 

the false and misleading statements alleged herein, and/or was aware that these statements were 

being issued regarding the Company’s business operations and approved or ratified these 

statements. The Individual Defendants were provided with copies of the Company’s reports and 

press releases alleged herein prior to or shortly after their issuance and had the ability and 

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opportunity to prevent their issuance or cause them to be corrected. The Individual Defendants 

were prohibited from engaging in unlawful corporate conduct, such as violations of the laws, 

rules, and regulations applicable to Zynex and its business.

28. Because of each of the Individual Defendants’ positions with Zynex, each knew 

and had access to non-public information about the ongoing business operations of Zynex, via 

access to internal corporate documents, conversations and connections with other corporate 

officers and employees, attendance at management and/or board of directors’ meetings and 

committees thereof, and reports and other information provided in connection therewith. The 

Individual Defendants, as corporate fiduciaries entrusted with non-public information, were 

obligated to disclose material adverse information regarding Zynex and its faulty revenue 

recognition practices.

29. Because of their positions and access to material non-public information, each of 

the Individual Defendants knew that the adverse facts specified herein had not been disclosed to, 

and were being concealed from, shareholders and the public, and that the positive representations 

that were being made were false and misleading.

30. Because of their positions of control and authority as directors and/or officers of 

Zynex, the Individual Defendants were able to, and did, directly and/or indirectly, exercise 

control over the wrongful acts complained of herein.

31. As members of the Audit Committee, pursuant to its charter, defendants Simonton 

and Vitale were responsible for reviewing the integrity of Zynex’s auditing, accounting, and 

reporting processes and consideration and approval of appropriate changes. Defendants 

Simonton and Vitale were also responsible for reviewing Zynex’s financial reports and other 

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financial information provided to shareholders and filed with the SEC, in addition to reviewing 

Zynex’s internal controls. By virtue of their assigned duties and responsibilities, the Audit 

Committee defendants had a special relationship with the Company. The Audit Committee 

Charter, in effect since October 6, 2008, specifically provides that the committee’s “primary 

responsibility...is to oversee the Company’s financial reporting processes on behalf of the Board 

and report the results of its activities to the Board.” The charter further provides that the 

“Committee, in carrying out its oversight responsibilities, will assess the Company’s systems of 

internal accounting and financial controls, any internal audit process...and the overall integrity 

of the Company’s financial statements and information systems.” Further, the audit committee 

was “empowered to investigate any matter brought to its attention with full access to all books, 

records, facilities, and personnel of the Company.” Among the “principal recurring processes of 

the Committee” was the duty to “[r]eview with management and the independent auditor the 

interim financial statements to be included in the Company’s Quarterly Report on Form 10-Q.” 

Also included in the “principal recurring processes of the Committee” was the duty to “[d]iscuss 

with management...the quality and adequacy of the Company’s internal controls...”

32. To discharge their duties, the Individual Defendants were required to exercise 

reasonable and prudent supervision over the management, policies, practices, and controls of the 

Company. By virtue of such duties, the Individual Defendants were required to, among other 

things:

a. exercise good faith to ensure that the affairs of the Company were 

conducted in an efficient, business-like manner so as to make it possible to 

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provide the highest quality performance of their business and avoid 

wasting the Company’s assets;

b. exercise good faith to ensure that the Company operated in a diligent, 

honest, and prudent manner and complied with all applicable federal and 

state laws, rules, regulations, and requirements, and all contractual 

obligations, including acting only within the scope of its legal authority

and disseminating truthful and accurate statements to the SEC and the 

investing public;

c. properly and accurately guide investors and analysts as to the true 

financial condition of the Company at any given time, including making 

accurate statements about the Company’s revenues;

d. remain informed as to how Zynex conducted its operations and recognized 

revenue, and, when placed on notice of improper or imprudent conduct by 

the Company and/or its employees, exercise good faith in taking action to 

correct the misconduct and prevent its recurrence; and

e. maintain and implement an adequate system of controls and information 

systems, such that no officer, director, or employee of the Company would 

make false statements about Zynex to the securities markets or would be 

able to misappropriate internal confidential information for his or her own 

benefit and profit, by insider stock trading or otherwise.

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A. Zynex’s Business

SUBSTANTIVE ALLEGATIONS

33. Zynex engineers, manufactures, markets, and sells medical devices primarily in 

the United States for (i) electrotherapy pain relief and pain management and (ii) stroke and spinal 

cord injury rehabilitation. The Company’s medical device products are intended for pain 

management to reduce reliance on drugs and medications and to provide rehabilitation and 

increased mobility. Zynex’s medical device products purport to be cost effective when 

compared to traditional physical therapy, often resulting 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. Zynex’s medical device products are subject to FDA regulation and 

approval. The Company’s products require a physician’s prescription, authorization, or order 

before they can be dispensed in the United States. Zynex both sells and rents its products. 

During the Relevant Period, a majority of Zynex’s revenue was derived from private health 

insurance carriers with insurance plans on behalf their insureds. Zynex received its remaining 

revenue during the Relevant Period from Medicare, Medicaid, worker’s compensation agencies, 

attorneys representing injured patients, hospitals, and U.S. and international distributors. 

34. Sandgaard dominates and controls Zynex, including its board of directors. 

Sandgaard was the Company’s sole director until October 6, 2008, when the size of Zynex’s 

board of directors increased to three directors. Previously, Sandgaard was Zynex’s sole 

shareholder, and Sandgaard held 61% of the Company’s stock during the Relevant Period. 

