Lifeward Ltd. Q2 FY2023 Earnings Call

Hello, and welcome to the Q2 2023 ReWalk Robotics Limited Earnings Conference Call. Please note, today's event is being recorded. I'd now like to turn the conference over to Mike Lawless, Chief Financial Officer. Please go ahead.

Thank you, Keith. Good morning, and welcome to ReWalk Robotics Second Quarter 2023 Earnings Call. I'm Mike Lawless, ReWalk Robotics' Chief Financial Officer, and with me on today's call is Larry Jasinski, ReWalk's Chief Executive Officer. Earlier this morning, ReWalk issued a press release detailing financial results for the 3 and 6 months ended June 30, 2023. The press release and a webcast of this call can be accessed through the Investor Relations section of the ReWalk website at rewalk.com. Before we get started, I would like to remind everyone that any statements made on today's call that express a belief, expectation, projection, forecast, anticipation or intent regarding future events and the company's future performance may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to ReWalk management as of today and involve risks and uncertainties, including those noted in our press release and ReWalk's filings with the Securities and Exchange Commission. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. ReWalk specifically disclaims any intent or obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by law. A replay will be available shortly after the completion of the call, accessible from the dial-in information in today's press release. The archived webcast will be available in the Investor Relations section of the company's website. For the benefit of anyone who's going to be listening to the replay or the archived webcast, this call was held and recorded on August 11, 2023. Since that date, ReWalk may have made subsequent announcements related to the topics discussed. So please reference the company's most recent press releases and SEC filings for the most up-to-date information. And with that, I'll turn the call over to ReWalk's CEO, Larry Jasinski.

Thanks, Mike. Welcome, everyone, and thank you for joining us today. Q2, along with subsequent events, was an excellent period for the company, specifically regarding the milestones we have been pursuing. In the last few weeks, we have hosted two public calls on the subject of the proposed Medicare rule that would formally define a benefit category for personal exoskeletons and a call on our pending acquisition of AlterG. In parallel, we achieved revenue guidance for the quarter and submitted 11 new Medicare claims in Q2, exceeding our original goal. We believe these factors will continue to drive our business, allowing us to conserve capital in 2024 and 2025 and achieve profitability in 2026, relying solely on current cash reserves. Though our call today is to report on financial performance and provide a business update on the second quarter of 2023, I'd be remiss if I didn't start today's call by revisiting our exciting and transformative acquisition of AlterG that was announced on August 8, with closing planned for later today. AlterG is a leader in transformative technology that empowers people to recover mobility, improve wellness, and enhance physical performance. The Differential Air Pressure or DAP technology serves to reduce the effects of gravity, allowing movement in new ways with finely calibrated support and reduced pain. We believe the technology is unique, well-accepted, and has excellent growth potential to expand in a segment that has 40,000 U.S. clinics, which can benefit from DAP technology. ReWalk's stated strategy has long been and continues to be to add adjacent, accretive technologies via acquisition and organic development. Now what we're seeking to do is to increase our scale, build our strategic position in the clinic, expand our organizational skills, and add depth for commercialization. We believe the acquisition of AlterG, with its patented NASA-derived DAP Anti-Gravity system for use in physical and neurological rehabilitation, is a prime example of executing on this strategy. We believe the AlterG acquisition leverages a shared market presence and creates efficiencies across all product lines. Further, we believe combining AlterG's strong track record, assets, and skilled team with ReWalk's innovative leadership and exoskeleton technology and established infrastructure will create a formidable development, production, and commercial enterprise poised to maximize the opportunity across the product portfolio and drive towards profitability. The addition of Charles Remsberg as our Chief Sales Officer is the right step in developing a large organization that is highly capable of capital equipment sales and placement of systems, to those that come through the clinics to be trained on home systems. Clearly, you can tell we are very excited about this event and eager to update investors over the months ahead as we build up and realize benefits from our joint operations. With that recap complete, I will now provide a quick summary of figures from Q2. Sales in Q2 were $1.3 million, in line with prior financial guidance. For 2023, our active-case exoskeleton submissions are expected to convert to achieve year-over-year growth driven over the second half of 2023. This is spread over the VA, Germany, and the U.S. The revenue contribution for the addition of the AlterG Anti-Gravity systems is also expected to be additive once that transaction closes. Expenses were also in line with internal expectations and, excluding the expenses related to acquisition activity, declined by $300,000 from Q2. Mike will address this further in the financial results section. Our efforts with the Center for Medicare & Medicaid Services, CMS, to expand access to exoskeletons for Medicare beneficiaries is a key element of our strategic path and will be, we believe, a defining point for the exoskeleton industry. The process with the proposed rule to codify the definition of a brace to include personal exoskeletons is in a public comment period until August 29. A final rule will be developed from the base proposal and the comments provided. This final rule is expected to be issued in the November-December cycle and become effective January 1, 2024. Parallel considerations on price should occur in the HCPCS process, with a proposed price in late 2023, that may have a public comment period to follow. Finalization may occur in early 2024. After several years of effort, a code, a benefit category, and a price point are the foundation to facilitating Medicare beneficiaries' access to exoskeletons. ReWalk is highly supportive of the CMS proposed rule, and we are working extensively to support this process. The placing of 11 CMS beneficiary claims during Q2 and continuing submissions during Q3 and Q4 supports our target to place at least 35 submissions during 2023. Creating a repeatable process to secure payment for the ReWalk device for Medicare beneficiaries is an essential priority. The Medicare SCI population is the largest segment of individuals who could benefit from this technology and therefore, our single largest potential market segment in our single largest potential market, the United States. I am confident that our efforts will positively shape the industry in the long term. I'd now like to turn the call over to Mike for a review of financial details. Mike?

