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    zynexcorrespondence_82409.htm

      August
24, 2009

      Mr. Kevin
L. Vaughn

      Accounting
Branch Chief

      Division
of Corporation Finance

      U.S.
Securities and Exchange Commission

      100 F
Street, N.E.

      Washington,
DC  20549

      Re:        Zynex,
Inc.

      Form 10-K for Year Ended December 31,
2008

      Filed April 15, 2009

      File No. 033-26787-D

      Dear Mr.
Vaughn:

      This
letter responds to the comments of the staff of the Securities and Exchange
Commission in its letter dated July 15, 2009 with respect to the Form 10-K
Report listed above.  The text of the staff’s comments is set forth
below in bold followed in each case by the response.

      Form 10-K as of December 31,
2008

      Item 9A(T). Controls and
Procedures, page 44

      Management’s Report on
Internal Control Over Financial Reporting, page 44

                1.

                You
      state that management concluded that the Company has a material weakness
      in its ability to produce financial statements free from material
      misstatements.  Please tell us and revise future filings as
      necessary to discuss how you have compensated for the material weakness in
      order to ensure that the financial statements presented here in the Form
      10-K are free from material misstatement, including whether or not you
      applied alternative procedures.

      Mr. Kevin
L. Vaughn

      August
24, 2009

      Page
2

      Response:

      The
material weakness that management identified and disclosed in the Company’s Form
10-K was determined to exist at December 31, 2008.  In order to
compensate for the material weakness and to ensure that the Company’s December
31, 2008 consolidated financial statements were free from material misstatement,
the Company performed alternative procedures during the course of preparing the
December 31, 2008 consolidated financial statements.  These
alternative procedures performed by management included: 1) a detailed manual
review of the aging of accounts receivables, 2) the write-off of all accounts
over 270 days old, 3) establishment of additional methodologies to better
estimate the allowances for provider discounts (as more fully described in our
response to Staff’s comment number 9), and 4) a line-by-line review of all
purchased inventory items to correct, where needed, to current year costs of
items purchased and items which were manufactured.

      Management
expects that the material weakness will be corrected by December 31, 2009.
Alternative procedure #3, referenced above, has become one of the procedures
that will be used in the preparation of future financial
statements.

                2.

                We
      note that you have identified a material weakness in your ability to
      produce financial statements free from material
      misstatements.  Further, you state that this material weakness
      is the result of the combination of the specified significant
      deficiencies.  However, it is not clear from your disclosures
      here what specific control deficiency or deficiencies you have
      identified.  Instead, it appears you have simply outlined the
      items that resulted in adjustment to the financial
      statements.  Please tell us and revise future filings to explain
      in greater detail the underlying deficiency or deficiencies in your
      internal control over financial reporting.  In this regard,
      expand on the specific material weakness that you have identified to
      explain what underlying control deficiency or deficiencies limits your
      ability to produce financial statements free from material
      misstatements.

      Mr. Kevin
L. Vaughn

      August
24, 2009

      Page
3

      Response:

      The
Company will revise future filings to include disclosures substantially as
follows. Changes will be made based upon subsequent facts.

      Based on
an evaluation as of December 31, 2008, management had concluded that the
Company’s internal control over financial reporting was not effective as of
December 31, 2008. Our principal Chief Executive Officer and Chief Financial
Officer concluded that the Company had a material weakness in its ability to
produce financial statements free from material misstatements. Management
reported a material weakness resulting from the combination of the following
significant deficiencies:

                ·

                The
      Company did not have effective controls to ensure timely write-off of
      uncollectible accounts receivable, resulting in an overstatement of our
      accounts receivable and net revenue. The controls that were not considered
      effective included a performance issue with the Company’s billing system
      which prevented timely determination of accounts to be written-off and
      lack of procedures to write-off uncollectible accounts receivable based
      upon their aging.

                ·

                The
      Company was utilizing a method for calculating the allowance for provider
      discounts and uncollectibility that was dependent on annual calculations
      and annual historical results which was not reactive to rapid changes
      during the year. Further, this methodology was dependent upon write-offs
      which were not done timely.

