Ekso Bionics Holdings, Inc. (EKSO) Q3 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Ekso Bionics Third Quarter Company Update Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Tagatac, Director of the Investor Relations for Ekso Bionics. Thank you, Mr. Tagatac, you may begin.

Thank you, Linda. Welcome, everyone, and thank you for joining Ekso Bionics Third Quarter Conference Call. On the call with me today are Nathan Harding, Chief Executive Officer and Co-Founder; Tom Looby, President and Chief Commercial officer; as well as Max Scheder-Bieschin, our Chief Financial Officer. Before we begin the call, I would like to remind you that today's discussion contains forward-looking statements. Actual results or outcomes could differ materially from management's expectations and plans. Please review our most recent annual report on Form 10-K with the SEC and other SEC filings for a description of important risks and factors that could cause results or outcomes to differ materially from management's expectations and plans. The company undertakes no obligation to publicly update or revise any forward-looking statements. With that, I want to thank you again for participating on our call today, and I'll turn the call over to Nathan.

Hi, everyone. Thanks for joining the call, and thank you, Chris, for the introduction. I'm excited to report today on our third quarter results. From a revenue perspective, it was the best quarter in the company's history with total revenue of $2.9 million, up 38% from last quarter. In terms of utilization of our Eksos in the field, we've now recorded over 33 million steps being taken. That's up over 160% from the 12.5 million steps we have recorded the same time last year. This third quarter also tied for the best unit sales in the United States. We shipped a net 12 new units for the quarter. This excludes 3 units previously rented in 2014 that converted to a sale in the past quarter. It's great to see satisfied customers exercising their option to purchase. We've now sold and rented a net 156 Ekso units to over 100 customers. We now have 17 multi-unit customers. Kessler Rehabilitation, the #1 rehabilitation center on the East Coast, has recently ordered their fifth Ekso device. We're particularly proud of this metric as it speaks to the value proposition of our devices and the long-term belief by Kessler and other high-utilization customers that exoskeleton does a future rehabilitation. We also built our 200th medical production unit in September. This total includes the units in the field being used for demonstrations as loaners are temporary provided for research. Our Ekso Labs division in the exoskeleton incubator doubled revenue year-to-date in 2015 over the same 9-month period in 2014. Labs has now filed 45 U.S. patent applications and a further 116 patent applications outside the U.S. The combination of our TALOS program with Special Operations Command and our DARKER [ph] programs continue to help us drive exoskeleton innovation. I hope you saw the recent announcement by the Department of Defense that they plan on debuting the Tactical Light Operator Suit, or TALOS, in 2018. This suit is being designed to increase strength, safety and mobility. It's arguably one of the most technologically advanced pieces of military equipment ever conceived. Not only are we proud to be part of these types of programs, but these programs supplement our R&D investments, contribute to the growth of the patent portfolio and advance our exoskeleton's capabilities across the board. Last quarter, my Co-Founder, Russ Angold, shared the traction we have gained amongst potential major industrial customers in the U.S. and Europe with our Ekso Works product. We're in the final stages of beta field testing, and we'll be taking what we've learned and putting it into a production-quality product ready for the marketplace in 2016. A strong partnership or two will allow us to scale this business much more quickly than we could on our own. I want to talk about one other area where we spent a great deal of focus this quarter. We went public almost 2 years ago, and we spoke about the need to attract talented people to fill key roles within our business. Ekso Bionics is an exciting company with great opportunities and unique challenges, which makes us an attractive place to work. I'm happy to report that we've added to our bench strength by recruiting a few key individuals. We recently appointed Rudi Hausherr to help us continue to build our Europe, Middle East and Africa business. Rudi built his own business and was a long-time executive of what is now known as DJO Global, a prominent manufacturer of orthotic and rehabilitation products owned by Blackstone. Another area where we've added to our bench strength this quarter is in operations. Russ DeLonzor was recently President and Chief Operating Officer of Halt Medical and was also previously at Covidien. Russ will run and integrate our medical product development, our manufacturing and material procurement efforts. With that, I'll hand the call over to Tom Looby, our President and Chief Commercial Officer. Tom joined us from Given Imaging last year and has been the force behind refining our medical device business plans and developing the strategy to drive the Ekso GT to standard of care, both in the clinic and ultimately in the home.