Thanks, Larry. ReWalk Robotics reported revenue of $1.3 million in the second quarter of 2023, down $0.2 million or 15% compared to $1.6 million in the second quarter of 2022. This was in line with our guidance from the prior quarter's earnings call. For the 6 months ended June 30, we reported revenue of $2.6 million compared to $2.4 million for the 6 months ended June 30, 2022, an increase of $0.2 million or 8%. The decrease in revenue compared to Q2 2022 was a result of continued slow exoskeleton sales performance in Germany, while U.S. exoskeleton revenue was down slightly from the prior year's quarter. Our distributed product line, the MyoCycle FES training cycles had another strong quarter with revenue of over $500,000, up 60% from Q2 2022. The success of our sales effort around MyoCycles is a validation of our strategy to build a portfolio of complementary products that we can provide to our customers. Turning to our pipeline metrics within the current market for the ReWalk product line, which includes individuals covered by the Veterans Administration, Workers' Compensation insurance in the U.S., and by private insurance in Germany. The current pipeline of active rentals consists of 22 cases, up 4 from last quarter, which is broken down with 18 in Germany and 4 VA rentals. Our overall number of cases in process is 70, with 56 in Germany and 14 in the U.S. As a reminder, these pipeline figures do not include cases that would be eligible for Medicare reimbursement. If our progress with CMS successfully results in the establishment of an acceptable reimbursement mechanism and payment rate, then we can supplement the pipeline totals with our list of already identified Medicare-eligible patients. Moving to gross profit. In Q2 2023, our gross profit was $0.6 million or 43.1% of revenue, down 4.4 percentage points compared to $0.7 million or 47.5% of revenue in Q2 2022. This decrease in gross margin was primarily driven by lower exoskeleton volumes. Operating expenses in Q2 2023 were $5.7 million, up $0.6 million or 12% compared to $5.1 million in Q2 2022. Within these functions, R&D spending decreased $0.1 million or 15%, primarily due to lower spending on subcontractors and consultants as we completed the stairs project in the U.S. and due to lower spending on the ReWalk 7 project since we are in the final stages toward FDA submission. Selling and marketing expenses increased by $0.2 million or 7%, primarily due to higher consulting fees associated with CMS reimbursement-related activity and trade show expenses. General and administrative expenses increased $0.6 million or 33% and is due to higher professional services fees related to acquisition activity. Excluding the M&A transaction-related expenses, G&A expenses would have been $1.5 million, down $0.3 million, or 16%. The M&A transaction-related expenses consisted of legal, accounting, and investment banking fees incurred during Q2 2023. We will incur additional transaction fees in Q3 for the due diligence and transaction processing work that continued into the current quarter. Our operating loss for the second quarter of 2023 was $5.2 million compared to an operating loss of $4.4 million in the second quarter of 2022. Excluding the M&A transaction-related expenses, the operating loss improved by $0.1 million versus Q2 2022. I'd like to point out that we generated $558,000 of financial income in Q2. The favorable increase in income is a result of more aggressive yet prudent cash management policies that resulted in higher interest income from our cash balance. We ended the quarter with $58.2 million in cash and equivalents, and no debt. Our operating cash usage in Q2 was $3.5 million. For the first half of 2023, it was $8.7 million. During Q2, we repurchased approximately 359,000 ReWalk ordinary shares and spent $220,000 in cash on these repurchases. You may recall that in February, the Israeli court approved the second 6-month period for us to repurchase shares under our repurchase program. This 6-month authorization ended on August 9; we will evaluate the use of our capital for share repurchases versus other investments. If we decide that share repurchase is the best use of our capital, then we will seek another 6-month extension. As we announced a few days ago, ReWalk entered into an agreement to acquire AlterG for $19 million, adjusted for transaction expenses, working capital, indebtedness, and cash on hand, with the potential for 2 earn-out payments over the next 2 years based on the year-over-year growth that is achieved for the AlterG business. This transaction is expected to close later today. Accordingly, ReWalk's financial results for Q3 would include the financial performance of AlterG starting from August 11 through the end of the quarter. With that, I'd like to turn the call back to Larry for further remarks.

