Ekso Bionics Holdings, Inc. (EKSO) Q4 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Ekso Bionics' 2016 Fourth Quarter and Year-End Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Miss. Debbie Kaster. Thank you, Ms. Kaster, you may begin.

Thank you, Tim, and thank you all for participating in today’s call. Joining me from Ekso Bionics are Thomas Looby, President and Chief Executive Officer; and Max Scheder-Bieschin, Chief Financial Officer. Earlier today, Ekso Bionics released financial results for the quarter and year ended December 31, 2016. A copy of the press release is available on the Company’s website. Before we begin, I would like to remind you that management will make statements during this call that includes forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements including without limitation our examination of historical operating trends and our future financial expectations are based upon management’s current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. Ekso disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 7, 2016. I will now turn the call over to Thomas Looby. Tom.

Thank you, Debbie, and thanks everyone for dialing into our call this afternoon. We are pleased to report the results of one of our best years ever at Ekso Bionics. 2016 was a pivotal year for our Company during which Ekso Bionics initiated a transformation from a development stage organization to a commercial entity. Driven by the goals that our team set to ourselves we succeeded in achieving the followings. In April, we received FDA clearance allowing us to market our devices for patients with spinal cord injuries as well as for patients who have suffered a stroke. This gave us the widest label of any exoskeleton on the market in the U.S. Upon our clearance we kicked off our go-to-market efforts with the goal of first driving awareness that our device can help the hundreds and thousands of stroke suffers and then targeting the clinics with the greatest need. Recall that before 2016 no Company was allowed to market a Class 2 device for use to stroke patients. It is our single responsibility to do that now. During the second half of the year, we initiated and began enrollment in our first Company sponsored study the WISE study to help support the adoption of our technology as standard-of-care. In August, we concurrently finance the Company and uplifted our stock from the OTC to the Nasdaq Capital Market. Providing us with cash to commercialize our products as well as giving us access to a broader range of investors and increased liquidity. With our approval in hand, Ekso Bionics is now able to promote our products at medical conferences around the world participating in over 30 events in the U.S. and EMEA since our clearance. And our users have taken over 70 million steps on the way to better recoveries with this rehab tool. All of these accomplishments which have now set the groundwork for the growth we expect in 2017 and beyond culminated in the strong results in the fourth quarter of 2016. A few financial performance headlines, our medical device business had one of its best quarter ever with $1.8 million in sales, we are seeing particular strength in North America markets and I'm optimistic that the changes we have put in place in our EMEA organization in 2016 will set Europe on the path to catch up to North America during 2017. Our industrial business continues to gain traction with its fourth quarter of growth and now over 140 units in the field. We recognized the sale of 16 Ekso GT units including the conversion of two units from rentals, expanding the installed base to over 200 medical devices at over 160 customers. In January, we announced a long-term loan agreement for up to $10 million, which provides capital on attractive terms to help support our continued growth as a Company. With the transition from development staged, commercial entity, for me the next step is converting the large market opportunities into shareholder value driven by top-line growth as our products become standard within their industries. We are focused on proving that our business is sustainable by helping our customers cost effectively achieve great results in both the medical and industrial markets. Our strong value proposition and customer services will further strengthen our brand in this early market. During 2016 we made significant progress with our clinical program, which we believe will provide us with that data and experience we need to move towards standard-of-care. As mentioned earlier, in the fall we kicked of our first companies sponsored study, the WISE study, which stands for Walking Improvement for Spinal cord Injury with Exoskeleton. WISE is being lead by Burke Rehabilitation Institute and is evaluating improvement and independent gait speeds of incomplete spinal cord injury patients, undergoing rehabilitation with the Ekso GT. The U.S. based study is being conducted and at least eight centers and seeks to enroll approximately 160 communities dwelling people with chronic, incomplete spinal cord injury. Our WISE study is complemented by 46 ongoing and completed external studies, which together cover over 1000 patients and a U.S. based exoskeleton registry, in which we plan to participate. Thus far these studies have concluded some great findings for Ekso GT, first the Ekso GT is safe and feasible for use for gait training in stroke and spinal cord injury. Participants have demonstrated the possibility of walking longer distances without fatigue, while obtaining the physiological benefits and improved circulation. Training in Ekso GT has been shown to improve gait speed and parameters like endurance, balance, midline alignment and motor control during walking both inside the device, but also and may be even more importantly outside of the device. Training in Ekso GT may lessen affect of secondary complications and may improve lower extremity strength, body composition, bowel and bladder function and psychological well being. Our researchers continue to work with our team and their patients to further personalize rehabilitation with our Ekso GT as we drive towards