Zynex’s 10-K Report for fiscal year 2008, filed with the SEC on April 15, 2009, disclosed that 

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Zynex’s “success depends to a significant extent upon the continued service of Mr. Thomas 

Sandgaard.” The Company’s 10-K Report for fiscal year 2008 also revealed that Sandgaard 

wields “the ability to control substantially all matters submitted to [the Company’s] stockholders 

for approval, including: Election of [Zynex’s] board of directors; Removal of any of [Zynex’s] 

directors; Amendment of [Zynex’s] 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 [Zynex].” The Company’s 10-K Report for fiscal year 2008 also 

disclosed that, “Mr. Sandgaard, because of his stock ownership and position as director, may be 

considered a ‘parent’ of the Company.”

35. As revealed in the Company’s Form 10-K filed with the SEC on April 17, 2007, 

Zynex has previously struggled with its internal controls. The 10-K Report identified a material 

weakness in the Company’s internal control over financial reporting relating to inventory, but 

represented that the Company had undertaken remediation efforts to correct such deficiencies 

and that it would “continue to review its internal controls and procedures and [would] take 

further action as appropriate.”

36. Leading up to and during the Relevant Period, Zynex added significant numbers 

of sales representatives. Zynex’s rapid sales representative growth is matched by its dramatic 

growth in revenues during the first three quarters of fiscal year 2008, spurred primarily by an 

increase in prescriptions for rentals and purchases of the Company’s electrotherapy products. 

Indeed, the Company routinely touted during the Relevant Period the number of Zynex products 

ordered and the amount of top-line revenue recognized from those shipments. According to the 

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Company, this increase in product orders resulted from an expansion of the Company’s sales 

force, greater awareness of the Company’s products by end-users and physicians, growing 

market penetration, and increased rental income from the greater number of Zynex products 

placed in use during prior periods. In the first three quarters of fiscal year 2007, Zynex 

generated $1.34 million, $1.51 million, and $2.10 million in revenues and $232,000, $352,000, 

and $614,000 in net income, respectively. In the first three quarters of fiscal year 2008, Zynex

initially reported revenues totaling $3.74 million, $5.05 million, and $3.50 million and $1.19 

million, $1.85 million, and $206,000 in net income, respectively. Thus, in the course of just one 

fiscal year, combined quarterly revenue growth increased dramatically almost 2.5 times over and 

combined quarterly net income nearly tripled over a 9-month span, as depicted below:

Net Rental 

and

Sales 

Revenue

Net Income

Q1 2007 $1,336,731 $231,681

Q2 2007 $1,505,207 $351,548

Q3 2007 $2,104,446 $614,465

Total $4,946,384 $1,197,694

*Before 

Restatement

Net Rental 

and

Sales 

Revenue

Net Income

Q1 2008 $3,741,028 $1,192,991

Q2 2008 $5,047,635 $1,852,212

Q3 2008 $3,502,994 $205,837

Total $12,291,658 $3,251,040

37. During the relevant period, Zynex purported to recognize revenue when each of 

the following conditions was satisfied: (i) a contract or sales arrangement existed; (ii) products 

had been shipped and title had transferred or rental services had been rendered; (iii) the price of 

the products or services was fixed or determinable; and (iv) collectability was reasonably 

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assured. Accordingly, Zynex recognized revenue when the product shipped and the customer’s 

insurance was verified, and not when Zynex actually received payment. The Company’s sales 

and rental income was reported net of deductions for bad debt and estimated insurance company 

reimbursement deductions. The deductions are known throughout the healthcare industry as 

“contractual adjustments” and describe the process whereby the healthcare insurers unilaterally 

reduce the amount they reimburse the Company for its products as compared to the rental rates 

and sales prices charged.

B. The Individual Defendants Caused Zynex to Issue False and Misleading 

Statements During the Relevant Period

38. In committing the wrongful acts alleged herein, the Individual Defendants have 

pursued, or joined in the pursuit of a common course of conduct, and have acted in concert with 

and conspired with one another in furtherance of their common plan or design. In addition to the 

wrongful conduct herein alleged as giving rise to primarily liability, the Individual Defendants 

further aided and abetted and/or assisted each other in breaching their respective duties. During 

relevant times, the Individual Defendants collectively and individually initiated a course of 

conduct that was designed to and did: (i) conceal the fact that Zynex’s reported revenue and 

earnings were overstated due to the Company’s false accounting; (ii) conceal the fact that the 

Company was improperly portraying its revenue recognition practices and violating Generally 

Accepted Accounting Principles (“GAAP”); and (iii) conceal the fact that the Company lacked 

adequate internal and financial controls. In furtherance of this plan, conspiracy, and course of 

conduct, the Individual Defendants collectively and individually took the actions set forth herein. 

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The Individual Defendants accomplished their conspiracy, common enterprise and/or common 

course of conduct by causing the Company to purposefully misrepresent its business prospects 

and release improper statements.

39. As a result of the defendants’ positions with Zynex during the Relevant Period, 

each knew and had access to this non-public information about the business of Zynex and its 

improper revenue recognition practices, as well as about its finances, markets, and business 

prospects, via access to internal corporate documents (including operating plans, budgets, 

forecasts, and reports of actual operations), conversations and connections with other corporate 

officers and employees, and attendance at management and/or board meetings and committees 

thereof.

40. On May 21, 2008, the first day of the Relevant Period, defendants Sandgaard and 

Allison caused the Company to report its first quarter 2008 financial results on Form 10-Q filed 

with the SEC and an accompanying press release. For the first quarter of 2008, ended March 31, 

2008, Zynex reported collective net rental and sales revenue of $3,741,028 and net income of 

$1,192,991. Zynex’s financial results, as stated in its SEC filing, were false and misleading 

when made because:

a. Zynex overstated its collective net rental and sales revenue by $1.15 

million;

b. Zynex overstated its net income by approximately $960,000;

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c. Zynex’s revenue recognition practices violated GAAP and materially 

deviated from its stated practices; and

d. the Company lacked adequate internal and financial controls throughout 

the Relevant Period.