                ·

                The
      Company did not have an adequate process in place to update the inventory
      costing to reflect the pricing differences between purchased items and
      items manufactured by the Company

      In order
to remediate the material weaknesses described above, our management implemented
the following changes to the Company’s internal control over financial reporting
during the first quarter of 2009:

                ·

                The
      Company has made enhancements to the performance of our billing system to
      allow accounts to be analyzed timely, allowing write-offs to be made
      timely:

                ·

                The
      Company has implemented procedures to write-off accounts receivable which
      are deemed uncollectible based upon their
aging;

                ·

                The
      Company has developed a new model for analyzing the collectability of the
      Company’s accounts receivable that is updated on a timely basis throughout
      the year. The simultaneous use of the old model and timely write-offs of
      uncollectible accounts receivable serves as a comparative tool to validate
      annual trends;

      Mr. Kevin
L. Vaughn

      August
24, 2009

      Page
4

                ·

                Management
      has updated the Company’s inventory costing to reflect the pricing of
      purchased items and items manufactured by the
  Company.

      Consolidated Financial
Statements, page F-1

      Consolidated Statement of
Cash Flows, page F-4

                3.

                We
      note that you recorded a “provision for losses on accounts receivable
      (uncollectibility)” of $393,000 during 2008 and zero during
      2007.  Please explain to us the nature of this charge and
      discuss why there was no similar provision during
  2007.

      Response:

      In a
letter dated July 1, 2008, the Staff requested the Company break the “provision
for losses on accounts receivable (uncollectibility)” separately from the
“provision for provider discounts”. When preparing the 2008 comparative
consolidated financial statements for the year ended December 31, 2008, the
Company utilized the 2007 Statement of Cash Flows as originally filed and
inadvertently did not break out the 2007 provision amount separately into these
two components. There was no effect on the total of the two provisions. The
Company believes there is not a material impact to readers of the financial
statements as there is no impact on the “net cash provided by operating
activities” in the Statement of Cash Flows and that a reader of the financial
statements would not have formed a different opinion had the amount been
presented separately. The properly classified amounts for 2007 were $4,462,724
for the provision for provider discounts and $339,000 for the provision for
uncollectibility. The Company intends to break out the components described
above in future filings for all periods presented.

      Note (2) Significant
Accounting Policies, page F-7

      Revenue Recognition and
Allowances for Provider Discounts and Uncollectibility, page
F-7

                4.

                We
      note that you recognize revenue from distributors when you ship your
      products.  Please revise this note in future filings to discuss
      in greater detail your revenue recognition policy with respect to sales to
      distributors.  Disclose any significant payment terms, return
      rights, exchange provisions, price protection, discounts, sales incentives
      and any other significant matters.  Refer to SAB 104 and SFAS 48
      as appropriate.

      Mr. Kevin
L. Vaughn

      August
24, 2009

      Page
5

      Response:

      Sales to
distributors have historically been a small percentage of the Company’s total
revenue (approximately $50,000, 0.4% in 2008 and approximately $25,000, 0.3% in
2007). There are no significant payment terms, return rights, exchange
provisions, price protection, discounts, sales incentives or any other
significant matters with regard to these transactions. The Company will comply
with the Staff’s comment by revising the description of our accounting policy
for recognizing revenue from distributors in future filings as
follows:  The Company recognizes revenue from distributors when it
ships its products fulfilling an order and title has transferred.

                5.

                As
      a related matter, please clarify why it is appropriate to recognize
      revenue from distributors upon
shipment.

      Response:

      The
Company recognizes revenue upon shipment to distributors and transfer of title,
because the Company believes the four requirements for recognizing revenue have
been met. Specifically, evidence of an arrangement exists in the form of the
order from the distributor, delivery exists because the products have been
shipped to the distributor and title has transferred, there is a fixed sales
price based on the order from the distributor and, collectability is reasonably
assured based on the Company’s collection history with the distributors and the
assessed credit worthiness of the distributors with which the Company does
business. Sales to distributors were less than 0.5% of the Company’s total
revenue in 2008.

