Ekso Bionics Holdings, Inc. (EKSO) Q4 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the Ekso Bionics' Fourth Quarter Financial Results Conference 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. It is now my pleasure to introduce your host, Matt Steinberg with Lazar Partners. Please go ahead, sir.

Thank you, operator. And thank you all for participating in today's call. Joining me from Ekso Bionics are Jack Peurach, President and Chief Executive Officer, and Jack Glenn, Chief Financial Officer. Earlier today, Ekso Bionics released financial results for the quarter and 12 months ended December 31, 2018. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the 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 or examination of historical operating trends and our future financial or operational 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 businesses, 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 or operational projections or other 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, February 28, 2018. I'll now turn the call over to Jack Peurach. Jack?

Thanks, Matt. And thanks, everyone, for joining today's call. We concluded 2018 with a record quarter, both in terms of revenue and total units shipped, a major accomplishment as we have successfully executed on our commercial strategy, while building awareness and adoption and transfer of innovative products. Since I became CEO one year ago, our strategic focus has been on strengthening our sales performance, while concurrently improving our operational efficiency. I'm pleased to announce that we are making significant progress on both of these objectives as evidenced by the 54% increase in 2018 revenues, gross margin improvement of 10 percentage points and a reduction of 2018 operating expenses by nearly 7%. On the medical side of the business, we achieved a material improvement in sales productivity, an increase of nearly 60% in units per salesperson for 2018 compared to 2017. During the year, we continued to make inroads to our targeted customers' focus of neurosciences and neurological rehabilitation centers, many of which operate multiple facilities across an integrated network. We successfully built demand for EksoGT product throughout these centers by increasing our customers' understanding of the clinical and economic benefits our product provides. Additionally, we are developing a deeper customer pipeline with approximately one-third of our US customers purchasing multiple EksoGT systems within their network. We currently have several multiunit sales in the pipeline. This further illustrates that our customers are embracing the EksoGT and making it a core part of their rehab programs. We are also seeing continued momentum from our rental operations, which provide customers with a bridge to a capital budgeted purchase, giving them more flexible access to our products outside of annual budgeting processes and constraints. Conversion rates from a rental to a sale remain at approximately 80% in the United States, demonstrating our customers' commitment to incorporate EksoGT in their rehab programs. We continue to see revenue upside in the amount of approximately $1 million from contracted, but deferred, rental revenue as well as conversion revenues in excess of $3 million, assuming that all US rental units convert to sales. To take advantage of growing customer awareness and increasing demand, we believe now is the right time to invest more in our sales and marketing team, and we are in the process of increasing our sales force. This increase will enable us to better address our growing US pipeline. We also expect to increase sales productivity as customer adoption evolves. We believe that investing in our sales organization and enhancing our market development efforts now will allow us to build on our current sales momentum and position us for continued growth. As I noted earlier, we are making significant progress in creating greater cost efficiencies. As Jack G will detail shortly, we achieved gross margin expansion in 2018 full year to 38% and, for the fourth quarter, to approximately 45%. We are better now than ever at articulating our value proposition to our customers as well as reducing their cost of goods, which is driving our gross margins higher. From an operational standpoint, we are achieving greater efficiencies, which resulted in a significant decline in operating expenses during the fourth quarter. Our business is on a positive trajectory as evidenced by our narrowing net loss. Our approach to targeting and educating key decision-makers on the EksoGT value proposition is gaining traction. We anticipate that we can further reduce our cash needs in 2019. Last month, we entered into an agreement with Zhejiang Youchuang Venture Capital Investment Co. and another partner to establish a joint venture in China. This JV will create a global exoskeleton manufacturing hub and development to serve the exoskeleton market in China and other Asian markets. The manufacturing facility will be developed in Zhejiang, one of the most developed and enterprising regions in China. The JV will be capitalized in excess of $100 million over its term. As part of the agreement, subject to certain conditions, Ekso Bionics will receive royalties on the joint venture's medical and industrial product sales in China, Hong Kong, Malaysia and Singapore. ZYVC and its related parties will also make an equity investment of $10 million in Ekso Bionics, of which $5 million has been invested and the remaining $5 million will be invested after the joint venture begins shipping product. We view this JV as a tremendous growth opportunity for Ekso Bionics. Stroke is a leading cause of death in China and about 2 million Chinese die of stroke-related illnesses every year. There are currently 12 million stroke patients in the country and the number is expected to more than double to 30 by 2030. Even before we start seeing the benefits of product sales in China, this JV is expected to achieve a more efficient supply chain and lower the manufacturing costs of our products for all of our customers. Once the JV becomes fully operational, we will be positioned to become the leader in both medical and industrial exoskeletons in China. Turning to our EksoWorks industrial segment, we are making significant inroads across a number of Fortune 500 aerospace, construction and automotive customers. Our progress was highlighted by purchase orders that we announced in December from two global aerospace manufacturers to create and expand their pilot programs. Many companies have already seen the benefit of our EksoWorks products as they have been successfully integrating them into several global assembly lines, including Ford. The assistive devices used by these particular customers will be piloted by workers on the assembly production lines to enhance safety, improve productivity and reduce fatigue and the risk of injury. In the United States alone, more than $21 billion are spent per year of workplace-related injuries, which negatively impacts productivity. The use of an assistive device can be an effective approach to reduce the physical demands involved in overhead, while increasing endurance and productivity. These pilot programs will explore several applications where the EksoVest can assist workers with heavy tools and repetitive tasks in manufacturing processes. These are exciting developments for our EksoWorks industrial segment and we believe there are numerous future opportunities for additional growth. That concludes my opening remarks. I will now turn the call over to Jack Glenn to review our 2018 fourth quarter and full-year financial results.