standard-of-care. In addition to this growing body of clinical evidence, we continue to hear from customers regarding the compelling financial returns they are realizing from our products. As many of heard during our Investor Day in December, one of our customer shared how they have achieved an internal rate of return of over 50% from their Ekso devices. We are hearing this more-and-more as evidence by the fact that almost 30% of our customers are buying multiple units. To support our transition to full commercialization, our team spent significant time and energy building our operational infrastructure. As a reminder, before we received our FDA clearance in April, which impacted our ability to communicate through such avenues as industry conferences or even written and printed marketing materials. With FDA clearance in hand, our team is able to fully promote and market our Ekso GT to now hone in on the 16,000 hospitals that are best served by our products. As such, we have raised money to fund the next phase of growth for the Company and have appropriately added resources to our team to target these customers for awareness as well as product education and demos. The awareness campaign for Ekso is now incredibly wide spread through such outlets as industry conferences, media outreach, customer marketing campaigns and social media. We are excited about our newly initiated Centers of Excellence Peer-to-Peer program. Through this program existing high utilization customers, sign on to assist with clinical evidence generation, product development and to help educate new and potential customers on the benefits of using our devices. As additional validation many of our customers have released videos documenting their own use of our products and are actively promoting their experiences with the Ekso GT to the public. Consistent with broader healthcare industry trends we are really excited to be moving our technology platform in the direction of personalized care, and believe the Ekso brand will offer helpful tools for the global move to value based healthcare. We announced the first shipment of our Ekso GT with SmartAssist technology in Europe in September and launched this technology in the U.S. this past month. SmartAssist allows physical therapist to vary the support of the device for each leg independently from full power to free walking and thereby meet the specific needs of these patients. Already 26 devices or more than 160 customers have upgraded to this important software enhancement. We also recently announced the re-launch of our significantly upgraded EksoPulse to technology platform. EksoPulse allows physical therapist to not only capture patient progress during sessions but to safely store the therapeutic data in a cloud-based system to synchronize that data with cellular technology in order to track changes in patients performance and to then make real time adjustments to the care plans. Turning to the EksoWorks industrial business our business is really beginning to gain meaningful attraction with strategic customers. We shipped 58 industrial units in the fourth quarter of 2016 an increase of 29% from just the quarter before. In the second quarter launched the Ekso 0G product and also partnered with the major rental Company that gives us further access to the industrial and construction markets for product placement. EksoWorks 2 has turned a corner from a development into a viable commercial business and a strong contributor to the overall Ekso Bionics story. In order to support and promote the growth of EksoWorks we ramped up our investment into infrastructure that is dedicated to the industrial business. During the second half of 2016 in addition to focus R&D efforts refining our mounted RM systems and pre-commercialization of our soon to be launched best systems, we refine our positioning and execution with key customers including distributors picked up from our Equipois acquisitions and initiated a launch with the network of manufactures representatives to expand our rentals and sales distribution network. A very exciting milestone for us this January was our attendance at first industrial trade show the World of Concrete which was a sort of coming out parties for EksoWorks within the industry. The trade show as a huge success in the number of leads from the conference far surpassed our expectations. There are four main benefits of our products for the industrial workplace; increased productivity with less fatigue, improved safety, better quality of workmanship and the ability to attract a wider range of employees for these jobs. A case in point some of our customers are reporting a two to five times increasing productivity, improving the bottom line for these customers. I’m excited that our value proposition is taking hold among customers and users. And finally, in the fall of 2016, we started to realign our EMEA organization. In September, Matthias Stief, who I worked with at Given Imaging joined Ekso's management team to run our European operations. With the EMEA markets being as large as the U.S. market we needed to make sure we have the infrastructure in place to serve patients in EMEA as well. Under Matthias' leadership the Ekso GT was recently subject to a Medtech Innovation Briefing released by the National Institute for Health and Care Excellence known by its acronym NICE. The MIB highlights the innovative aspect of Ekso Bionics' proprietary SmartAssist software, which differentiates the Ekso GT from other available wearable exoskeletons. MIBs compliment existing NICE guidance by providing objective information on new and novel medical technologies and are used as an aid to local decision making by clinicians. We are honored to have been the subject of this MIB. During the first as the CEO of Ekso Bionics' I have been truly humbled by the team. All of the accomplishments outlined above continue to reinforce my confidence that we are building something great here and I'm excited to lead us into the future. At this time, I will hand the call to Max, our CFO to talk about our detailed financial results for the fourth quarter and the full-year 2016.