41. The Company’s May 21, 2008 press release, which defendants Sandgaard and 

Allison caused the Company to issue, confirmed the false and misleading first quarter of 2008 

financial results and contained additional false and misleading statements. In the press release, 

Sandgaard stated, in pertinent part: “We are very pleased to report continued increases in 

revenue and net income as a result of executing of our sales and marketing plan.” (Emphasis 

added.) As was revealed in the Company’s April 15, 2009 restatement, Zynex’s actual first 

quarter of 2008 revenue was $2,588,720 – resulting in a decrease of the Company’s revenue as

compared to the Company’s fourth quarter of 2007 revenue of $3,101,869.

42. On August 14, 2008, defendants Sandgaard and Allison caused the Company to 

report its second quarter 2008 financial results on Form 10-Q filed with the SEC and an 

accompanying press release on August 15, 2008. For the second quarter of 2008, ended June 30, 

2008, Zynex reported collective net rental and sales revenue of $5,047,635 and net income of 

$1,852,212. Zynex’s financial results, as stated in its SEC filing, were false and misleading 

when made because:

a. Zynex overstated its collective net rental and sales revenue by $2.01

million;

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b. Zynex overstated its net income by approximately $1.56 million;

c. Zynex’s revenue recognition practices violated GAAP and materially 

deviated from its stated practices; and

d. the Company lacked adequate internal and financial controls throughout 

the Relevant Period.

43. The Company’s August 15, 2008 press release, which defendants Sandgaard and 

Allison caused the Company to issue, confirmed the false and misleading second quarter of 2008 

financial results.

44. On November 3, 2008, in its Form 8-K filed with the SEC, Zynex partially 

revealed that it had been improperly billing and charging at least one of its top customers, 

Anthem, and that Anthem sought a significant refund. In the Form 8-K, the Company, in 

pertinent part, stated:

Zynex, Inc. declined on October 31, 2008 a settlement offer regarding a refund 

request by Anthem Blue Cross and Blue Shield (“Anthem”), a major health 

insurance provider. The refund claim concerns payments previously made by 

Anthem for certain medical devices (the “devices”) rented or sold to insureds of 

Anthem by Zynex from September 1, 2007 through July 31, 2008. Despite 

Anthem’s paying claims for such devices, including some that were individually 

subject to an Anthem review process and resulted in decisions favorable to Zynex, 

Anthem claimed in a retrospective review that the devices were considered 

investigational or not medically necessary under a medical policy statement of 

Wellpoint, Inc. (the parent entity) and therefore not eligible for payment. As a 

result, Anthem now claims that it should receive a refund of approximately 

$1,065,000. Zynex met with representatives of Anthem for a reconsideration of 

the claim; however, Anthem continues to assert the claim. Anthem offered to 

allow payments over 12 months without interest if Zynex agreed on October 31, 

2008 to pay the claimed amount. However, Zynex has indicated to Anthem that it 

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is appealing the claim to a higher authority at Anthem. Zynex will consider other 

options if the appeal is not successful.

Anthem is also indicating that it will not pay current outstanding amounts with 

respect to such devices, which receivables are estimated to be approximately 

$700,000 as of June 30, 2008. Pending the appeal, Zynex is not recording any 

revenues from rentals or sales of the devices to Anthem insureds since July 1, 

2008. Other products of Zynex are now provided to Anthem insureds who 

previously may have been prescribed the devices subject to the claim.

As previously disclosed, Zynex has a line of credit with Marquette Health Care 

Finance. This loan facility requires the consent of Marquette for Zynex to make 

or settle the claim made by Anthem and to reduce or waive any accounts 

receivable that would otherwise be owed by Anthem. Marquette may assert that 

Anthem’s claim constitutes a breach of representations and warranties made to 

Marquette, which would be an event of default; it may also assert that there has 

been a material adverse change which would affect Marquette’s obligations to 

make any advances. Zynex has commenced discussions with Marquette 

regarding the claim. There is, however, no assurance that Zynex will be able to 

maintain the loan facility in place or obtain the approval of Marquette for any 

potential future payments to Anthem.

The amounts described above are pre-tax. Nevertheless, payments that might be 

made to Anthem as a result of the claim, and any changes to or termination of the 

Marquette line of credit, could have a material impact on the cash flow and 

liquidity of Zynex.

Zynex has an agreement (terminable by either party upon advance notice) with 

Anthem making Zynex part of the Anthem network. Although less advantageous, 

Zynex can provide services to Anthem insureds on an out of network basis, if 

needed. Neither Anthem nor Zynex has indicated that it will terminate this 

agreement.

Anthem has been and continues to be one of the largest health insurers in terms of 

payments to Zynex for the rental and sale of its products. Zynex continues to 

provide a variety of its devices to Anthem insureds, including devices which may 

be used to treat insureds with the same medical conditions as those using devices 

subject to the claim.

45. Although the Company had now partially revealed that the Individual Defendants 

had caused the Company to engage in an improper billing and charging scheme of Anthem, the 

Company’s previous statements regarding its financial results for the first and second quarters of 

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2008 remained materially false and misleading because such financial results remained 

overstated. Moreover, notwithstanding having been put on notice that the Company’s leading 

customer demanded rebates and credits amounting to millions of dollars as a result of Zynex’s 

improper billing practices, the Individual Defendants continued to conceal and misrepresent the 

Company’s actual financial condition and ignored the Company’s deficient internal controls.