Thanks, Nate. It's a great opportunity to share some of the progress we are making in our medical device business. I'd like to begin by stating our objective in this market. Ekso Bionics is committed to providing elegant, safe, effective and cost-effective devices to medical professionals who help patients rehabilitate from stroke and spinal cord injury. Our mission is to make these solutions standard of care within the rehabilitation clinic. In the future, we also foresee our devices and widespread use in settings outside of the clinic. As many of you know, we've been at this mission for a while. In the U.S., we started off marketing our product in 2012, a successful and medical device. Last October, the FDA established a new Class 2 classification for powered exoskeletons, and we immediately began working with the agency to comply with this new standard. As previously reported, we submitted a 510(k) application at the end of last year and have been working closely with the agency to address their questions. In the interim, we have continued to market the Ekso in the U.S. under the current Class I registration. In situations where the FDA has elevated the Class I products, manufacturers like ourselves are often granted an enforcement discretion, which allows companies to remain on the market and given time to seek clearance at this new class levels. Throughout the year, we have responded and will continue to respond to questions and comments from the FDA regarding our submission. Our device is designed for a very specific reason. We wanted to provide healthcare professionals with a reliable tool to cover a range of patients for both stroke and spinal cord injury. And we have spent a lot of time thinking about how to rapidly adjust the device between patients, how to support patients with a range of spinal cord injuries, how to assist patients with hemiplegia due to stroke, how to help physical therapists get patients into correct positioning and most importantly, how to do all of this very safely. As such, we had needed to work closely with our reviewers at the FDA to understand both how we fit within the new classification and how our data supports our proposed IFU or indications for use. We have been very encouraged by our work with the FDA, and the agencies review team has been extremely helpful. While there are no guarantees, we remain confident that we will receive 510(k) clearance for our Ekso, but it is the FDA that will provide the final determination and clearance. In the meantime, we continue to operate under the FDA's enforcement discretion. The regulatory clearance is only one part of our plan to drive adoption and build a sustainable medical device business. We are also focused on working with key opinion leaders to understand our needs for exoskeleton even better, tackling reimbursement and supporting favorable healthcare economics. A key part of our plan to drive adoption is the collection of data to confirm and build upon the preliminary outcomes we and our customers have been reporting. Meaningful outcomes are what lead to accelerated adoption and to obtaining reimbursement. There are important findings from studies on rehabilitation robotics that include the following. First, weight-bearing activities, including standing and walking, have been proven to mitigate some common secondary complications and also have psychological benefits; second, early mobilization after stroke has been demonstrated to improve outcomes; and third, stroke patients benefit from rehabilitation included -- including repetitive and high-dose practice that is task-specific like walking on the ground. With this evidence as a foundation, our research partners have initiated their own studies with Ekso Bionics' rehabilitation product -- products and have presented their own relevant outcomes. This early data is important and impactful for 3 reasons. First, given the early promising outcomes and pilot studies, most of the researchers have now expanded the scope of these trials. On ClinicalTrials.gov, you can see 8 studies underway with anticipated enrollments of close to 300 patients, and we also know many more studies underway that are not publicly listed by the investigators. Second, these results and our interaction with our research partners are guiding us to understand which large-scale studies we, as a company, will want to undertake and sponsor. And third and most importantly, all of this data supports and strengthens our value proposition for hospitals today and our reimbursement strategy for payers tomorrow. In sum, we are working hard to prove that getting more people up and walking sooner and more regularly has real benefits, both in terms of reducing rehabilitation and lifetime care costs and improving population health with increased mobility, function and quality of life. We are often asked about the home market. We at Ekso Bionics had a vision of future where individuals with or even without physical therapists or lay spotters can utilize these exciting technologies to safely walk around their homes or communities while receiving the health benefits we mentioned earlier. We believe this market will be quite large and that Ekso Bionics will deliver more value to users relative to other devices. We have active programs to learn from these individuals about their needs as well as the needs of their care providers. As you can imagine, home use and community emulation are applications that require a lot of know-how on how to navigate uneven terrain safely. With our experience in military applications with soldiers and within the rehabilitation clinic, we think that Ekso Bionics can apply our IP to innovate mobilization within the community and the home as well. We strongly believe that our path is the right one to build the best exoskeleton company for the rehab market today, to continue to build upon our brand promise of safety, reliability and innovation, and to use this foundation to extend into the home, we plan to develop this large and sustainable home market at Ekso Bionics. I hope these updates were helpful to all of you. With that, I'll hand the call over to Max, our CFO.

