Earnings Call Transcript - EKSO Q2 2022

Operator, Operator

Hello, and welcome to the Ekso Bionics Q2 2022 Financial Results Conference Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to David Carey. Please go ahead. Thank you, operator, and thank you all for participating in today's call. Joining me from Ekso Bionics are Steven Sherman, Chairman and Chief Executive Officer; Scott Davis, President and Chief Operating Officer; and Jerome Wong, Interim Chief Financial Officer. Earlier today, Ekso Bionics released financial results for the second quarter of 2022. 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 the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including statements regarding our business strategy, future financial or operational expectations or our expectations of the regulatory landscape governing our products and operations 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 of 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, our regulatory outlook or other forward-looking statements whether because of new information, future events or otherwise, which speak only as of today, July 28, 2022. I will now turn the call over to Ekso Bionics' Chairman and CEO, Steven Sherman.

Steven Sherman, CEO

Thank you, David, and thank you to everyone for joining us today. We achieved strong revenue growth in the second quarter, reflecting the continued execution by our team. We are successfully raising awareness of the benefits that our innovative EksoNR devices are bringing to patients. This is resulting in strong demand with inpatient rehabilitation facilities and network operators. And now with the recent clearance by the U.S. Food and Drug Administration, giving us the ability to market EksoNR for use with MS patients, we are poised to help a significantly larger patient population. Our EksoWorks business continues to build momentum with large key customers as they more clearly understand the overhead productivity and safety benefits that our Ekso EVO devices deliver. We expect this segment to be a significant contributor to our growth in the future. Financially, we are in a solid cash position. Our dedicated team of professionals are constantly improving efficiencies. Our commercial team is deepening customer relationships, and the management team is motivated by our core responsibility, which is to maximize shareholder value. Now I will turn the call over to our President and Chief Operating Officer, Scott Davis.

Scott Davis, CFO

Thank you, Steven. Ekso Bionics generated strong revenue growth in the second quarter, reflecting the continued positive traction we are making with network operators. This momentum resulted in year-over-year revenue growth of 57% led by our EksoHealth segment, which delivered $3.2 million of revenue. We achieved a couple of major company milestones this quarter. First, we delivered on the largest order in Ekso's history. This multiunit order was comprised entirely of capital purchases. We're proud of this accomplishment and believe that it highlights our commercial team's efforts to engage with large network operators who are now choosing to make EksoNR their standard of care in neurological rehabilitation. Second, as Steven just mentioned, the FDA's 510(k) clearance to market EksoNR for use with MS patients not only gives more patients in need the opportunity to rehab using our leading exoskeleton devices, but it also meaningfully expands our total addressable market. I'll touch more on this in a moment. Turning back to our performance for the quarter. We booked 17 EksoNR units, a majority of which were capital purchases. Demand continues to improve as capital budgets previously restricted by COVID are opening up. Our cumulative conversion and renewal rate remain strong at 82% with approximately $1.9 million of contracted unrecognized revenue under our subscription model. Additionally, we have witnessed an encouraging trend, whereby our customers are increasingly committing to multiyear subscription agreements, which indicates their confidence in the value proposition of the EksoNR. For example, Avera McKennan, a network operator in Sioux Falls, South Dakota and our first customer in the state, recently secured a multiyear EksoNR subscription. In the international market, we're pleased to have recorded a strong booking quarter, particularly in Europe. The strength in Europe underscores our investment in lucrative, indirect partnerships in that region. In APAC, we generated a solid number of bookings as well, adding to our optimism. We continue to see these regions as important growth drivers in the years to come. Now for a discussion on the FDA clearance of the EksoNR for multiple sclerosis indication and what it means for MS patients and our business. EksoNR is the first exoskeleton device to receive FDA clearance for rehabilitation use in patients with MS. With this, we are excited to bring our device to a broad group of patients in need. According to the National MS Society, there are nearly 1 million people in the U.S. living with MS and more than 2.8 million globally. Every 5 minutes, someone is diagnosed with MS. Now these patients will have access to a wearable robotic device, potentially improving their mobility and supporting them in their rehabilitation. I'd like to share a story of how a patient with MS benefited from an EksoNR from the Kessler Foundation, one of the facilities that provided data to help us receive this clearance. Pilar Santillana was diagnosed with MS in 2006, and as the progression of the disease worsened, it impacted her ability to walk. Pilar joined a novel pilot study led by Dr. Ghaith Androwis at the Kessler Foundation, evaluating robotic exoskeleton training in MS using EksoNR. As part of the 8-week study, Pilar learned how to balance, stand up straight and improve her posture and gait mechanics. At the end of the 8-week training session, Pilar said that what I had done with the exoskeleton in 3 months of physical therapy could never do. Dr. Androwis was quoted as saying initial findings suggest that robotic exoskeleton training improves mobility and cognition and may play an important role in the future rehabilitative care for people with MS. We're proud of Pilar's progress and hope to see many more success stories like hers. Turning to an update on the progress with our industrial segment, EksoWorks. We're making inroads with several large customers with sizable employee headcounts who can benefit from significant workplace productivity and safety features that EVO provides. We continue to see demand primarily emerging in the automotive, aerospace and solar energy verticals. Our current strategy is geared towards developing larger customers, which can result in a longer sales cycle, like it did this quarter. For the second quarter, EksoWorks delivered approximately $237,000 of revenue. As construction, general manufacturing and green energy ramp up across the country, we remain committed to educating and expanding customer access to EVO to a wider number of industrial verticals. As we've previously mentioned, our target industrial verticals represent a vast addressable market opportunity of approximately $5 billion. Moving forward, our commercial team is focused on building customer awareness and engagement to ensure the success and safety of our customers' workforce. I'd like to take a moment to comment on the challenges associated with the global supply chain and our plans to mitigate its effect on our business. Like so many other businesses, we're not immune to the tight supply market. Our devices are comprised of more than 600 unique components. As discussed earlier, we're pleased with the healthy demand environment. However, with that comes a greater need for supplies, resulting in manufacturing pressures. To ensure that we can fulfill current and future orders in a timely manner, we made the decision to order parts well in advance of when we would ordinarily do so. This has led to an increase in our use of cash and, when combined with inflationary pressures, can impact our gross margins. Nevertheless, we are well-financed and well-prepared to navigate through the current market environment. We have an experienced team of professionals managing our business, allowing us to prudently manage our expenses and limit our cash burn. Finally, I'd like to briefly highlight a corporate update. We're currently in the process of moving our headquarters across the San Francisco Bay to a new facility in San Rafael in Marin County. Our new headquarters aligns with our current management, administrative and manufacturing needs. We expect to complete this move during the third quarter. Looking ahead to the second half of the year, our outlook remains one of cautious optimism. Driven by the strength of our commercial team, we are increasingly encouraged by the progress of our growing customer engagement levels and international opportunities. Our innovative wearable exoskeletons are among the most studied exoskeleton devices in the industry with more than 180 unique publications demonstrating significantly improved patient outcomes. Now with the EksoNR receiving FDA clearance for MS, we are excited to bring our game-changing solutions to a greater number of patients who are in need. Before turning the call over to Jerome Wong, who will discuss our second quarter 2022 financial results, I'd like to recognize his recent appointment as our interim CFO. Jerome has served as the company's controller since May of 2017 and brings more than 20 years of experience in finance, accounting and strategy to this role. His knowledge of our finance and accounting controls enables a seamless transition. Now I'd like to turn the call over to Jerome.