46. Thereafter, on November 19, 2008, the Individual Defendants, including 

Simonton and Vitale, caused the Company to report its third quarter 2008 financial results on 

Form 10-Q filed with the SEC and an accompanying press release on November 20, 2008. For 

the third quarter of 2008, ended September 30, 2008, Zynex reported collective net rental and 

sales revenue of $3,502,994 and net income of $205,837. Zynex’s financial results, as stated in 

its SEC filing and press release, were false and misleading when made because:

a. Zynex overstated its collective net rental and sales revenue by $1.30

million;

b. Zynex overstated its net income by approximately $570,000, resulting in a 

net loss;

c. Zynex’s revenue recognition practices violated GAAP and materially 

deviated from its stated practices; and

d. the Company lacked adequate internal and financial controls throughout 

the Relevant Period.

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47. The Company’s Form 10-Q for the third quarter of 2008 and accompanying 

November 20, 2008 press release also revealed that the settlement of Anthem’s claim regarding

Zynex’s improper overbilling for Zynex products cost the Company in excess of $2 million. The 

Company’s Form 10-Q stated, in pertinent part:

The Company received and has 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. In the settlement, the Company agreed to 

pay Anthem a total of $679,930 over 12 months and waive rights to payments of 

outstanding billings for the devices provided to Anthem’s insureds subsequent to 

September 1, 2007 through September 30, 2008. Accounts receivable for these 

billings were approximately to be $329,664, net of contractual allowances, as of 

June 30, 2008. Under the settlement, the Company will initially pay $17,770 

before the end of 2008 and will monthly make a payment of $55,180 on the first 

day of each month commencing December 1, 2008 and ending November 1, 

2009. The liability of $679,930 is recorded in other accrued liabilities on the 

Company’s Condensed Consolidated Balance Sheet as of September 30, 2008. 

The Company may request that patients voluntarily return devices which were the 

subject of the settlement, but the Company is not doing so if the return of the 

equipment would interfere with the treatment of the patient.

The Company recognized no revenue in the third quarter of 2008 relating to the 

devices rented or sold to insureds of Anthem.

The Company wrote off the accounts receivable ($329,664) from Anthem against 

the allowance for provider discounts for the devices, which receivables were 

unpaid and arose prior to July 1, 2008. The Company also charged the amount to 

be repaid to Anthem ($679,930) against the allowance for provider discounts. The 

Company records its normal provision for provider discounts as direct reductions 

of rental and sales revenue (see Note 2); however, because of the size and 

retrospective nature of the Anthem settlement ($1,009,594 in total), this change in 

estimate has been displayed as an additional provision and as a separate line 

reducing total revenue in the Company’s Condensed Consolidated Statement of 

Operations.

Although Anthem had paid claims for the devices, including some that were 

individually subject to an Anthem review process and resulted in decisions 

favorable to the Company, Anthem claimed in a retrospective review that the 

devices were considered investigational or not medically necessary under a 

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medical policy statement of its parent entity and therefore not eligible for 

payment. Anthem originally claimed that it should receive a refund of 

approximately $1,065,000. The Company met with representatives of Anthem for 

reconsideration of the claim. Anthem continued to assert the claim, and on 

October 31, 2008, the Company gave notice to appeal the claim to a higher 

authority at Anthem. On November 18, 2008, the Company and Anthem 

executed an agreement for the settlement as described above.

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.

* * * *

The rate of increase in rental revenue slowed in the third quarter of 2008 because 

we did not recognize revenues (approximately $1,075,000) from the rental of 

certain devices to insureds of Anthem Blue Cross Blue Shield during the quarter 

due to a refund claim of Anthem which was settled in November 2008.

48. The Company’s November 20, 2008 press release, which the Individual 

Defendants caused the Company to issue, also confirmed the false and misleading third quarter 

of 2008 financial results and contained additional false and misleading statements. In the press 

release, Sandgaard stated, in pertinent part: “Sales and rentals to date in the fourth quarter of 

2008 continue at a strong pace, and our internal projection for net revenue in the fourth quarter is 

in excess of $7,000,000.” As was revealed in the Company’s April 15, 2009 restatement, 

Zynex’s actual fourth quarter of 2008 revenue was only $3,935,640 (or only 56% of Sandgaard’s 

unsubstantiated $7,000,000 projection).

49. As was revealed in the Company’s Form 8-K filed with the SEC on November 

24, 2008, Zynex’s improper overbilling practices also forced the Company to agree to a less 

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favorable credit agreement with Marquette Healthcare Finance, with which the Company had 

maintained a $3,000,000 line of credit. The Form 8-K stated, in pertinent part: 

Zynex, Inc. has obtained a waiver of a financial covenant in its line of credit with 

Marquette Healthcare Finance. The covenant was not satisfied as of September 

30, 2008 because of a previously disclosed claim and settlement of it. In the 

waiver, Marquette stated that it will not take action on the financial covenant 

default for the quarter ending on that date.

Marquette also stated in the letter that it will re-set the covenant for upcoming 

quarters to reflect the impact of the settlement on projected revenues for the 

remainder of 2008 and future years. In addition, Marquette and Zynex amended 

the interest rate under the line of credit from a floating prime rate plus 2.5% to the 

higher of (a) a floating prime rate plus 2.5% or (b) the floating LIBOR rate plus 

4.5%.