Thanks, Tom. Now to some financial highlights, please see our accompanying earnings release and 10-K for further details regarding the quarter and full-year 2016. Total reported revenue for Q4, 2016 was $2.6 million up from $1.9 million in Q4, 2015. The breakdown for Q4, 2016 revenues is as follows. Approximately $1.8 million in medical device and related revenue, this is up 56% over Q4, 2015. During the fourth quarter we again experienced strong second unit buyers. We continue to be excited to see this validation by early users of the value proposition of the Ekso GT. Approximately 600,000 in EksoWorks revenue up from nothing the same period a year ago, approximately 300,000 in EksoLabs down from 800,000 in Q4 of 2015. Remember at the beginning of 2016, we made the strategic decision to shift the focus of our labs’ engineering team to our industrial business a next generation home mobility device. Overall for the year, 2016 revenues were $14.2 million; please note that this includes $6.5 million of previously differed revenue recognized in Q1. Our overall gross profit for the quarter was 843,000 for gross margin of 32.6%, this compares to a gross loss of 10% in Q4 of 2015. The gross margin for our medical business in Q4 was 30.5%, a continued improvement over prior quarters as we scale among other areas our after sales service. Gross margin for industrial business in Q4 was 27.7% and for engineering services unit 58%. Note that the lateral reflects an annual royalty payment in Q4 from our strategic license with Ottobock. Operating expenses for the fourth quarter of 2016 were $7.5 million as compared to $6.5 million for the fourth quarter 2015. The increase was driven by the increased sales, clinical and marketing investments we are making since our April clearance, and the increased R&D investment, to support our industrial and next generation home mobility products. Net loss for the quarter was $5.6 million, as compared to a $4.6 million net loss in Q4. Net loss applicable to common shareholders for the year was $33.8 million, note that this includes a $10.3 million in non-cash preferred deemed dividend expense associated with our December 2015 financing. Given that all, the preferred shareholders have converted the preferred shares we do not foresee any further non-cash preferred deemed dividend expenses for 2017. Cash used in operating activities for the quarter was $4.4 million. As of December 31, 2016, we have cash balance of $16.8 million. Some additional notes of important for the fourth quarter for our rehab business we hit our target for demos, which is for us a key indicator for sales traction later this year and into 2018. In EksoWorks at year end we had reached over 140 units in the field, 40% of which were sold in the fourth quarter and the pipeline is strong with the leads from our first two trade shows this year. We saw continued improvement in our gross margins across the business with 2016 margins up 50% over 2015 gross margins. And we decreased inventory levels by close to 20% from 1.9 million at the end of September, as we gain better visibility into our pipeline for both EksoHealth and EksoWorks. We are more confident than ever that the market opportunity for our devices in rehabilitation is compelling and sizable. There are an estimated 16,000 centers in United States and 50,000 worldwide. Based on the execution of our marketing strategy, combined with the success with early customers, we are targeting a run rate of 30 Ekso GT units per quarter by year end 2017. This would be up from the 11 units we have recognized in Q2, 2016, before we had an FDA label. On the industrial side, we see a similarly compelling and sizable opportunity. Given our Q4 run rate and order in place, we are optimistic that we will at least double sales in 2017 from the 1.2 million we hit in 2016. While there will be changes quarter-over-quarter due to mix, we expect overall gross margins to remain stable for the year in 2017 that is in the 25% to 30% range we achieved over the last two quarters. Our ultimate goal as we get to standard-of-care is to achieve gross margins in north of 50%. Subject to our hitting our internal sales goals, we see our investment in sales and marketing increasing 20% in this current Q1 over Q4 2016 and then holding relatively flat for the rest of 2017. We expect R&D expenses to increase 10% in Q1 over Q4 with another increase in the second half as we get closer to some new products introductions. With that, I will turn the call back to Tom.