Thank you, Tom. Now to some financial highlights where, unless stated otherwise, we will focus during this call on our 9-month or year-to-date results with a comparison to the same period for 2014. Please see our accompanying earnings release with further details regarding quarterly and year-to-date comparison. Through the end of September, we recognized $6.7 million in revenues as compared to $3.8 million for the same 9-month period in 2014. For the third quarter alone, we recognized $2.9 million. As Nate pointed out, this is the best quarter in terms of revenue in the company's history. 9-month revenue for our medical device segment represented $3.1 million, up 56% from the same period last year. 9-month revenue for our engineering services grew to $3.6 million, a doubling of the $1.8 million we recognized for the first 9 months of 2014. In terms of units, we have now shipped a net 44 units year-to-date and 156 overall. Of these 156 units, 145 were sold and 11 are currently being rented. Our overall gross profit year-to-date is $1.4 million as compared to $1 million over the same period last year. Our gross profit for the hardware and software elements within our medical device segment has remained consistent quarter-over-quarter. Our gross margin for the service element within our medical device segment continues to be negative. Given the ongoing efforts in our after-sales service segment, we expect to see gross margins improving in 2016. Gross margins for engineering services remain consistent with year-to-date margins at slightly above 30%. This compares to 22% gross margin we reported for the same period 2014. Operating expenses through September of this year were $16.3 million as compared to $13 million for the same 9 months last year. Loss from operations for the first 3 quarters were $14.9 million as compared to $13.6 million for the same period last year. Turning to the balance sheet, we ended the quarter with $11.2 million in cash and no debt. Accounts receivable and inventory increased to $3.4 million as compared to $2.2 million at year end. Cash used in operating activities for the quarter again averaged $1.5 million per month, consistent with our target and our 2015 operating history. With that, I hand it back to Nate.

Thanks, Max, and thank you, Tom. Before we turn it over to Q&A, I want to add that we're planning on holding a second Annual Technology Demonstration Day in New York City in January. We will have a number of key opinion leaders present presenting their thoughts and experiences regarding exoskeletons for what we hope to be another extra session for investors and analysts to get to know us better. We'll devote medical and able body to exoskeleton experts present, and we'll hold demonstrations on some of our technology. Invitations will go out in early December. If you're interested in attending, please let Chris Tagatac and our colleagues at Trout Group know. With that, I'll end our prepared remarks. Linda, please open the call for questions.

[Operator Instructions] Our first question comes from Jeffrey Cohen with Ladenburg Thalman & Company.

So I think I'm a little off on my units. I had 147 at the end of Q2. So I may be 3 or 4 over. But you said for the quarter, it was 12 sold, and how many converted from rentals? 3?

That's correct. We shipped a net 12, but we did also have from last year, 3 units that we rented third quarter of last year that converted to a purchase. And we did not -- as you know, we don't include those in our numbers because we've already included them as being shipped once.

Okay. So the 156 minus 11 rentals would be 145 sold, which includes 44 year-to-date as you just said?

Okay.

Okay. So I just wanted to clarify that. Can you give us any color on the industrial segment and ongoing work or what we should anticipate as far as the beta testing or any partnerships or anything further on the units that you have out there now?

Yes. So the beta testing has been going very well. We've been doing beta testing at sites in the U.S. and in Europe. We've actually been able to revise the products and go back to some of the same sites and get some feedback again, which has been extremely helpful. So there's a lot of excitement on the customer side. We still believe that we'll be talking to you soon about a partnership on the industrial side, and we still believe we can have some orders for the industrial business within 2015.

Okay. Super. And could you talk about next the engineering service business? It's up dramatically for the year and for the quarter. Are you still comfortable with $4 million, $4.5 million for 2015? And what might that look like for 2016?

Yes. I think we've already said that we're going to hit $4 million in 2015. 2016, we still try to avoid giving guidance in any of our areas. However, I mean, we're looking very, I would say, very optimistic on the Ekso Labs side right now and especially, with the recent announcement by SOCOM that they intend to demonstrate TALOS by 2018. That has to mean good things for us since we're honored to be the only real exoskeleton provider in the program.

Okay. But do you have pretty good clarity into how the workflow might be fairly far in advance?

Yes.