C. The Truth is Revealed

50. On April 1, 2009, the Company for the first time revealed the true extent of its 

improper revenue recognition practices, announcing in its Form 8-K filed with the SEC and an 

accompanying press release that Zynex had “concluded that Zynex’s unaudited financial 

statements for the quarters ended March 31, 2008, June 30, 2008, and September 30, 2008, 

including its quarterly reports, should be revised to reflect adjustments to Zynex’s allowance for 

provider discounts, accounts receivable and net revenue for such periods.” The Company 

indicated that the need for restatement was “determined after an evaluation of adjustments 

identified in connection with the 2008 year-end closing and the audit of the 2008 financial 

statements.” Zynex instructed investors that its financial statements and press releases covering 

those periods “should not be relied upon.”

51. As more fully discussed in Zynex’s 10-K Report for fiscal year 2008, filed with 

the SEC on April 15, 2009, the restatement resulted in a reduction of reported net revenues and 

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related net accounts receivable of approximately $5.1 million, with most of the adjustments 

being applied to the first three quarters of 2008. According to Zynex, the restatement was 

necessary “based on a re-evaluation of the estimated allowance for provider discounts that 

management believes should have been utilized in 2008.” The Company, admitting it applied 

improper provider discount rates, further stated that the “change in the provider discount rates is 

based on management’s analysis of business conditions, recent rates of collection and additional 

methodologies that the Company applied in estimating these rates at year end, which 

management believes are more accurate than previously applied rates during the quarterly 

periods in 2008. Zynex’s allowance for provider discounts is recorded to account for the risk of 

non-payment arising from reimbursements from insurance providers that are less than amounts 

claimed, amounts subject to patients’ deductibles and benefit denials.” In essence, during the 

first three quarters of fiscal year 2008, Zynex recorded and reported revenue on product 

shipments for which insurers had not authorized billing and for which insurers had never agreed 

to pay the amounts billed. Consequently, Zynex was only collecting a small fraction of the 

amounts billed and publicly reported as revenue.

52. Rather than the dramatic reported revenues for the first three quarters of fiscal 

year 2008 of $3.74 million, $5.05 million, and $3.50 million, respectively, Zynex’s actual 

revenues for the periods, as restated, totaled a modest $2.59 million, $3.04 million, and $2.20 

million, respectively. Thus, instead of year-over-year revenue growth of 2.5 times over the 9-

month span, the Company witnessed 58% revenue growth compared to fiscal year 2007, as 

depicted below:

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2007 Net Rental 

and Sales Revenue

2008 Net Rental 

and Sales Revenue 

(as originally filed)

2008 Net Rental 

and Sales Revenue 

(as restated)

Q1 $1,336,731 $3,741,028 $2,588,720

Q2 $1,505,207 $5,047,635 $3,040,460

Q3 $2,104,446 $3,502,994 $2,198,738

Total $4,946,384 $12,291,658 $7,827,919

53. The revenue adjustments drastically impacted the Company’s reported net 

income. Indeed, rather than the robust net income for the first three quarters of fiscal year 2008 

of $1.2 million, $1.9 million, and $0.2 million, Zynex’s actual net income for the periods, as 

restated, totaled only $0.2 million, $0.3 million, and a loss of $0.4 million, respectively. Thus, 

instead of year-over-year net income nearly tripling over the 9-month span, the Company barely 

produced a profit and made only 13% of what it did over the same period in 2007, as depicted 

below:

2007 Net Income 2008 Net Income 

(as originally filed)

2008 Net Income 

(as restated)

Q1 $231,681 $1,192,991 $230,683

Q2 $351,548 $1,852,212 $289,037

Q3 $614,465 $205,837 ($366,419) (loss)

Total $1,197,694 $3,251,040 $152,301

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54. As was revealed in the Company’s Form 8-K filed with the SEC on April 7, 2009, 

the April 1, 2009 revelation of Zynex’s systemic improper overbilling practices again forced the 

Company to agree to a less favorable credit agreement with Marquette Healthcare Finance, with 

which the Company had maintained a $3,000,000 line of credit. The Form 8-K stated, in 

pertinent part:

With respect to Zynex’s recently announced restatement of financial statements 

for the first three quarters of 2008, Marquette has waived any breach of a 

representation, warranty or covenant concerning the accuracy of the original 

unaudited financial statements for these quarterly periods. Notwithstanding such 

waiver, Marquette expressly reserved any right to declare a default, and any other 

claim, right or remedy with respect to (a) the restated financial statements for 

these quarterly periods; and (b) any fraud or intentional misrepresentation in 

connection with the original financial statements for these quarterly periods.

Marquette and Zynex will amend the line of credit to increase the margin to 

3.25% and increase the collateral monitoring fee to $1,750 per month. The 

interest rate for the line of credit is the margin plus the higher of the (i) a floating 

prime rate; or (ii) the floating LIBOR rate plus 2%.

55. The accounting scandal at Zynex has damaged the Company. As a result of the 

Individual Defendants’ breaches of fiduciary duty and other improprieties, Zynex disseminated 

improper financial statements, which have damaged Zynex’s credibility, as reflected by the 

Company’s market capitalization loss of over $19 million, or 57% of the Company’s total market 

capitalization, following the announced restatement. Defendants knew that their acts and 

practices and misleading statements and omissions described herein would adversely affect the 

integrity of the market for Zynex’s securities and would artificially inflate the prices of those 

securities. Zynex’s stock reached a price of $6.14 per share during the Relevant Period, yet 

THE INDIVIDUAL DEFENDANTS HAVE DAMAGED ZYNEX

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traded at $0.46 per share after the full truth regarding the Company’s revenue transactions was 

finally disclosed. Defendants’ actions have further damaged Zynex’s corporate image and 

goodwill. For the foreseeable future, Zynex will suffer from what is known as the “liar’s 

discount,” a term applied to the stocks of companies which have been implicated in improper 

behavior and have misled the investing public, such that Zynex’s ability to raise equity capital or 

debt on favorable terms in the future or secure business partners is now impaired.

