Earnings Call Transcript - EKSO Q4 2022

Operator, Operator

Greetings and welcome to the Ekso Bionics Fourth Quarter 2022 Financial Results Conference Call. All participants are currently in a listen-only mode. A brief question-and-answer session will follow the presentation. This conference is being recorded. It is now my pleasure to introduce your host, Matt Steinberg with FINN Partners. Thank you, Matt. You may begin.

Matt Steinberg, Host

Thank you, operator, and thank you all for participating in today's call. Joining me from Ekso Bionics are Scott Davis, Chief Executive Officer; Jerome Wong, Chief Financial Officer; and Jason Jones, Chief Operating Officer. Earlier today, Ekso Bionics released financial results for the quarter and year ended December 31, 2022. 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 made during this call that are not statements of historical fact should be deemed to be forward-looking statements. All forward-looking statements, including statements regarding our business strategy, future financial or operating 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 and description of the risks and uncertainties associated with our businesses, please see our filings with the Securities and Exchange Commission. Ekso disclaims any obligation except as required by law to update or revise any financial or operational projections, its regulatory outlook 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, March 28, 2023. I will now turn the call over to Ekso Bionics' Chief Executive Officer, Scott Davis.

Scott Davis, CEO

Thank you, Matt. We're pleased to have officially closed 2022 with continued solid demand for EksoNR and the completion of our most significant transaction to date, the acquisition of Human Motion & Control business unit, or HMC, from Parker Hannifin. The importance of this acquisition cannot be understated, as it expands our product offering across the continuum of care to home and community use markets. This is also why we are announcing our Q4 and 2022 financial results weeks later than usual, as is often typical in matters involving business combinations. I'll touch on this deal in more detail shortly, including what it means for our business and the value we are bringing to customers and patients. But first, a summary of our fourth quarter business performance. We generated revenue of $3.6 million in the fourth quarter, which included bookings totaling 27 EksoHealth devices, of which two were Indego devices that were booked in the last few weeks of December, post close of the acquisition. Throughout our EksoHealth segment, we continue to leverage our advanced robotic exoskeleton technology and rehabilitative programs to help patients on their road to recovery and improved health, with better outcomes than the current standard of care. In 2022, we successfully executed on our commercial strategy, resulting in the placement of a substantial volume of additional devices within network operators globally and the completion of many multi-unit orders, both of which contributed to driving a solid year for EksoNR bookings and record revenue internationally. With EksoNR receiving FDA clearance for the multiple sclerosis indication, the first known exoskeletal device to carry this designation for rehabilitative use in patients suffering from MS, enthusiasm for EksoNR continues to grow. Demand in order flow for EksoNR remained robust, with revenue in our EksoHealth segment up by more than 20% compared to 2021. Overall, for the year, we recorded 100 EksoHealth device bookings. Our cumulative conversion and renewal rate is 81%, and we now have more than $2.2 million of contracted unrecognized revenue under our subscription model. Furthermore, we have made significant inroads with many of the large network operators or IDNs throughout the year, as they continue to make EksoNR their standard of care in lower extremity neurological rehabilitation. Our pipeline of new opportunities remains strong; although due to more challenging economic and market conditions, the sales timeline is taking longer than in previous quarters. Nevertheless, we remain bullish on our future growth prospects. Our integrated sales and marketing teams are executing on our overall commercial strategy, putting us in what we believe to be a favorable position heading into 2023. On the international front, we achieved record annual revenue performance in Europe and APAC, with APAC growing by more than 60% year-over-year. We're excited by this increase and we'll continue to invest in our international footprint to support ongoing growth in these regions. Now, turning to our acquisition of the HMC business from Parker Hannifin, which is synergistic and broadens our product portfolio in commercial health and expands our reach into home use. These products acquired include: Indego Therapy and Indego Personal, now renamed Ekso Indego Therapy and Ekso Indego Personal. Both devices are FDA cleared lower-limb powered exoskeletons, which enable task-specific over-ground gait training to patients with weakness or paralysis in their lower extremities. Ekso Indego Personal is a lightweight exoskeleton, safer to use in most home and community environments. It's the only known exoskeleton to offer a modular quick-connect design, which allows for portability and enables users to put on and take off the device without assistance. This device allows for gait-impaired individuals to stand and walk again, granting them a new level of independence at home and in the community. Ekso Indego Personal is primarily sold to veterans by using existing reimbursement and rehabilitation programs supported through the Veterans Administration, but has also been funded through Workers’ Compensation and various international programs. We believe there are future opportunities to expand to more traditional reimbursement programs both domestically and internationally. Ekso Indego Therapy is an adjustable modular exoskeleton used primarily for patients with spinal cord injury, but also stroke, complementing Ekso's product offering in outpatient facilities. It can be fitted to most patients in minutes, providing the potential for high-dose therapy sessions that further enhance rehabilitation. Last month, we showcased our new Ekso Indego Therapy with functional electrical stimulation, or FES, at the American Physical Therapy Association meeting, and recently filed a premarket notification 510(k) with the U.S. Food and Drug Administration that covers the addition of integrated FES hardware and software to Ekso Indego Therapy. This added technology brings forth further patient benefits allowing for improved limb function, balance, and muscle strength. Through this acquisition, Ekso added the ongoing development of intelligent robotic-assisted technology designed for use in the orthotic and prosthetic, or O&P, industry. This potential technology is being designed to enhance the capabilities of existing industry-leading knee-ankle-foot orthotics, or KAFO, products to improve the standard of care. This is a large and accessible market with established reimbursement, payment, and channel models. Ekso is looking forward to continued development along this front. Also, along with these current and future products, this combination expands the current Ekso team to include the former employees of HMC, comprised primarily of highly experienced engineering, operations, clinical, and sales professionals. Finally, through this acquisition, Ekso has added strategic relationships with key commercial and research partners, including Vanderbilt University. The collaboration with Vanderbilt is expected to provide a continued path for future research and product development. This decade-long partnership has yielded the successful Indego product line and has promising prospects for the development of future innovations. With Ekso's core engineering staff and experienced quality and operations team, we are thrilled to have joined forces with this elite academic partner to help power new product development. To showcase the value and benefits of our newly integrated product line, I'd like to share a story of a patient who regained mobility through the use of Ekso Indego Personal. Phil was initially diagnosed with spinal ependymoma tumors. Despite numerous treatments, the tumors recurred four times, leaving him partially paralyzed from cervical vertebrae seven down. Over 20 years of increased neuropathy, Phil explored different therapies and devices in an effort to maintain his mobility. Eventually, he was chosen to participate in the VA's exoskeleton evaluation program, where after exposure to multiple exoskeleton devices, he opted for a rehabilitation program utilizing Ekso Indego. The Ekso Indego device helps Phil with countless aspects of his daily life. For example, he no longer experiences severe physical challenges when standing, and his digestive processes are much improved. According to Phil, 'Beyond the physical improvements, the Indego exoskeleton has given me the confidence to try sports and social events that I would not have previously.' We are honored to see our products improving the lives of our patients firsthand and are very grateful to Phil for sharing his story.