Jerome Wong, Interim CFO

Thank you for those kind words, Scott. Now on to a summary of our second quarter 2022 financial results. Ekso generated second quarter 2022 revenue of $3.5 million compared to $2.2 million for the second quarter of 2021, an increase of 57%. This increase in revenue was primarily driven by an increase in the volume of EksoNR device sales. Our gross profit for the second quarter was $1.6 million, representing a gross margin of approximately 47% compared to a gross margin of 58% for the same period in 2021. The overall decrease in gross margin was primarily due to the increase in EksoHealth service and inventory costs due to the continued global supply shortage partially offset by a favorable change in product mix. As we noted on previous calls, gross margin tends to fluctuate from quarter-to-quarter based on channel and product mix, as was the case this quarter. Operating expenses for the second quarter of 2022 were $4.9 million compared to $4.6 million for the second quarter of 2021. During the second quarter of 2022, the company incurred increased expenses related to increased sales and marketing activities and higher research and development expenses due to sustaining engineering activity for the EksoNR and the development of next-generation products. Net operating loss in the second quarter of 2022 was $3.2 million compared with a net operating loss of $3.3 million in the prior year period. Gain on warrant liabilities for the quarter ended June 30, 2022, associated with the revaluation of warrants issued in 2019, 2020 and 2021 was $1 million compared with a gain of due to the revaluation of warrants issued in 2019, 2020 and 2021 for the same period in 2021. Turning to our 2022 first half results. Revenue increased $1.9 million or 46% to $6 million for the 6 months ended June 30, 2022, compared to $4.1 million in the same period of 2021. The increase in revenue was primarily driven by an increase in the volume of EksoNR device sales and the recognition of previously deferred prepaid royalties associated with a license and distribution agreement that expired. Gross profit for the 6 months ended June 30, 2022, was approximately $2.9 million, representing a gross margin of approximately 47% compared to a gross profit of $2.5 million for the same period in 2021, representing a gross margin of 61%. Operating expenses for the 6 months of 2022 were $10.3 million compared to $9 million for the same period in 2021. During the first half of 2022, the company incurred increased general and administrative expenses primarily due to noncash stock-based compensation and severance expense and higher research and development expenses due to an increase in product development activities. Net operating loss in the first half of 2022 was $7.5 million compared with $6.5 million for the comparable period in 2021. Gain on warrant liabilities for each of the first half of 2022 and 2021 was $0.9 million in each case from the revaluation of warrants issued in 2019, 2020 and 2021. Cash used in operating activities in the first half of 2022 was $8.5 million. As of June 30, 2022, the company had a strong cash balance of $31.9 million. Please see our 10-Q filed earlier today for further details regarding the quarter. Operator, you may now open the line for questions.