56. The precipitous decline in Zynex’s stock price as a direct result of the Individual 

Defendants’ conduct has exposed the Company to a substantial risk of liability for violations of 

the federal securities laws. See Mishkin et al. v. Zynex, Inc. et al., No. 09-cv-00780 REB-KLM 

(D. Colo. filed April 6, 2009). Zynex has expended, and will continue to expend, significant 

sums of money defending the Company, Sandgaard, and Allison in that action. These 

consequent costs and expenses must be paid by the Company as a direct and proximate result of 

the Individual Defendants’ breach of their fiduciary duties. Moreover, Zynex has already 

incurred these costs and expenses and therefore the harm caused to Zynex has already been 

realized. These damages caused by defendants’ failure to live up to their fiduciary duties owed 

to Zynex are not contingent upon the outcome of the securities class action.

57. The investors’ recent victory in Mishkin, in which the Court held that the 

plaintiffs satisfied the heightened pleading requirements imposed by the Private Securities 

Litigation Reform Act of 1995, substantially increases the likelihood of Zynex facing securities 

fraud liability for issuing false and misleading statements at the behest of defendants in that 

action. Indeed, on March 30, 2011, U.S. District Judge Robert E. Blackburn denied a motion to 

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dismiss the investors’ class action lawsuit for violations of the Securities Exchange Act of 1934 

§10-b, Rule 10b-5, and §20(a) filed against Zynex and defendants Sandgaard and Allison, 

finding that plaintiffs had sufficiently pled that Sandgaard and Allison knowingly misled the 

market, causing substantial losses to class members identified in the complaint when the truth 

emerged. Judge Blackburn found that plaintiffs’ allegations supported “a reasonable conclusion 

that the defendants knew that Zynex’s relevant statements to the public concerning Zynex’s 

revenue and profits were materially false because those statements were based on the 

intentionally inflated amounts billed to insurance companies, as opposed to reasonable estimates 

of the payments Zynex actually would receive.” See Mishkin et al. v. Zynex, Inc. et al., No. 09-

cv-00780 REB-KLM, Order Denying Motion to Dismiss at 12 (D. Colo. March 30, 2011). Judge 

Blackburn further found that the “alleged direct participation of Sandgaard and Allison in these 

practices supports a strong inference of scienter, as does the magnitude of the corrections to 

Zynex’s financial statements once Zynex recognized publicly that it could not collect anything 

close to the amounts routinely billed to insurers.” Id. Therefore, as a direct and proximate result 

of the Individual Defendants' improper conduct, there exists a substantial threat of Zynex 

incurring millions of dollars worth of costs, expenses, and damages.

58. As a result of the Individual Defendants’ improper behavior, defendants have also 

proximately caused Zynex to incur significant costs from compensation and benefits paid to the 

defendants, as alleged herein, in breach of their duties to Zynex.

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59. Plaintiff brings this action derivatively pursuant to Federal Rule of Civil 

Procedure 23.1 in the right and for the benefit of Zynex to redress injuries suffered, and to be 

suffered, by Zynex as a direct result of breaches of fiduciary duty by the Individual Defendants,

and which Zynex has failed to enforce.

DERIVATIVE ACTION ALLEGATIONS

60. Plaintiff will adequately and fairly represent the interests of Zynex in prosecuting 

its rights. Plaintiff has no interest adverse to Zynex, and has hired counsel experienced in this 

type of litigation. The wrongs complained of herein occurred during the Relevant Period, during 

which time plaintiff was a Zynex shareholder. Plaintiff continues to hold Zynex shares. Hence, 

plaintiff has standing to bring this derivative action on behalf of the Company to recover 

damages for all of the conduct described herein.

61. Plaintiff has not made any demand on the board to institute this action because 

such a demand would be a futile, wasteful, and useless act. Such a demand is therefore legally 

excused.

DEMAND IS EXCUSED FOR FUTILITY

62. The board of Zynex at the time of the original filing of this action consisted of the 

following four individuals: Sandgaard, Simonton, Vitale, and Mats Wahlström. Each of the 

three members of Zynex’s board of directors who are named as defendants in this action, due to 

his or her participation in the wrongful acts alleged and potential individual financial exposure, is 

not disinterested and cannot exercise independent business judgment on the issue of whether 

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Zynex should prosecute this action. These three director defendants knew of the unlawful acts 

alleged herein, participated in the actions of their colleagues, and failed to prevent, detect, and 

halt these breaches of fiduciary duty. These directors, comprising a majority of Zynex’s current 

board of directors, would never sue themselves or their colleagues to recover the damages Zynex 

has incurred. As a result, demand on Zynex and its board of directors is futile and therefore 

excused.

63. Demand is also excused because defendant Sandgaard is also a named defendant 

in the Mishkin federal securities class action. In Mishkin, Judge Blackburn of the United States 

District Court for the District of Colorado recently upheld the investors’ claims for violations of 

the Securities Exchange Act of 1934 §10-b, Rule 10b-5, and §20(a) against Sandgaard. 

Consequently, Sandgaard faces a substantial likelihood of liability and is neither independent or 

nor disinterested in the outcome of this shareholder derivative action naming Sandgaard as a 

defendant. Furthermore, if the Company pressed forward with its claims against the defendants 

in this case, then the Company’s efforts could undercut or even compromise the defense of the 

securities class action, excusing demand.

64. Demand is further excused because, although Zynex has been and will continue to 

be exposed to significant losses due to the wrongdoing complained of herein, the board of 

directors has not filed any lawsuits against itself or others who were responsible for that 

wrongful conduct to attempt to recover for Zynex any part of the damages suffered thereby.

