Ekso Bionics Holdings, Inc. (EKSO) Q2 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Ekso Bionics' Second Quarter 2017 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. For opening remarks, I'll now turn the call over to David Carey of Lazar Partners. Thank you, David, you may begin.

Thank you, Devin. And thank you all for participating in today's call. Joining me from Ekso Bionics are Tom Looby, President and Chief Executive Officer; and Max Scheder-Bieschin, Chief Financial Officer. Earlier today, Ekso Bionics released financial results for the quarter and 6-months ended June 30, 2017. 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 include 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 is not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements including without limitation are examination of historical operating trends and our future financial expectations are based upon management’s current estimates and various assumptions. These statements involve material risk 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 descriptions 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 broadcast today, August 7, 2017. I will now turn the call over to Thomas Looby. Tom?

Thank you, David and thanks to everyone, for participating on today's call. We're pleased with the progress our team made in the second quarter in both the healthcare and industrial segments of our business. We continue to work towards expanding the footprint of Ekso GT at stroke and rehabilitation centers in North America and Europe. And we're also focused on developing our Ekso Works program for use of our products in a broad array of industrial settings. We remain confident that our team members' dedication and commitment will result in a broad market acceptance of our technology and positive financial returns for our shareholders. Max will review our second quarter financial results in greater detail in a moment, but I would like to spend a few minutes reviewing several key highlights for the quarter. We shipped 20 Ekso GT units of which 13 were sales and 7 were rentals. This represents the highest number of Ekso GT units shipped during a quarter and compares with 8 units shipped during the same period last year and 10 units shipped in the first quarter of this year. This is the first quarter since I have been CEO that both North America and EMEA contributed relatively equally. As of the end of the second quarter, we had 245 Ekso GT units in the field of which about 230 were sold and about 15 are under a rental agreement at over 185 customers in North America and EMEA. I believe that the number of qualified demos we performed for potential customers is one good indicator of future placements. We have seen our quarterly demos in the U.S. grow from an average of approximately 16 demos per quarter, prior to our FDA clearance in April 2016, to over 25 demos this past quarter in the U.S. alone. Europe also held 25 demos in the same quarter. To be clear, however, while we're proud of the increased number of demos performed, qualified demos alone are not the only indicator of future placements. We're seeing increasing interest from customers who are buying a system without a demo and we believe that trend will continue as people become more aware of our technology. As we refine our optimal sales strategy, we're continuing to see signs of a shortening in the sales cycle from around 18 months prior to receiving FDA clearance, to currently under 12 months. We're also increasing our marketing efforts to educate the market on the benefits of stroke rehabilitation using exoskeletons. You can see these efforts in improvements to our website, our work on co-marketing videos with customers and our discussions with professional societies, such as the American Stroke Association and the Christopher Reeve Foundation to expand progress for patient outreach. We currently have 5 direct sales reps and 1 sales development rep in the United States, as well as 1 direct sales rep and a distributor manager in Europe. They are supported by a new and experienced inside sales teams so that our field reps can be more efficient with the goal of lowering our cost of sales. This sales team is paired with 10 physical therapists who help to ensure that customers receive effective demonstrations and training. Our innovative Ekso GT FDA label is the only one in the industry that includes patients with hemiplegia due to stroke. To put this in context, there are 20x more stroke sessions than spinal cord sessions. We're leveraging this important differentiating factor as we move forward with expanding the launch of Ekso GT and developing and implementing strategies to capture significant portions of the U.S. and European markets. A key factor in helping our customers realize the value of our technologies is generating clinical data that provides an evidence base on which they can make their purchasing decisions. More than 1,200 patients have or will participate in 55 clinical studies of Ekso GT which includes 33 completed and 22 ongoing trials. This includes the first company-sponsored clinical trial. We're very pleased that Professor Dylan Edwards, Ph.D., P.T. of the Burke Medical Research Institute is leading the WISE study which stands for Walking Improvement for Spinal Cord Injury with Exoskeletons. The WISE study will assess changes in independent gait speeds in spinal cord injury patients undergoing rehabilitation with the Ekso GT or conventional therapy and also in a control group. In addition to educating critical constituencies about our technologies, we're capitalizing on our strong customer relationships to gain insight into the decision cycle for adopting new technologies. Based on the input we have received, we have implemented several pilot programs that provide current and target customers with flexibility in how they evaluate, purchase or rent our products. Our short term rental program allows customers to try equipment for 3 to 6 months with the option to convert to a purchase or a long term rental. This has enhanced our ability to place units with customers and it has been more effective than pursuing the standard capital purchase budget cycle in several instances. Given the utilization we're seeing in the field and our historic conversion rates, this program will allow us to meet our customers' needs while achieving our sales and revenue targets. We initiated a collaboration with Americor Financial LLC as a third-party financing company earlier this year which allows us to provide our customers with even more options for accessing our products. The omni investments we have made and continue to make in our sales and marketing efforts, we're also focused on working with key opinion leaders around the world to advance our technological capabilities and to raise awareness of the benefits of our technology. In May, we participated in the 6th International Conference of Rehabilitation Medicine and Engineering in Shanghai. We had the opportunity to present a company overview and exhibited our product, thereby introducing the world's largest population of stroke and spinal cord injury patients to the unique rehabilitation benefits of our technology. In June, we commenced a collaboration with 4 leading rehab facilities to establish the Centers of Robotic Excellence. This collaboration is designed to help further advance the use of our innovative exoskeleton technology and it enables us to team up with early adopters of state-of-the-art exoskeleton technology at centers that have committed to provide peer-to-peer support and active liaisons to train other facilities interested in becoming proficient and innovated approaches to rehabilitation. The centers include Barrow Neurological Institute in Phoenix, Arizona, Good Shepherd Rehabilitation Network in Allentown, Pennsylvania, Mary & Joy Rehabilitation Hospital, part of Northwestern medicine in Wheaton, Illinois and Villa Beretta in Northern Italy. In late June, a team of excellent employees attended and provided a demonstration of the Ekso GT at a congressional briefing on the value of rehabilitation in America's Healthcare System. Also in late June, the U.S. House of Representatives passed the annual funding bill for the U.S. Department of Veteran Affairs and related health and research programs. The bill contains language that directs the VA to conduct research on stroke rehabilitation using advanced robotic exoskeletons. With our unique clearance for hemiplegia, we believe we're well positioned to work with the VA to make exoskeletons the standard of care in stroke rehabilitation which we believe would provide significant value to our veterans and Ekso shareholders. We expanded our intellectual property portfolio with the issuance of a new U.S. patent for a fail-safe system for exoskeleton joints. We also completed the development of a lightweight flexible load carriage exoskeleton prototype named Artemis and we're presently exploring ways to commercialize Artemis through our product development pipeline. Now I'll switch over to provide an update on our emerging industrial business. While we're still in the early commercialization stage of our industrial product segment, we continue to be pleased with the level of interest from potential customers. We sold 48 total systems during the quarter and continued work to ramp up our relationships and activity with our new manufacturer reps. We also continued efforts on national customer and business development. We're on track to launch our second product in this segment, the Ekso Vest, in the third quarter of this year, in both the U.S. and Asia. Ekso Vest is an upper body exoskeleton that elevates and supports a worker's arms to assist with tasks ranging from chest height to overhead. This product can be used in a variety of industries, including the construction sector, automotive and day-to-day utility jobs. Initial feedback we've received from customers has been very positive. In fact, we sold all of our prototypes in Q2, as early users wanted to accelerate their evaluation of the unit in advance of our official launch later this quarter. We had an opportunity to demonstrate our industry leadership at the 2017 WeRACon Conference in Phoenix and we will be participating in the WeRACon Conference in China later this year. I would like to turn the call over to Max, our CFO, to discuss our financial results. Max?