Thank you, Mike. We laid out our goals for 2023 at the start of the year, and I'll provide progress on each of them after each quarter. To restate the goals: first, to achieve sales growth via our Workers' Compensation and VA activity along with adding more contracted insurers in Germany; second, to expand our portfolio of products through distribution agreements or product line acquisition; and third, to leverage these activities to move towards breakeven profitable operations with current capital. We have made substantial progress on all 3 objectives. For 2023 revenue, we anticipate year-over-year sales growth with our existing lines as Germany has increased their leads and submissions in the first half of the year to support growth in the second half. As the VA has opened up more facilities to candidate referrals and exoskeleton training, we expect to approximately double the number of exoskeleton placements from 5 to 10 or more veterans year-over-year. We see potential upside with the CMS MAC case submissions if they are paid in part in 2023. After closing AlterG, we would also add 4.5 months of Anti-Gravity systems sales with the AlterG lines to add to the 2023 results. For our objective of growing our portfolio, the acquisition of AlterG will add 3 new complementary products in the VIA, FIT, and PRO Anti-Gravity systems. These broadly used and well-accepted products grew at a CAGR of 10% for 10 years pre-COVID and can continue to expand penetration into clinics with current and upcoming new designs. We're leveraging growth and expenses to reach breakeven on current capital; the progress with CMS is a key driver as we seek to enhance approximately 40 exoskeleton units per year to hundreds once available to Medicare beneficiaries. We believe that the parallel addition of an established, growing, and profitable line of DAP products with the AlterG programs and systems will also drive a reduction in burn rate in 2024 and 2025 and lead to profitability with a workable cash balance if we execute on our goals. I also wish to thank our existing shareholder base and the new shareholders that have recently joined us for their commitment to supporting these life-changing technologies as we expand this business in 2023 and 2024. I look forward to providing further updates each quarter and through communication of each milestone as it is achieved. I would now like to answer any questions you may have.

And the first question comes from Swayampakula Ramakanth from H.C. Wainwright.

Larry and Mike, as you mentioned, if the brace category is awarded for exoskeletons, including ReWalk, around November, how would that impact the HCPCS code, and what kind of benefit can we expect from that?

Well, there are 3 components. There's a code in which they apply the product, and that is the K1007 code that exists. That does not change. That is a created code for exoskeletons that defines, in particular, the ReWalk product well. Once you have a code, you have to apply it to a benefit category in order to be paid for, and that has been our gap. So what's going to come out of the rule-making process is a defined benefit category, which is essentially exoskeletons within an existing category of braces. A challenge had been that there was nowhere to put us because there was nothing even remotely like what we did. The product is so innovative and different; it didn't fit in the CMS system. And that was the frustration that is why we didn't have a category. By changing the definition with this rulemaking into a new category or newly defined category into an existing category, it will now be able to be paid for. So it'll go into that code. It now has a defined benefit category in the brace if the rule-making stays on track. And then the price, the HCPCS process is the establishing of the final price. So there are 3 stages for us to work through. The first one succeeded. The second one is defined now by CMS and going through comments, and the pricing one is the HCPCS discussions, where we believe they will propose a price here at the November HCPCS meeting, and it may or may not go through a public comment period. If it goes through a public comment period of 60 days, they would then issue a final price afterward. So we will have a benefit category, we believe, in this calendar year, November cycle. We will have a pricing proposed and issued somewhere between the end of this year and the end of the first quarter of next year is probably the best way I can definitively say it. But the timelines are up to CMS and not up to us. So that's why I'm being a little cautious on that. Was that a better explanation or okay?

Yes, that's good. I’m trying to understand, once you receive the brace category in November, do you still need to wait for the reimbursement dollar to be identified before reimbursement starts, or can it be reimbursed as soon as you get the category?

Well, you're supposed to be able to get paid once you have a benefit category, but we need a price. So our challenge is CMS will have to decide what price they will use as they process it through the MACs. One of the reasons we have filed the 11 claims in Q2 and put in 35 or more this year is they've got all these pending ones that will have met all the definitions, and they'll either use the proposed price as interim pricing or some other price that they can establish in theory, until there is a final approved price. But once you have a benefit category, we then meet all requirements for it to be paid for. They just didn't say how much yet. That wasn't the clearest answer, and that's exactly the way I understand it...

I understand the situation. This brings me to my next question. Regarding the 11 submissions made in Q2 and the expectation to reach 35 by year-end, is it challenging to determine the lead time because the reimbursement amounts have not yet been established, or is there a regulation stating that once a reimbursement is submitted, there is a specific timeframe for CMS to provide payment?