65. Demand is also excused because defendant Sandgaard dominates and controls 

Zynex’s board of directors. Sandgaard was the Company’s sole director until October 6, 2008, 

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when the size of Zynex’s board of directors increased to three directors. Previously, Sandgaard 

was Zynex’s sole shareholder, and Sandgaard held 61% of the Company’s stock during the 

Relevant Period. According to Zynex’s 10-K Report for fiscal year 2010, filed with the SEC on 

March 28, 2011, Sandgaard currently owns 58% of the Company’s stock. Zynex’s 10-K Report 

for fiscal year 2011 further affirmed that the Company’s “success depends to a significant extent 

upon the continued service of Mr. Thomas Sandgaard, our Chief Executive Officer and 

Founder.” The Company’s 10-K Report for fiscal year 2011 also confirmed that Sandgaard

continues to wield “the ability to control substantially all matters submitted to [the Company’s] 

stockholders for approval, including: Election of [Zynex’s] board of directors; Removal of any of 

[Zynex’s] directors; Amendment of [Zynex’s] certificate of incorporation or bylaws; Approval of 

significant corporate transactions, such as a sale, merger or liquidation of our Company; and 

Adoption of measures that could delay or prevent a change in control or impede a merger, 

takeover or other business combination involving [Zynex].” The Company’s 10-K Report for 

fiscal year 2008 disclosed that, “Mr. Sandgaard, because of his stock ownership and position as 

director, may be considered a ‘parent’ of the Company.” Sandgaard has consolidated power in 

himself by ensuring that he is Zynex’s Chairman and Chief Executive Officer. By virtue of these 

positions, Sandgaard controls Zynex’s daily operations, board of directors meetings, and books 

and records. Further, Sandgaard’s overwhelming 58% voting power, combined with his 

executive position, gives Sandgaard unfettered influence to nominate, elect, and remove Zynex’s 

directors. In a telling example of Sandgaard’s control over the Zynex board of directors, as was 

revealed in the Company’s 8-K Report filed with the SEC on April 6, 2011, less than a week 

after the securities class action complaint was upheld against Sandgaard for violations of the 

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federal securities laws, the purportedly independent members of Zynex’s board approved a 

$61,000 raise to Sandgaard’s base salary. Thus, due to Sandgaard’s domination and control, a 

demand on defendants Simonton and Vitale and director Mats Wahlström is futile.

66. As Sandgaard was actively involved in the day-to-day management of Zynex and 

was directly responsible for the acts and omissions described herein, including the false and 

misleading statements made in press releases and SEC filings, Sandgaard is not disinterested and 

cannot exercise independent business judgment on the issue of whether Zynex should prosecute 

this action.

67. The members of the Company’s Audit Committee during the Relevant Period, 

defendants Simonton and Vitale, themselves comprising one half of the board, are incapable of 

impartially considering a demand for the additional reason that each bears responsibility for 

reviewing the integrity of Zynex’s auditing, accounting, and reporting processes and 

consideration and approval of appropriate changes. Defendants Simonton and Vitale were also 

responsible for reviewing Zynex’s financial reports and other financial information provided to 

shareholders and filed with the SEC, in addition to reviewing Zynex’s internal controls. By 

virtue of their assigned duties and responsibilities, the Audit Committee defendants had a special 

relationship with the Company. The Audit Committee Charter, in effect since October 6, 2008, 

specifically provides that the committee’s “primary responsibility...is to oversee the Company’s 

financial reporting processes on behalf of the Board and report the results of its activities to the 

Board.” The charter further provides that the “Committee, in carrying out its oversight 

responsibilities, will assess the Company’s systems of internal accounting and financial controls, 

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any internal audit process...and the overall integrity of the Company’s financial statements and 

information systems.” Further, the Audit Committee was “empowered to investigate any matter 

brought to its attention with full access to all books, records, facilities, and personnel of the 

Company.” Among the “principal recurring processes of the Committee” was the duty to 

“[r]eview with management and the independent auditor the interim financial statements to be 

included in the Company’s Quarterly Report on Form 10-Q.” Also included in the “principal 

recurring processes of the Committee” was the duty to “[d]iscuss with management...the quality 

and adequacy of the Company’s internal controls...” As demonstrated by the Company’s 

disclosures in April 2009, the Audit Committee members failed to live up to these 

responsibilities, and face a substantial likelihood of liability as a result.

68. Among the additional facts demonstrating the futility of demand are the 

following:

(a) in order to bring this action for breaches of fiduciary duty, the members 

of Zynex’s board of directors would have to sue themselves, and/or their 

fellow directors and allies in the top ranks of the Company. Annually, 

directors are paid considerable compensation for their service on the 

board of directors. By way of example, for fiscal year 2010, Simonton 

and Vitale received cash and stock compensation of $57,665 and 

$42,165, respectively. Sandgaard derives his livelihood from Zynex, 

which he would never jeopardize by investigating and pursuing claims of 

misconduct. Given the financial interests in their positions, these 

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defendants would never jeopardize these amounts by pursuing the 

Company’s claims; and

(b) the acts complained of herein constitute violations of fiduciary duties 

owed to Zynex and its shareholders as well as violations of law and, 

therefore, are incapable of ratification. Because the director defendants’ 

actions were illegal and non-ratifiable, demand is excused as a matter of 

law.

COUNT I – BREACH OF FIDUCIARY DUTY AGAINST 

69. Plaintiff incorporates by reference the allegations set forth in the preceding 

paragraphs.