Thanks Max. As we have discussed in the past a broader theme to our strategy at Ekso is to be very deliberate moving into our markets. We are pleased with the results we are seeing thus far which confirm to us that our strategy is to right one. We believe that this approach will lead to great success across all of the businesses and markets at Ekso Bionics. Looking ahead to our future, we are making great progress on the development of our revolutionary home mobility platform, which leverages the exceptional safety, sophistication and efficacy of our flagship Ekso GT. The team is hitting their product development goals and is on-track for a go-to-market date for an novel home mobility product in Europe in 2018 and the U.S. in 2019. On the industrial side, we are building this business with the strategy similar to how we have approached the medical business by laying down the fundamental cornerstones in the thoughtful methodical way as we build the infrastructure around EksoWorks. We are continuously learning more about the market for these products uncovering many drivers of adoption as well as unmet customer needs that we hope to address. We are currently hard at work on our next product offering our EksoBest, a wearable exoskeleton help with overhead work. The first grade team here at Ekso Bionics is focused on accelerating market adoption of our products with the goal of ultimately establishing Ekso Bionics as standard-of-care. As we look back and review the year I’m pleased with what we have accomplished and I’m confident that we are set up to achieve our longer-term goals. Some of our strategic objectives for the upcoming year include the following; Drive market development globally for our medical devices through clinical evidence and a strong marketing program. Continue to move forward on the development of the home used product. Continue to collect data that supports the financial benefits of using our products and promote business development and the industrial segment. I’m incredibly energized by our business and excited for the year ahead. We are proving that we can execute and continually move our Company to the next level and we are more confident than ever that we have the best strategy and the right team to achieve our goals of being the premiere exoskeleton Company in the world. With that, I will end our prepared remarks and look forward to your questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Imron Zafar of Suntrust. Please proceed with your question.

Hi good afternoon. Thank you very much for taking my question I wanted to first ask a couple of questions on your outlook for 2017. Could you just sort of talk about how we should we think about the cadence I know you talked about the run rate at the end of the year, but just looking at your year backlog and the sales cycle you probably have some pretty good visibility on the next couple of quarters. If you could just sort of describe how you are thinking about the cadence for the year that would be helpful? Thanks.

Thanks, Imron. This is Max. So for the beginning of last year 2016 as we averaged between Q1 and Q3 and average the cash burn about 6.8 million a quarter and then for the fourth quarter last year we averaged about 4.4 million. I think going forward for the year that's very much how we will be managing our business in that bandwidth. I think from a gross margin standpoint, we expect to be holding the margins we have recognized or realized in the last two quarters. So between those two items, I think that’s how we will be managing our operating expenses as well.

Okay, why would the gross margin not trend higher as you increase your unit volumes over the course of the year?

Primarily because of the mix in 2016, we had unfortunately we had a fewer sales coming out of Europe, that’s why Tom made the shift he did. Typically it’s the 50%, 50% between Europe and United States and a lot of our sales in Europe are distributor sales, they have a lower ASP and so the ASP's that we have had sort of in the fourth quarter, we don’t expect those to remain the same, because we expect more business out of Europe and with that more distributor sales. So you are right we expect to improve on the service side of the business, we have gone from a very deep loss to less of a loss, enhance the improvement in the margins and that we expect to continue but with average sales price is dropping a little bit that’s why we sort of come out at the same levels, for at least the next couple of quarters.

Got you, in terms of the your sort of the comparative landscape and sort of customer interest, has there any change in the comparative landscape in terms of rehab center, purchases and also have you noticed any near-term change in patterns just in light of the uncertainty around the ACA and what administration might be with healthcare.

First and for most competitively we don’t see many changes, we are still the only one with stroke on our label, we are still very good tractions in the clinics that have now become aware of exoskeletons and then become aware of exoskeleton with stroke. I would say that biggest trend that I see is that the utilization is up. Quarter-over-quarter, year-over-year the utilization that we our smart devices that send that of the cloud is that, we are not just selling units but the units are being used and being used in the accelerator rate. But we think that this is another indicator that we will have more traction in the future. It's up by the way 20% quarter-over-quarter, Q4 over Q3 20% that’s the nice trend I think.

Sure thank you, and then my last question is about the military construction in VA appropriations budget for fiscal 2017, obviously the language in there was very strong into our spend of medical exoskeletons. Can you just talk about what the implications are for the Company, I mean have you seen any impacts thus far in terms of potential grants from the VA or also sort of the longer term implications for the Company in terms of support from VA?