Jason Jones, COO

Thank you, Scott, and thank you for having me join today's call. I am excited to expand my role at Ekso to include Operations in addition to Product Development. As background, I've been with Ekso since 2018, previously serving as Senior Vice President of Product Development. My goal as COO is to leverage my experience in engineering, product development, and supply chain management to build Ekso into a platform with the capacity to design, produce, distribute, and service a broad range of products that amplify human motion and mobility. Improving our operational efficiency is critical to enabling us to scale our business both organically and through strategic initiatives. As a case in point, the recent acquisition of the Indego product line represents the next step in leading the way for patient rehabilitation. While we are well on our way to successfully integrating the business, we are also using this as an opportunity to improve or upgrade systems and processes. As one example, we now have a second R&D and manufacturing facility in Macedonia, Ohio. Currently, we are using space provided by Parker Hannifin for continued operation. We plan to move the facility to a separate nearby location within the next 12 to 16 months and are evaluating how to optimally utilize our Ohio presence. Additionally, as mentioned earlier, we are starting the process of combining our engineering and product development teams while also working with Vanderbilt in an effort to accelerate our technology innovation. We believe the combined expertise of these teams is unmatched in the field of exoskeleton R&D, which helps to further strengthen our position as industry leaders. On the EksoWorks side, in 2022, we began the process of adding external manufacturing capability for our EVO product line at a contract manufacturing partner located in Malaysia. We believe this will help us expand capacity, lower costs, and improve quality. Our current expectation is for production from Malaysia to begin in the first half of 2023. Moving forward, as part of our executive leadership team, I am intent on ensuring the successful execution of our strategy and supporting our corporate development activities. I look forward to contributing to the company's success.

Jerome Wong, CFO

Thank you, Jason. Ekso generated fourth quarter 2022 revenue of $3.6 million compared to $4.1 million for the fourth quarter of 2021. Our gross profit for the fourth quarter was $1.7 million, representing a gross margin of approximately 47% compared to a gross margin of 59% for the same period in 2021. The decrease in gross margin was primarily driven by an increase in service and supply chain costs, elevated labor costs, and lower average selling prices of device sales due to sales channel mix. Operating expenses for the fourth quarter of 2022 were $6.1 million compared to $7 million for the fourth quarter of 2021. The 14% decrease was primarily due to lower legal and consulting expenses. Net operating loss in the fourth quarter of 2022 was $4.4 million compared with a net operating loss of $4.6 million in the prior-year period. Gain on warrant liabilities for the quarter ended December 31, 2022, was $0.3 million from the revaluation of warrants issued in 2019, 2020, and 2021 compared to a $2 million gain associated with revaluation of warrants issued in 2019, 2020, and 2021 for the same period in 2021. Turning to our full year results for the year ended December 31, 2022. Revenue increased by 15% to $12.9 million compared to $11.2 million for the same period in 2021. Revenue growth was primarily driven by an increase in the volume of EksoNR device sales. Gross profit for the full year ended December 31, 2022, was $6.2 million, representing a gross margin of approximately 48%, compared to a gross profit of $6.7 million for the same period in 2021, representing a gross margin of 60%. The decline in gross margin is primarily due to an increase in service and supply chain costs, elevated labor costs, and lower average selling prices of device sales due to sales channel mix. Operating expenses for the 2022 full year were $21.8 million compared with $20.6 million for the prior-year period. The increase was primarily due to one-time severance costs associated with management changes, costs related to the relocation of our corporate headquarters and manufacturing facility, and acquisition and operating costs of HMC. These increases were partially offset by a decrease in legal and consulting expenses. Net operating loss in the 2022 fiscal year was $15.6 million compared with $13.8 million for the comparable period of 2021. For the year ended December 31, 2022, we recorded a gain on warrant liabilities of $1.3 million associated with the revaluation of warrants issued in 2019, 2020, and 2021, compared to a $4 million gain associated with revaluation of warrants issued in 2019, 2020, and 2021 for the same period in 2021. Cash used in operating activities in the 2022 fiscal year was $14.7 million. As of December 31, 2022, the company had a strong cash balance of $20.5 million. Please see our 10-K filed earlier today for further details regarding the quarter and full year.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from RK at H.C. Wainwright. Please go ahead with your question.