Okay, okay. Got it. So a couple more questions. Margins on the medical devices. So they were net-net 0, and I guess the -- what Max was talking about was the service portion was negative. Could you give me -- us a little more color on to the what would the gross profit have been exiting out the service for the quarter on the devices? And then could you talk about the service component, and what may change about that over the next few quarters?

Yes. On the hardware-software side, our margins have been very consistent. That's coupled with the fact that our ASPs have remained solid. Our ASPs are north of $100,000 for direct sales, so less, of course, with our distributors. And then the ASPs of $100,000-plus don't include the service element that we also charge about $8,000 to $10,000 a year. So that's one of the reasons our gross margins for hardware-software are in the 45% range, call it. The service element, with any new technology, we have constant desire to upgrade and put in the latest technology into the device, make sure their customers are having a great experience with them. We're very proactive with that. We got a lot of input from our customers and appreciate that. And it's -- I think you know our decision to bend over backwards and spend the time and the money to make sure that these products are up and working properly.

Okay. So you're overservicing and undercharging?

Well, we certainly expect to -- one of the nice things is we have good visibility on the development of our service efforts and service costs of what we need to do. So I think we feel we can control that element should we want it to. And again, we're early market. I think we're static that we misplan the utilization, these units we're having in the field. That's really sort of hit an inflection point for us, and they take a lot of steps. They need some extra service that we didn't anticipate, and we're fine with that.

Okay. Got it. Can you give us any color on any developments on any new project software-wise or device-wise, or give us any color on personal mobility unit?

Yes, sure. Thanks, Jeffrey, this is Tom. We have some things in development right now for the rehab clinic. We're not prepared to talk about when we're going to launch those, but they are, let's say, not so far in the future. There are some technologies that I think that the rehabilitation clinic have been asking for, such as an FES, and so you'll see that coming out in some products that we've got. Of course, releasing them in Europe and in the United States will take two different paths because of the regulatory part of the program. And as far as the home business is concerned, we're doing a lot of work on that. Obviously, we scanned the marketplace to see what is out there in terms of incumbent modality being used in this market, working and doing some work with people who use these devices in the home and the community to understand their needs. And we have, as I said before, active programs to do that. But right now, we're not talking about when we're going to launch those home unit products.

Okay. And two more questions, if I may. Could you tell us, for the quarter, what was the composition of U.S. and outside U.S. placements for sales for units?

Jeff, can you repeat that question, please?

The 12 units sold in the third quarter...

Yes. The significant majority of those were in the U.S., and that's what led to the U.S. being such a great quarter.

Got it. And then lastly, could you just kind of give us some additional color on your regulatory update? So you have a -- the FDA responded in early September looking for more information. And are you planning on submitting that information within 180 days? Or are you planning on scheduling a meeting? It says that you intend to request a submission issue meeting with the FDA. And if so, when might that be held? And is that public? And will the outcome of that be public?

Well, actually, it's -- so thanks, Jeffrey, this is Tom again. We have been working sort of like on a weekly basis having phone calls with the FDA very collaboratively. And one thing I'd like to say is, and I mentioned it in my comments earlier, we have to fit within this new classification, and there's a predicate. And we do some of the same things as a predicate, thus, we can use them as a predicate. And there's some things that we're working with the agency for them to understand that we do differently, how we deal with spinal cord-injured patients and I think more importantly, also how we deal with stroke patients and having them get comfortable with the data that we can demonstrate for both of those patient populations. So this has just taken some time to do. We are very imminently going to request formally this meeting, which is a closed meeting with the agency. And they have about 21 days to comply with getting that meeting scheduled. We will review data with them. Some of it they've seen before. Some of it is new. They understand that there's new data that's going to be presented, and I look forward to having this meeting. I think it's going to be very good. We'll have maybe better clarity after that meeting.

Okay. And lastly, as far as the meeting goes, there is certainly one other company that I'm aware of that's going through the same process with the FDA without the ability to sell now. Are they going through the same process with you? Or would that be considered separate?

No. They are undertaking their own process. And they have to, right? Because not all these devices are created equally, so they have their own indications for use, I'm sure, that they proposed. Because we're all trying to do the same thing, which is to help patients get better faster and help the healthcare economy afford all these things, and so we're all sort of aware of each other's efforts and congratulate each other on the progress that we're all making. So as such, I'm kind of familiar with who you're speaking about and the efforts that they're undertaking. And again, I -- we distinguish our IFU from theirs, and that we're trying to accomplish different things. And our focus is primarily on the rehab clinic and the work that we can do with patients there today. And as I mentioned before, once we really strengthened that foundation, moving these technologies in the home when they become more capable and more cost effective, but they are separate submissions.