Thanks, Tom. Total reported revenue for Q2 2017, was $1.9 million compared to $1.6 million in Q2 2016. The breakdown for Q2 2017 revenue is as follows. We recognized approximately $1.5 million in medical device and related revenue, up from $1.2 million in Q2 2016. The 20 unit placements this quarter were significantly higher than in the comparable period last year when we shipped 8 units. We recognized approximately $400,000 in Ekso Works' revenue compared with $300,000 in the same period a year ago. In this segment, we placed 48 units which consisted of 32 arms and 16 vests, all of which were sold in North America. Our overall gross profit for the quarter was $400,000 representing a 21% gross margin, this compares to a gross margin for the same period last year of 13%. Operating expenses for the second quarter of 2017 were $8.9 million compared to $7.6 million for the second quarter of 2016. The higher spending is driven by increases in clinical and marketing investments, such as our company-sponsored WISE study, an increase in R&D investment to support our industrial and next-generation home mobility products and severance and other costs associated with our 25% workforce reduction, implemented in May of this year. Net loss from operations for the quarter was $5.5 million as compared to $5.8 million net loss from operations in the second quarter of 2016. Cash used in operating activities for the 6-months ending June 30, 2017, was $16.9 million as compared to $14.1 million for the first 6 months of 2016. As of June 30, 2017, we had a cash balance of $10.7 million. Please see our 10-Q filed earlier today for further details regarding the quarter and with that, I will turn the call back to Tom.

Thanks, Max. I wanted to reiterate the terrific progress we have made to date. Our installed base of units in the field continues to grow and our customers are becoming more comfortable with the technology, enabling them to use the product more effectively and efficiently. We're also building a powerful catalog of clinical data through the dozens of studies that are presently ongoing. This will provide us a strong competitive advantage by facilitating strategic opportunities, in both the medical and industrial fields and in both existing and emerging geographies, particularly China and Japan. Operator, you may now open the line for questions.

[Operator Instructions]. Our first question comes from the line of Matt Keeler with SunTrust.

I guess just first on trends in the quarter. Medical showed good sequential momentum, doubled versus first quarter, can you talk a little bit more about what drove the sequential growth and do you see similar momentum going in into the third quarter?