Swayampakula Ramakanth, Analyst

Yes, thank you. Good afternoon, Scott.

Scott Davis, CEO

Hi, RK.

Swayampakula Ramakanth, Analyst

At the start of the call, you mentioned that there were two Indego installs in the fourth quarter. Is that included in the backlog from the acquisition? If so, what is the current backlog as we head into 2023?

Scott Davis, CEO

So, RK, thank you for your question. Those were not backlog units. Those were units that were actually orders received in the last three weeks of December post close. So, with the acquisition, we did not receive a backlog of orders. However, we do have a strong pipeline.

Swayampakula Ramakanth, Analyst

That's good to hear. For the NR business, you mentioned that demand is strong and the pipeline is solid, but the lead time is getting longer. I'm curious about your definition of what constitutes a long lead time. Additionally, if the backlog continues to grow, do you anticipate any impact on demand? After all, customers may become frustrated with long wait times for products.

Scott Davis, CEO

Yeah, understood. So, in terms of our backlog, I think as we came through 2022, we managed backlog pretty well certainly as we pushed to the close of 2022. So, generally speaking, we're not carrying a huge backlog of orders with us. To answer the first part of your question, which is regarding the lead time, generally speaking, we are experiencing slightly longer times to close, maybe a couple of months, generally speaking, anywhere from 30 to 60 days that we're seeing, as we have seen more of our customers beginning to use some third-party financing options that we offer, and it simply takes a bit longer to work through that process. But in general, we have a strong pipeline going forward, and it looks good. And Jason would like to elaborate just a little bit.

Jason Jones, COO

RK, this is Jason Jones. It's good to meet you. To clarify on lead times, we're really referring to the time it takes to close deals. Our actual shipment lead time is quite short, probably between four and eight weeks, though not immediate. Once the order is in, the lead times are pretty short. I believe Scott is talking about the deal cycle time instead of the lead time for shipment.

Swayampakula Ramakanth, Analyst

Thank you for that. My final question is, now that you have had Indego for a few months, when do you think it will be fully integrated within the Ekso business so that you can start seeing synergies both on the sales front and the operational side?

Scott Davis, CEO

That's a two-part question. From a sales and go-to-market perspective, the integration has been progressing well. Our commercial team is aligned, and we have great synergies. Ekso's sales team is also promoting the Indego product line, and we have adjusted our sales methodology for the personal unit to work alongside our sales team. Overall, the integration on that side of the business has been going very well. There is another aspect of the integration focused on finding synergies in operations and engineering, and Jason might be best to address those.

Jason Jones, COO

Yes, sure. Here’s a quick update on integration. From a systems perspective, the ERP and accounting systems are fully integrated, so that part is complete. On the R&D side, we have a plan for integrating some systems, which will continue through the rest of this year, but it's going to be incremental. The last area involves pure operations, manufacturing, and supply chain. These functions are currently separate, and I believe this will take longer to integrate because the business units are operating independently. However, over the next 12 to 18 months, we can expect to see more integration in supply chain and operations.

Swayampakula Ramakanth, Analyst

Thank you, both, for taking my question.

Scott Davis, CEO

Thank you, RK.

Operator, Operator

There are no further questions. Now I'd like to turn the floor back over to Scott Davis for any closing comments.

Scott Davis, CEO

All right. Thank you, John, and thanks to everyone for joining us today. 2022 was a transformational year for Ekso Bionics, highlighted by the successful acquisition of the Indego product line, FDA clearance to market EksoNR for rehabilitation use in patients with MS, and a strong number of EksoHealth bookings. The complementary acquisition of the HMC business was critical to our future growth, principally as it expands our product offering across the continuum of care to home and community use markets. We can now reach more patients in need across the larger market opportunity. We believe that the smooth integration of the HMC business, combined with the continued strong demand for our industry-leading products, has us well positioned to continue our momentum into 2023 and beyond. We look forward to providing updates on our continued progress. Thank you, and have a great day.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.