There are timelines that should be followed, and it will become a repeatable process. Our conservative strategy has been that, although we expect to have at least 35 products placed this year, we are not planning to generate any revenue from them until early next year. We have a substantial number of products delivered that are being used for training, which we will receive payment for at some point, but we did not count them in this year's projections. Typically, once the process is established, it does not take long. The submission and training phases require some time, but the payment cycle usually lasts between 30 to 60 days. The government tends to be efficient once a process is in place. So, to answer your question, the timeline should not be excessively long once the process is defined, and we expect to reach that point by the first quarter of next year based on the efforts made with CMS and the feedback we've received.

Perfect. So now moving on to the acquisition. The AlterG transaction is expected to be completed by the end of today. In your prepared remarks, you mentioned we could anticipate about four months' worth of revenues from AlterG. Are you able to provide a dollar amount for that, or is it still too early to discuss the potential revenue upside? Additionally, could you offer some high-level insights on the synergies we might expect?

And Mike, I'll let you start. You can give some of the history of revenue and what our expectation or what we how we think it will develop.

The AlterG business generated $20 million in revenue for 2022 and is experiencing growth. For the current quarter, Q3, we prefer not to provide revenue guidance due to it being a partial quarter, which is approximately half a quarter's worth of revenue from them. Since we anticipate closing the deal today, August 11, we will eventually bring the two management teams together and work on quarterly forecasts as a team. This transaction will provide us with more scale and predictability, allowing us to better forecast our future performance. We expect to offer clearer guidance in upcoming quarters.

And I'll add a comment more from the way we're managing this. There's been extensive effort in the pre-closing integration process. The sales team that has been predictable with AlterG is in place and unchanged from after it closes this afternoon until December 31; it is the exact same group that has been delivering their numbers for years. So it's completely unchanged. Next year, we will combine the sales forces and have a bigger one and go through some training. That way we will have even more representatives that can sell it. But having the same team in place makes us feel pretty good that they will be continuous in their revenue results.

Great. And then also with this acquisition because you're going to get additional points of contact, especially in the clinic. So what are your thoughts about relaunching the clinic unit of ReWalk as well as any commentary on cross-selling of some of the products that you sell in the clinic point of sale?

I believe Mike and I can provide insights on both growth and expense synergies. Strategically, entering the clinics with a larger and more experienced team that has established relationships will greatly benefit us with the MyoCycle product lines, which are well-developed clinic products. For the ReWalk product line, we see the most significant impact at the clinician level, as we need these clinicians to write prescriptions for appropriate patients when dealing with CMS. This forms the foundation of our synergistic approach, focusing on selling personal units through these relationships. Regarding the ReWalk clinic model, we do not have high expectations since most training occurs on the unit that patients will eventually take home. If CMS covers this in a lump sum, clinics will select products tailored to each patient’s needs, which we believe will be effective. Additionally, I'd like to mention that ReStore is a product we haven't effectively promoted in clinics, so we plan to reignite our efforts there. You also inquired about synergy; I provided insight into the revenue strategic synergy. Mike, would you like to share your thoughts on the expense aspect?

On the expense side, we anticipate reducing duplicate vendor and subscription costs quickly. As we grow, both businesses have planned for future hires to support the increased resources and larger operations. However, by bringing together talent from our peer companies, we can avoid some of these new hires. Over time, we expect to achieve annual savings of around $1 million from this merger, driven by these two factors. I expect these savings to be realized within a year.

All right, there is nothing else at the present. Now, I would like to return the floor to management for any closing comments.

Thank you, Keith, and thank you, everybody, for joining us today. ReWalk today is a bigger, better company that is better positioned to grow bigger and better because of the combination of ReWalk and AlterG. That simple addition is there, but also the position to grow is because of the progress with CMS. As we go here into Q4, our extremely high level of focus will be on integration. We put extensive planning and detail on every step of the integration process pre-closing this. We are very well prepared, and the next few months will be a significant period to effectively make this work by doing the integration process correctly. We understand the importance of that. This is how you make these things work and work well. We have a team that's experienced in it, and we also have outside expertise that has helped us ensure we are getting every detail right. So that is a very important measurement for us, and we're laser-focused on it. Second, and we are just as focused on this, is the CMS process is still in process. We are highly active and working to provide support in the comment period, obviously, with our own positive comments because we believe CMS is going the right way in educating political leaders, in educating the societies that would support this and encouraging them to also provide comment. We are also working to provide support on pricing and why the pricing we have established is the best for the industry, the best for the patient, the best for the beneficiary, and reasonably established with what we already have with the VA and others. So there's extensive work in this quarter, which we're really excited about, and we will be able to report on as we get to our next earnings call. Thank you again for your time today.

As mentioned, this concludes the question-and-answer session and the call. Thank you for so much for attending today's presentation, and you may now disconnect your lines.

Thank you.