                6.

                With
      reference to your disclosures on pages 22, 44 and F-6 with respect to the
      collectability of outstanding accounts receivable, including your ability
      to estimate the allowances for provider discounts, please tell us why you
      believe it is appropriate to recognize revenue when the product has been
      dispensed to the patient and the patient’s insurance has been
      verified.  Specifically, explain why you believe the sales price
      is fixed and determinable and that collectability is reasonably assured at
      this point in time.  Refer to SAB Topic
  13.

      Mr. Kevin
L. Vaughn

      August
24, 2009

      Page
6

      Response:

      SAB Topic
13 states that revenue generally is realized or realizable and earned when all
of the following are met:

                ·

                Persuasive
      evidence of an arrangement exists,

                ·

                Delivery
      has occurred or services have been
rendered,

                ·

                The
      seller’s price to the buyer is fixed or determinable,
      and

                ·

                Collection
      is reasonably assured.

      The
Company believes that at the time the product has been dispensed to the patient
and patient’s insurance has been verified all SAB Topic 13 requirements have
been satisfied. At this point:

                ·

                Evidence
      of an arrangement exists in the form of an order and
      acceptance;

                ·

                There
      is no contingent service or action required by the Company and delivery
      has occurred;

                ·

                The
      Company believes that the price is determinable. The Company’s sales price
      is subject to contractual adjustment; however, this adjustment can be
      estimated and determined based on contractual arrangements with insurance
      companies or other third party payors and/or can be estimated based on
      historical adjustments made by such third party payors (as described in
      greater detail below).

                ·

                Collectability
      is considered reasonably assured based on contractual arrangements,
      historical rates of collection, trends in the historical rates of
      collection and current relationships and experience with insurance
      companies or other third party
payors.

      Provider
discounts result from reimbursements from insurance providers that are less than
amounts claimed, where the amount claimed by the Company exceeds the insurance
provider's usual, customary and reasonable reimbursement rate, amounts subject
to insureds’ deductibles, and when there is a benefit denial.

      The
Company believes the use of an estimate of provider discounts applied against
the claims sent to the providers for goods and services performed during the
period is appropriate for the following reasons:

      Mr. Kevin
L. Vaughn

      August
24, 2009

      Page
7

                ·

                The
      estimate is made upon a large pool of homogeneous
  items.

                ·

                The
      estimate can be made on a timely
basis.

                ·

                There
      is sufficient historical information available within the Company to serve
      as a basis for making the estimate.

                ·

                There
      are no external factors such as product obsolescence which would impact
      the estimate.

            The Company
is following industry standards. The American Institute of Certified Public
Accountants published the following in their Audit and Accounting Guides for
Health Care Organizations.

        Revenue
from Health Care Services

            Excerpts
from paragraph 1.26. In general, gross service revenue is recorded in the
accounting records on an accrual basis at the provider's established rates,
regardless of whether the health care organization expects to collect that
amount. Provisions recognizing contractual adjustments and other adjustments are
recorded on an accrual basis and deducted from gross service revenue to
determine net service revenue. For financial reporting purposes, gross revenue
does not include charity care and service revenue is reported net of contractual
and other adjustments in the statement of operations.

        Third-Party Payor
Considerations

            Excerpts
from paragraph 1.28. Some third-party payors retrospectively determine final
amounts reimbursable for services rendered to their beneficiaries based on
allowable costs. These payors reimburse the health care organization on the
basis of interim payment rates until the retrospective determination of
allowable costs can be made. In most instances, the accumulation and allocation
of allowable costs and other factors result in final settlements different from
the interim payment rates. Final settlements are determined after the close of
the fiscal periods to which they apply and may affect materially the health care
organization's financial position and results of operations. Consequently, a
reasonable estimate of the amount receivable from or payable to these payors
should be made in the same period that the rel