Operator, Operator

Operator Instructions. Our first question today is coming from R.K. from H.C. Wainwright.

Swayampakula Ramakanth, Analyst

I have a couple of quick questions. It's encouraging to see that most of your sales are from multiunit orders. Regarding the 17 units sold under this, could you provide more details? Also, when you begin trials with potential clients, do you tend to focus more on those with multiunit orders, or are you open to all types of clients at this point?

Scott Davis, CFO

Thank you for your question. Regarding the 17 bookings made in the quarter, we had a combination of capital and subscription, with 5 being subscription and the rest capital. Our sales team is focused on larger integrated delivery networks while still maintaining engagement with smaller clinics. A segment of our sales team continues to work with those network providers. However, the majority of our efforts are aimed at larger customers, and this strategy has proven effective, as evidenced by a significant increase in sales to larger IDNs over the years. In 2019 and 2020, about 30% of our sales were to these larger IDNs, which grew to over 70% in 2021 and 2022.

Swayampakula Ramakanth, Analyst

Perfect. And then you also said in ex-U.S., especially in APAC, you had solid numbers. So I would like to understand what that solid number means.

Scott Davis, CFO

Okay. So in APAC, we had two bookings that were in Hong Kong. And in Europe, we had 8 total bookings that were capital and driven through distribution in that market this quarter. All of them were actually through distribution in Europe.

Swayampakula Ramakanth, Analyst

Perfect. And then in terms of multiple year subscription, and you said that there is increasingly more interest in having multiyear subscriptions, obviously, it's good news on one end and on the other side, how are these set up? In the sense, what is a multiyear? Is it more than 2 years? And if so, is there a clause as to conversion to a capital purchase at the end of the second or the third year whatever is the term?

Scott Davis, CFO

Sure, that's a great question. Generally, when we discuss a multiyear subscription, we refer to a 24-month subscription within our program. If it extends beyond that, we consider capital procurement options, which could involve a direct capital purchase or a capital lease for the customer. The 24-month timeframe is important because as clinics implement new programs with Ekso, we want to give them enough time to fully realize the benefits of a neuro rehab program using the EksoNR. We've found that within 12 months, they can certainly see some benefits, but it typically takes 18 months to really enjoy the full advantages. Consequently, we expect that this will encourage customers to resubscribe at the end of that term, as they would have experienced successful programs.

Swayampakula Ramakanth, Analyst

Then moving to the new indication for multiple sclerosis, you provided the number of patients in terms of annual incidences. But what is the actual market opportunity for you in rehabilitation? When your commercial team engages with them, is that a different target market? Or does the same rehabilitation unit address both stroke patients and those with multiple sclerosis? Or do they need to approach two different types of facilities?

Scott Davis, CFO

Yes. Great question. We are very excited over our MS indication, largely because we can help an entirely new segment of patients with these great outcomes. One of the things that's quite different about an MS patient relative to some of the other neuro patients that we have with spinal cord injury or acquired brain injury is that these patients will have a continuation of degradation over the period of having this disease. So we like to say that with Ekso, patients walk out of an Ekso. And with MS, this is something that can be used as a treatment to prolong and preserve their health, fight against this illness and give them all the health benefits from that. To that end, yes, there's a large addressable market that exists for this. There is crossover. For some patients who have acute spells of this, certainly inpatient rehabilitation is an area that they would use it, but this expands our reach into outpatient rehabilitation. We have crossover into outpatient right now, but this is effectively bringing us down the continuum of care into outpatient as well.

Swayampakula Ramakanth, Analyst

Very good. My last question before others can jump in is about the supply chain. I know you discussed this in the last quarter's call, and it appears you have a good handle on it now. What is the current status of managing the supply chain? I also noticed that your inventory levels have increased significantly, about 50% compared to December. Does this mean that over time, your gross margin is expected to improve as some of these inventories that are currently on the books will be reduced?