Thank you, Jack. Turning to our financial results, total reported revenue for Q4 2018 was $3.3 million, the strongest on record at Ekso Bionics as we continue to execute on our commercial growth strategy. This compared with revenue in the prior-year period of $2.5 million. The breakdown for Q4 2018 revenue is as follows. We recognized approximately $2.6 million in medical device and related revenue, up from $2.1 million in Q4 of 2017. We placed 25 units this quarter, of which 11 units are rentals. We currently have a total of 350 Ekso rehab units in the field, of which 44 are rentals. Our rental program continues to help drive customer adoption and serve as a bridge to a capital purchase. We recognized approximately $736,000 in EksoWorks revenue compared with approximately $314,000 in the same period a year ago. Our EksoVest continued to gain traction among manufacturing customers as evidenced by purchase orders for the EksoVest from two global aerospace manufacturers to create and expand pilot programs. Our gross profit for the quarter was $1.5 million, representing a gross margin of approximately 45%. This compares to a gross margin for the same period last year of 32%. The overall increase in our gross margins is primarily attributed to a strong execution of our medical business. We are extremely pleased with the progress we are making this respect, particularly on product reliability, cost reduction and superior customer service. Going forward, we continue to focus our efforts on increasing total gross margins. Operating expenses for the fourth quarter of 2018 were $6.7 million compared to $8.7 million for the fourth quarter of 2017, a reduction of nearly $2 million or close to 24%. The reduction reflects the companywide initiatives we implemented to shift our focus to sales of commercialized products that we believe will drive sales and improve our margins. Loss from operations for the quarter was $5.1 million compared to a loss from operations of $8 million in the fourth quarter of 2017. Net loss for the quarter was $4.1 million or $0.07 per share compared to a net loss of $9 million or $0.15 per share in the fourth quarter of 2017. Now, turning to our full-year result. Revenue in 2018 was $11.3 million, a 54% increase, compared with $7.4 million for the same period in the year prior. In 2018, we shipped 90 EksoGT systems, up nearly 50% compared with 61 systems shipped in 2017. 2018 gross profit was approximately $4.3 million, representing a gross margin of approximately 38% compared to gross profit of $2.1 million, representing gross margin of approximately 28% in 2017. Loss from operations in 2018 was $27 million compared to $29.1 million in 2017. We are improving our financial standing by reducing the use of cash. Cash used in operating activities in 2018 was $22.2 million, a decrease of $9.1 million or 29% compared to $31.2 million in 2017. This reduction in cash burn is exemplified by our actions to reduce costs across the organization, while increasing cash collections related to an increase in sales. As of December 31, 2018, we had a cash balance of $7.7 million. Please see our 10-K filed earlier today for further details regarding the year. And with that, I'll turn it back over to Jack Peurach.

Thank you. To summarize, 2018 was a record year and we are well-positioned to continue our momentum going into 2019. Our customers are at the core of our business and our mission is to ensure their complete success in helping their patients recover from potentially debilitating, life-altering events. To that extent, we continue to strive to increase awareness of the benefits that our innovative products can provide, while generating value-added feedback from our users. This past November, we held our fifth annual user group meeting in Phoenix, and it was our largest ever. This event included over 60 certified physical therapists and other users of our products. The increase in attendance each year illustrates our commitment to our customers and their commitment to us, and an increasing level of adoption and enthusiasm for our products and our leadership in the robotic neuro-rehab market. Ekso Bionics is committed to delivering the highest levels of customer support and our annual user group meeting is one aspect where we are leaders. Turning to our outlook, we are focused on continuing our strong sales momentum in 2019. Our expanded sales organization is poised to take advantage of a large market throughout North America, as well as other high profile opportunities in Europe and Asia. The China joint venture highlights an emerging market for our products in an underserved region and our focus on removing costs from our supply chain to further enhance our margin levels. We are also pleased with the traction gained in recent quarters from our EksoWorks segment. Fortune 500 manufacturers in the automotive, aerospace and construction industries are realizing some of the many benefits provided by our industrial products, and we look to build on this growing industry demand moving forward. We are very excited about the many positive developments at Ekso Bionics following a record-breaking year. Looking forward, we expect to see continued progress in unit adoption and pipeline visibility, creating value and helping patients as well as improvements in gross margins and customer acquisition costs, with the ultimate goal of maximizing our profitability levels and adding value to our shareholders. Operator, you may now open the line for questions.