Yes. Thanks for joining the call and thanks for the question. We have been on a program since receiving our FDA clearance about 1 year ago, to educate the market on the benefits of stroke rehab using exoskeletons, when that market at first didn't know about exoskeletons and then secondly, thought it was only about spinal cord injury and that program takes some time to do. I think that what we're experiencing in Q2 and we look forward to finishing the year strong, is building on a foundation of that awareness that people are now aware that it's beneficial for stroke rehab. We were calling on clinics -- the busy clinics all the way down to those that don't receive a lot of patients yet, but they want to build programs around our technology as sort of a cornerstone for what they're doing. We're building our book of qualified demos. All of these things give us a lot of confidence that we're building that momentum for the future. Also, as you may have heard us remark in the past, we began about 9 months ago to rebuild our EMEA organization, recruiting an excellent manager and Keith building out that team, really kind of being thoughtful about when do we go direct when we go and find a distributor for a region and really kind of increasing our standards of performance there. And I think that we're happy to see that Matias in EMEA is now performing at the same level, at least in Q2, that North America was. So I think everybody was contributing to get to that number.

Got it. That's helpful. And then the color around rental versus permanent purchase was useful. Was that mix similar in the U.S. and ex-U.S.?

Mostly -- the rental program is mostly being deployed in the United States right now. So most of the sales in EMEA were of the capital variety and our rental program is really a means to an end. We're really seeking out the clinics that are going to be putting these devices into good utilization. And as you know -- we know that because of the data that is thrown off by our devices, so we can see that they're really being used at a high-level. We also are kind of happy with our -- the stickiness of the rental program so that when we rent, we're pretty confident that that's going to convert into a sale at a later time. So yes, we saw an uptick in that in Q2. But as a way of getting them into the hands of these clinics that really wanted to deploy the technology.

Got it. And what's, for our modeling purposes, a reasonable conversion assumption from rental to permanent?

Well, we're dealing with relatively small numbers right now but our current experience is greater than 80%.

Got it, thanks. And then just moving on here a couple more. I guess, gross margins in the quarter -- revenues were up sequentially, gross margins were down a little bit, can you sort of speak to the dynamic there of what happened?

I think we had -- this is Max, Matt. Thanks for the question. We had about 23% gross margin in the first quarter, 21% this quarter and the little bit of a softness had to do with the Vests, the preproduction units that went into the market. We just haven't scaled up production yet, so the bill of materials is a little bit higher than we would have expected to see once we launch. ASPs and margins on the healthcare side remained very positive and met our expectations.

Got it. Thanks. And then I have one on the financing announcement. Can you give us an update, really on what the next steps are around the rights offering and when you expect that to close?

Yes. We're limited in what we can say, Matt. But I think you hopefully saw the press release, we set a record date for later this week of August 10. Shortly, thereafter they'll be more materials put out by the company press release and our prospectus supplement and that'll provide all the details. I think that you'll be looking forward and until then we just have to wait until those filings are made.

Got it, that's helpful. And then in the release, you talked about uses of proceeds. One among them was expanding Ekso's footprint in Asia and I was wondering if you could expand a little bit on that? What that might entail, is it medical? Is it industrial? Is it both? It's -- sort of what the regulatory hurdles are before that could become a meaningful driver for you guys?

Yes. And Tom will jump in here. But at the end of day, our goal is to be a global leader in exoskeletons. We're starting to see the traction in Europe and EMEA and Asia is a clean slate for us. I think our primary interest in Asia, in Japan and China, today at least, is the Ekso GT on the medical side. There are huge demographic trends there that we think we can take advantage of and in high demand for a product like ours in the rehabilitation world. So that'll be the initial focus. At the end of the day, we're about wrapping robot around human, whether that person is able-bodied or disabled and augmenting them some way or the other. So you can imagine that it is not going to be necessarily focused on one business element for very long.

I think Max said it very well. And when we've -- what we've experienced in some of the areas of Asia are a huge demand, a huge receptivity to the type of technology that we're deploying in the United States and in Europe. One case in point, one clinic we visited have 1,200 patients walk through their doors or go through their doors every single day and they're looking for ways to use technology to leverage the scarce human medical resources that they've got to take care of this population base. And so what we've always said is, as Max indicated, this is a global healthcare market. We can't ignore a large geography such as Asia, but what we wanted to do was to be smart about our approach and to make sure that we were capitalized well enough to approach that. So that's what part of this rights offering will help us do.

Got it. That's great. And one last one if I can sneak it in for Max. You highlighted the severance costs, I'm thinking about OpEx for the rest of the year. In the press release, you got $665,000 it looks like, identified. But was there anything incremental in there in the -- it's not separately reported in OpEx, so what should we be thinking about that would make 2Q a poorer predictor of OpEx for the rest of the year?

So we will still have some restructuring expenses that will impact Q3. But we're seeing the benefits of a lower OpEx across-the-board. I should say on the R&D and the G&A side, you'll see that impacting the third quarter and going forward.

At this time, we have no more questions. I'd like to turn this call back over to Tom Looby for closing remarks.

Thank you all for joining us today. We look forward to updating you with our progress in the coming months as we focus on advancing the commercialization of our rehabilitation and industrial products, with the goal of creating long term value for patients, customers and shareholders. Thank you.

This concludes today's call. All parties may now disconnect.