Scott Davis, CFO

That's correct. As we've discussed in previous quarters, supply chain challenges have affected us and others significantly. Anyone involved with circuit boards or mechanical parts has faced difficulties. To address this, we placed orders more aggressively than usual to ensure we could meet our increasing demand. Consequently, our inventory levels have risen. This situation is impacting our margins as well. However, we anticipate that as we've positioned ourselves better and assuming there are no further issues in the supply chain, things will start to normalize over time. We are actively seeking ways to reduce costs as we navigate through this crisis and aim to return to a margin level that aligns more with our expectations.

Operator, Operator

Our next question is coming from Kyle Bauser from LakeStreet Capital.

Kyle Bauser, Analyst

Thanks, Steven, Scott, and Jerome for all the updates here. Congrats on a really strong quarter. Maybe I'll follow up on the MS opportunity, and sorry if I missed this. Scott, but can you talk just a little bit more about maybe the broader opportunity as you kind of outlined it in terms of incidents, but also prevalence? I mean, is there an opportunity to treat the prevalence pool here? And then separately, if that's the broader opportunity, in your assessment, what would be kind of the smaller, more focused near-term opportunity, whether that's in terms of number of patients or facilities? Just kind of curious on how you plan on attacking that new opportunity?

Scott Davis, CFO

Sure. Using EksoNR for multiple sclerosis isn't new; our customers and researchers have been using it for that purpose informally. The new indication allows us to officially market this. This means we can reach out to our existing customers, which we have already started doing with our sales and clinical teams, to inform them about the potential benefits for multiple sclerosis patients. In the short term, we're focused on spreading the word to these customers. Looking further out, this broadens our reach into different care settings and opens doors to outpatient facilities, aligning better with their patient demographics. One of Ekso's strengths is our strong commercial team, including sales, clinical, and marketing teams, which we are leveraging to promote how we can assist more patients.

Kyle Bauser, Analyst

Got it. And maybe following up on that, now that you are able to market this on label, it sounds like you've already kind of deployed marketing and commercialization resources towards this. So I guess the question is, in terms of OpEx and incremental overhead and potentially changing any sort of marketing strategy, how should we think about kind of the run rate of SG&A going forward for the balance of the year?

Scott Davis, CFO

We don't anticipate any changes relative to this indication. We've anticipated this for some time.

Kyle Bauser, Analyst

Sure. Got it. And then just lastly, housekeeping, if it's handy, what was depreciation stock comp in the quarter? Just back into EBITDA.

Scott Davis, CFO

One moment. We are just digging up the detail on that now. One moment.

Kyle Bauser, Analyst

While we're gathering that information, Scott, could you briefly go over the timing for the new headquarters in relation to Q3?

Scott Davis, CFO

Sure. We have been in a long-term lease in Richmond, which is a sizable facility, and we are very excited about our new location in San Rafael. San Rafael is just over the Richmond Bridge, not far from where we are now. We've moved from one side of the bay to the other in Marin County. The new facility is better suited to our organization's needs. It represents a savings for us as well. Overall, it's a positive move. We are planning this relocation for the third quarter and will officially be settled in before the end of that quarter. Does that answer your question, Kyle?

Kyle Bauser, Analyst

That's perfect.

Scott Davis, CFO

Okay. And now back to your depreciation question, Jerome can answer this.

Jerome Wong, Interim CFO

So depreciation is about $125,000 and then stock comp was 519, and it's all for Q2.

Kyle Bauser, Analyst

Excellent. Okay. Great. And congrats on the quarter.

Scott Davis, CFO

We appreciate it, Kyle. Thank you.

Operator, Operator

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

Scott Davis, CFO

Thank you all for being with us today. We are excited about the progress and milestones achieved in our second quarter, particularly the largest multiunit capital purchase order in our company's history. We are pleased to see our revenue growth accelerate this quarter. Moreover, obtaining 510(k) clearance from the FDA for our EksoNR to be used with MS patients not only broadens the pool of patient access but also integrates it into their rehabilitation solutions. This significantly enhances our market opportunities. Our success reflects our ability to navigate challenging market conditions that continue to affect the broader economic landscape. We are committed to providing treatment options for patients in need and are proud to help raise the standard of care for neurorehabilitation. By strengthening partnerships with key network operators, we are driving more multiunit deliveries, which has built a stronger pipeline for our future growth. Coupled with deeper customer relationships across various industries for EVO and proactive management of supply chain issues, we are well-positioned to maintain our momentum for the second half of 2022 and beyond. In closing, I want to express my appreciation to the entire Ekso team and our valued shareholders. We anticipate sharing more updates throughout the year. Thank you all, and have a wonderful day.

Operator, Operator

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