Jeff, just one clarification, you've mentioned a couple of times, 12 units sold. I want to just make clear, you follow our wordings next shipments. We actually sold more because some of them were converted from a rental to a sale. They were just already in the field.

Our next question is from Greg Chodaczek with CRT Capital.

I think Jeff stole about 13 of my questions here, so I'll ask a few more.

He asked a lot of questions, but thank you for being patient.

No, no, no. They were excellent questions. Of the net 12 units shipped, were they all sold? Or were there some rentals in there, Max?

They were all sold.

Okay. And the units are still -- the revenue is still recognized over a 3-year period?

That is correct.

Okay. Tom, you were talking about reimbursement. Are there any type of reimbursement issues right now for the Ekso? Or is there additional reimbursement on top of what's out there?

Right. That's an excellent question. We obviously have, as Nate mentioned in his comments, a lot of repeat users, which we think is underscoring the fact that people will put the idea of these things in motion. They test them out, and then they buy other units on top of that. Some of them have 2. Some of them have 3. And we have now a clinic that's got 5. They wouldn't do this if it weren't effective and cost-effective. But today, it is covered by reimbursement that already exists. And what we want to do is to make sure that the future of robotic exoskeletons are appreciated. There are going to be investments necessarily to keep the technologies fresh and doing more things for patients and more things for physical therapists. So what we're going to do, and I think maybe some of our colleagues within the market are trying to do, is to show the value of these devices. And so we have to show that they're effective and also show how healthcare economies can save money, and that's why we're pursuing reimbursements is to do that.

Okay. And in terms of the FDA, what are you using as a predicate device?

So the predicate device is the ReWalk application. They went in de novo route and achieved their decision in 2014. At that time, it was not entirely clear if the classifications fit us because ReWalk, again, covered some ground that we don't intend to cover and we cover other ground. But we met with the agency last year and determined that we will fit within that classification, but what we wanted to do is to clarify these differences with them. But it is the ReWalk application, yes.

And I will -- I'll get off my soap box and say that's your problem -- oh, never mind. I won't get into bashing ReWalk at all. In terms of Kessler, what do they know that other rehab centers don't know? They have 5 now. And if you talk to them, the reason they have 5, it's generating revenue. What -- how do you get those other rehab centers look at Kessler and say, "If they have 5, you should have at least 1"? How do you make that sale?

I think it's twofold. So first, institutions like Kessler may be a bit advantaged in that they are highly regarded. They have scientific budgets, and they lead the way for other clinics to understand how these things can be used. But that's the research angle. I think that, that can explain why they may be increasing their units to some degree. But they will also won't do it and put it into practice with their everyday patients if they don't see that it's also effective and cost-effective. So that's Kessler, but we also have other institutions maybe without such a highly visible name that are also buying other units, and these are not for scientific purposes. These are really for day to day, helping patients get better and get better faster.

Right. And I'm assuming one to now in time [ph] if I hit that right.

One to now in time, but yes.

Yes. Good Shepherd has 3 units, and they keep buying them because they keep filling the schedule, and they keep thinking it gets them a lot of incremental revenue.

Right. And in terms of industrial, Nate, you -- correct me if I'm wrong, but you said, by the end of this year, we may hear something about a partner and there may be some orders out there for that partner. Did I hear that correctly?

Yes, that's correct.

Okay. So it sounds like you're getting very close. We're already in November here.

That's correct.

There are no further questions at this time. I would now like to turn the floor over to Nathan Harding for closing comments.

Thank you to everyone on the call for participating today. I have the pleasure of leading a group of incredibly talented individuals in the field of sales and marketing, physical therapy, manufacturing and of course, robotics. We're an exoskeleton company with multiple products to help millions of people. We can help our men and women in the military stay safer. We can help those who suffered a stroke or spinal cord injury stay healthier, and we'll release our Ekso Works Industrial product into the market in 2016 to help workers stay productive. Ekso Works will help those who work daily with heavy handheld tools by making those tools weightless. This will allow employers to hire and retain highly skilled workers who wish to remain active longer, and it will lower the risks and costs associated with workplace injuries. Again, we'd like to thank you for taking the time to join the call, and please have a great evening.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.