Sure first of all the VA remains our biggest customer overall and we get 24 units at 11 sites around the U.S. The build that you refer to is it takes some time to cook in DC. And so I think they are due for a plan for the center of excellence by midyear 2017, but as of yet, we are the only robotic exoskeleton Company, who is value proposition comes into focus as contemplated by that build. So we are actually optimistic of what it will mean once they publish that plan.

Okay. Thank you very much.

Thank you Imron.

Our next question comes from the line of Greg Chodaczek [B. Riley]. Please proceed with your question.

Thanks. Just a couple of here, Tom out of the 1600 center in the U.S., how many of those do you think can justify an excellent skeleton right now?

You know Greg, we have a very rich data about these 16000 centers, not just who they are and where they are but also how many patients go through them. At relatively small organization we have to be focused on them, what we did is we organically does filed these put them groups of ten, from the very busiest to the least busy. And as a business we are focusing on the top four, that’s the way that we are prospecting doing the inside sales calls, then refining them for quality demonstrations and then bringing them to close. But when we also look at the data, we see that we have sales to each one of those ten deciles from the very busiest to they are not so busy and some of the ones in a lower deciles have made a second order, so we know that our value preposition resonates to every single one of those levels it's just that as a business we want to be smart by taking it from the top down.

And with the changing label that you have for a while has that changed the sales cycle in terms of time from first looking at one to signing a purchase order?

I think it has accelerate a little we have some data that suggest that but keep in mind exoskeleton is not something that everybody knows about yet either, and then when you would think about exoskeletons most times people think about spinal cord injury and so we have to educate them about stroke and then you facture in that it has been a relatively long sales cycles. All of those things we are very focused on accelerating each step in that phase of the sales cycle from general awareness to the demo to convincing the leaders or the decision makers at the clinics to make him that close. So we use sales automation and we are tracking sort of those gaits in between in each step and making sure that we know where to accelerate and I think that over the next few quarters we will see a shortening of that lead time of that sales cycle.

Okay, and the SmartAssist software the update. What percentage of the systems is out there have SmartAssist?

I think its 26 units is what we just said out of the 200 plus, so call it about 10% to 15% and it's growing. Some of those units the recent ones the SmartAssist software is encompassed in the purchase price that ASPs for the units that have been for the technology that has been purchased separately is about I believe it's $4,200 a unit.

Okay, and do all the units out there are they capable of SmartAssist?

All the unit are capable of SmartAssist, I can't tell you we don’t know how many will convert to SmartAssist that will be a approx. But it gives the sales team another touch point to go and talk to customers and understand them better as well.

Okay, and last but not least regarding the home use products, can you talk about what you are trying to do with that, what it could be what it may not be or is this more skunk works and we will talk about it later?

Great question, Greg, first of all just to elaborate a little bit on what Max said and I know you didn’t ask the question but anecdotally the centers where we have installed SmartAssist have been thrilled by what it does. So when you dream of something, then design it, then get it cleared and then release it, you always have a hope that it's going to have a good reception to marketplace and we are seeing that right now. So with home mobility we have said for a while that we are going to build this brand by winning the hearts and minds of the rehab clinics establishing the brand of exoskeleton and Ekso Bionics, but we lookout and for home mobility and it's a big price. Right, but In order to do this we need to have the devices be capable and capable for different disease states and injuries have it be really safe we have got a very safe product in the Ekso GT and we want to make sure that we bring this reputation into the home and making it cost effective. So what our teams are doing is we are looking at many technology vectors, so think about all-day wear ability and battery life and how to package the device so that it is less intrusive than what the rehab devices are and so on and then making that applicable for the different disease states. So but this is not just skunk works we have really constrained the design question to how do we do this as rapidly as possible by achieving cost affectivity and safety. So that's why we are very optimistic that 2018 will release something in Europe and 2019 we will do so in the United States for the first product.

Perfect. And I just have one more question I apologize everybody else is also on the line. When it comes to useful life of an Ekso GT out there right now how long is it?

They have been designed for 1.2 million steps and so our estimate is somewhere in the three to four year range.

All right. Thank you Max.

Okay. Thanks.

Greg, thank you.

[Operator Instructions]. At this time, we have no questions over the audio portion of the conference. I would now like to turn the conference back to management for closing remarks.

We just simply like thank you for taking the time to join the call and please have a great evening.