Certainly. [Operator Instructions]. Our first question today is coming from Bruce Nudell from SunTrust. Your line is now live.

Hi. This is Tyler on for Bruce. Thank you for taking the questions. Of the 25 medical units you shipped in the quarter, can you give the US, ex-US breakdown of those?

Sure, Tyler. Thanks for the question. Jack?

Yeah. So, the North American units were 13. Europe units were 9. And we had 3 units out of Asia-Pacific.

Okay, great. And then, can you give a little more detail on the aspects of the joint venture, particularly on the dynamics of the new facility over there and the assembly arrangements with the JV?

Yeah, sure. Let's see. From a facility perspective, the initial facility – this will be moving into a facility very quickly that will serve as a temporary manufacturing location for us. We will also be building a specific new facility over time. But to get us going, there's a facility there already. The more specifics around our manufacturing approach, the JV will – I look at it this way, Tyler. There's going to be kind of a multi-phase implementation of the JV. Phase 1 is really getting it set up, getting employees in place, starting to build processes in place and getting manufacturing capability in place. At that point, the JV really will be in a position to start delivering products to us. Phase 2 is really going to be around improving the supply chain and reducing the cost structure of our products. I think that's something that we're going to see happen in the, call it, 6 to 18-month period. And we think there's a huge amount of opportunity there. And then, phase 3 is really going to be around market development in China, and that is, I think, a long-term opportunity for us and for the JV and something that really will require a lot of effort. But that's how I see the JV deploying if that was your question.

Yeah. No, it's very helpful. And then, with the JV, how does that impact your margin expansion opportunities going forward? And does that change your thinking on timelines towards reaching cash flow breakeven?

Let's see. So, first of all, multiple things are going to drive – help us improve our margins. First, on the value proposition side, our customers are really starting to understand the value our product brings, and that's allowed us to maintain ASPs in the market and that's been very, very helpful, and a tribute to our organization to communicate that effectively. The JV is really helping us in two additional ways. One, helping us increase the volume of our products because, with volume, will come opportunities to invest in cost reduction activities; increase the market adoption, so we get to – maybe different opportunities that give us different insight that drive different features in our product; and then, of course, three, just investing in a lower cost manufacturing capability that allows us to reduce the COGS, or cost of goods, in our products that ultimately will drive margin. But I think it's a much broader picture than just the cost of the product. I think it helps us across-the-board.

Okay, great. Thank you. And then, do you have any updates on the enrollment progress and timeline for results of the WISE study?

Yeah. Let's see. As we announced in, I think, Q3 or Q4, we really refocused the WISE study with some goal of having results in midyear of 2019, Q3 roughly. I believe we're on target for that. And we should have some results midyear this year.

Okay, great. And then, previously, you've mentioned that you've had to focus on on getting products into leading stroke rehab centers. Do you have an updated range on how many of those centers you're currently in?

No, I don't have a specific number. But in the United States alone, we're in roughly 150 of the top 1,000 stroke rehab centers. That's a rough number, but that's roughly where we're at.

Okay, that's helpful. And then, switching over to the industrial side, how many industrial units were placed in the fourth quarter? And what was the split between the vests and the mounts?

Yeah. So, in the fourth quarter, we placed 127 units. We have decided really going forward we're not going to split out between the two. It just gets kind of confusing. But in total, it was 127 units in Q4 compared to 56 units of the year prior.

Okay, great. And then, in regard to the ongoing pilot programs, are you seeing any additional business from these companies? And are there any similar industrial competitors in the pipeline?

So, let's see. Yeah, certainly, on the pilot programs that we've deployed, here's how we view the adoption process by our customers of the industrial technology. They go through, think of it four phases, a discovery phase, a trial phase, a pilot phase and then a deployment phase. And we've kind entered in that cycle. A number of our customers are right now in advanced trial or pilot stage, where they're using the product in a subset of the applications that it could be used and maybe a subset of the sites or locations that it could be used in, to really get data, understand the effectiveness before doing a broader deployment. In all those customers, we expect to see them to continue to advance that, ultimately, leading to deployment initially in specific applications and, eventually, more broadly across a number of different applications and facilities. And we continue to see strong demand across a variety of market segments and industries. But this kind of adoption processes is fairly common across all different industries and we've got a number of customers, large customers – large potential customers that are in the early phases of this adoption cycle where they're trialing it in a very small set of applications just to understand how it works. And we expect those to progress over time as well.

Great, thank you. That's all the questions for me. Thank you for your time in answering the questions.

Thank you, Tyler.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you all for joining us today. 2018 was a strong year for Ekso Bionics as we achieved record revenue and unit placements. Our recent JV in China, combined with our expanded sales force, leaves us well-positioned to take advantage of several growth opportunities ahead. Our pipeline of multiunit EksoGT opportunities remain strong and we continue to see healthy user adoption. Going forward, we will remain focused on demonstrating the clinical and economic benefits of our exoskeleton offerings across the rehab and industrial markets where we see tremendous growth potential. We appreciate the continued support from our employees, customers and shareholders. And I look forward to sharing our progress with you in the months ahead.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.