ALL INDIVIDUAL DEFENDANTS

70. Each of the Individual Defendants was a director and/or officer of Zynex during 

the Relevant Period, and as such owed to Zynex fiduciary obligations. In violation of these 

fiduciary duties of good faith, candor, and loyalty, the Individual Defendants failed to disclose, 

or caused the Company to fail to disclose, material information and/or made material 

misstatements to Zynex’s shareholders regarding the Company’s business, financial condition, 

and revenue recognition. These Individual Defendants knew that the statements about Zynex’s

business, its financial condition, and revenue were false and misleading when made. The 

preparation and dissemination of inaccurate press releases alleged herein represents a failure by 

the Individual Defendants to assure the existence within Zynex of appropriate and adequate 

internal financial controls and a reasonable information and reporting system necessary to assure 

Case 1:11-cv-01964-RBJ-KLM Document 1 Filed 07/28/11 USDC Colorado Page 37 of 41
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the accuracy of the Company’s financial reporting. Further, when put on notice that various 

insurers demanded rebates and credits amounting to millions of dollars as a result of Zynex’s 

improper billing practices, the Individual Defendants had a fiduciary duty to promptly take 

appropriate action to correct the misconduct and prevent its recurrence. 

71. Defendants willfully ignored obvious and pervasive problems with Zynex’s 

internal controls alleged herein, and by deliberate and knowing indifference failed to make a 

good faith effort to correct the problems until it was far too late.

72. Defendants violated their fiduciary duties of care, loyalty, and good faith by 

causing or allowing the Company to disseminate to Zynex shareholders materially inaccurate 

information through, inter alia, SEC filings and other public statements and disclosures. These 

actions could not have been a good faith exercise of prudent business judgment.

73. Defendants violated and breached their fiduciary duties of care, loyalty, 

reasonable inquiry, oversight, good faith, and supervision. By virtue of their conduct alleged 

herein, the Individual Defendants engaged in intentional misconduct, fraud, and knowing 

violations of law.

74. As a direct and proximate result of defendants’ failure to perform their fiduciary 

obligations, Zynex has sustained significant damages, not only monetarily as alleged herein, but 

also to its corporate reputation and goodwill.

75. As a result of the misconduct alleged herein, defendants are liable to Zynex.

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76. Plaintiff incorporates by reference the allegations set forth above.

COUNT II – CONTRIBUTION AND INDEMNIFICATION AGAINST ALL 

INDIVIDUAL DEFENDANTS

77. Zynex is alleged to be liable to private persons, entities, and/or classes by virtue 

of the same facts or circumstances as are alleged herein to give rise to the Individual Defendants’ 

liability to Zynex.

78. Zynex’s alleged liability on account of the wrongful acts and practices and related 

misconduct described above arises, in whole or in part, from the knowing, reckless, disloyal, 

and/or bad faith acts or omissions of the Individual Defendants.

79. Zynex is entitled to contribution and indemnification from each of the Individual 

Defendants in connection with all such claims that have been, are, or may in the future be 

asserted against Zynex by virtue of the Individual Defendants’ wrongdoing.

WHEREFORE, plaintiff, on behalf of Zynex, demands judgment against defendants and 

each of them jointly and severally as follows:

PRAYER FOR RELIEF

A. determining that this suit is a proper derivative action and certifying plaintiff as an 

appropriate representative of Zynex for said action;

B. declaring that each of the Individual Defendants breached his or her fiduciary 

duty to Zynex;

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C. determining and awarding Zynex the damages it sustained as a result of the 

violations set forth above and restitution from the Individual Defendants, and each of them, and 

ordering disgorgement of all profits, benefits, and other compensation obtained by the Individual 

Defendants;

D. granting extraordinary equitable and/or injunctive relief as permitted by law, 

equity, and state statutory provisions sued hereunder;

E. determining and awarding Zynex the damages sustained by it as a result of the 

Individual Defendants’ breaches of fiduciary duties, as set forth above, from each of the 

Individual Defendants, jointly and severally, together with interest thereon;

F. directing Zynex to take all necessary actions to reform and improve its corporate 

governance and internal procedures to comply with applicable laws and to protect the Company 

and its shareholders from a repeat of the damaging events described herein;

G. awarding plaintiff the costs and disbursements of this action, including reasonable 

fees and costs to plaintiff’s attorneys, accountants, and experts; and

H. granting such other and further relief as the Court may deem just and proper.

Plaintiff demands a trial by jury of all issues so triable.

JURY TRIAL DEMANDED

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Dated: July 28, 2011 CHARLES LILLEY & ASSOCIATES, P.C.

s/ Charles W. Lilley_________________

Charles W. Lilley

730 17th Street, Suite 670

Denver, Colorado 80202

Telephone: (303) 293-9800

Facsimile: (303) 298-8975

Email: clilley@lilleylaw.com

Robert C. Schubert

Willem F. Jonckheer

Dustin L. Schubert

SCHUBERT JONCKHEER & KOLBE LLP

3 Embarcadero Center, Suite 1650

San Francisco, California 94111

Telephone: (415) 788-4220

Facsimile: (415) 788-0161

Email: rschubert@schubertlawfirm.com

Email: wjonckheer@schubertlawfirm.com

Email: dschubert@schubertlawfirm.com

Laurence Rosen

Phillip Kim

THE ROSEN LAW FIRM, P.A.

275 Madison Avenue, 34th Floor

New York, New York 10016

Telephone: (212) 686-1060

Facsimile: (212) 202-3827

Email: lrosen@rosenlegal.com

Email: pkim@rosenlegal.com

Attorneys for Plaintiff

PLAINTIFF:

Stephen T. Hatch

3814 45th Ave NE

Tacoma, WA, 98422

Case 1:11-cv-01964-RBJ-KLM Document 1 Filed 07/28/11 USDC Colorado Page 41 of 41