Earnings Call Transcript - LFWD Q2 2020

Operator, Operator

Thank you for joining us for the Second Quarter 2020 Earnings Conference Call for ReWalk Robotics Limited. All participants are currently in listen-only mode. After the presentation, we will have a question-and-answer session. I will now turn the call over to Ori Gon. Please proceed.

Ori Gon, CFO

Thank you, Michelle. Good morning and welcome to ReWalk Robotics' second quarter 2020 earnings call. This is Ori Gon, ReWalk's Chief Financial Officer. And with me on today's call is Larry Jasinski, Chief Executive Officer. This morning the company issued a press release detailing financial results for the three and six months ended June 30, 2020. This press release and a webcast of this call can be accessed through the Investor Relations section of the ReWalk website. Before we get started, I would like to remind everyone that any statement made on today's conference call that expresses a belief, expectation, projection, forecast, anticipation or intent regarding future events and the company's future performance may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are based on the information available to ReWalk management as of today and involve risks and uncertainties, including those noted in this morning's press release and ReWalk's filings with the SEC. 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, except as required by law. A telephone replay of the call will be available shortly after completion of this call. You will find the dial-in information in today's press release. The archived webcast will be available on the company's website. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on August 12, 2020. Since then, ReWalk may have made announcements related to the topics discussed. So please reference the company's most recent press releases and SEC filings. And with that, I'll turn the call over to ReWalk's CEO, Larry Jasinski. Larry?

Larry Jasinski, CEO

Thank you, Ori. Good morning, everyone. We are satisfied with our second quarter results and the progress we have made with key initiatives in 2020 as they mark the beginning of a fundamental change in the industry and for ReWalk Robotics. The advent of meaningful reimbursement pathways represents a transition point to true penetration of a significant market. We have relied on case-by-case battles over the past few years as we expanded the evidence to support the safety and value of walking again for the paralyzed community. With an established insurance-based infrastructure with the German government and multiple German insurers, we can now demonstrate the results of the new structure. In the United States, a pathway has been established through the Centers for Medicare & Medicaid Services decision to issue the first-ever distinct billing code for an exoskeleton as a result of the ReWalk application. The first measure of success is operating and supplying ReWalk systems for spinal cord individuals through the contracts established so far this year. All systems placed in Germany this quarter were processed through these new agreements. While we have limitations on our capacity and training and access due to the COVID virus, we were still able to place eight systems exclusively under the contracts in Germany in the second quarter. This demonstrates to users and clinicians that there is now a clear and well-defined path for medically qualified patients to utilize the ReWalk 6.0 system to improve their quality of life and to walk in their community. In parallel, we are actively advancing to complete multiple additional contracts during 2020. In the United States, a process via a formal application to create a distinct category for billing and payment for the ReWalk exoskeleton started in 2019, after an extensive review of the data provided on the ReWalk device. In May 2020, the government issued a preliminary decision that a code be issued. The process then progressed to public hearings, which included a presentation by the company, presentations by medical experts on the need for this coverage of this technology, and statements given by a paralyzed party who represented many in the community, followed by questions from the panel that was charged with the decision. In July 2020, the HCPCS Level 2 code, K1007, which identifies and describes that exoskeleton device was issued to facilitate insurance claims submissions and processing. The code is effective October 1, 2020. Over the past six years, our company and the industry have relied on case-by-case battles to provide systems to users. During this period, we placed close to 600 ReWalk systems. This allowed establishment of community experience by paralyzed individuals via rewalking, expanded the base of published data, allowed clinicians to understand the value and safety of rewalking, and allowed ReWalk to build an infrastructure support that was capable of expansion. The U.S. and German populations include over 350,000 paralyzed individuals. From that population, we will target 45,000 individuals that we believe best qualify under the criteria for the ReWalk system. Until now, we have not been able to achieve meaningful market penetration as economic resources in terms of insurance policy and coverage had not yet shifted to this technology. We have now entered the beginning of that shift in Germany and anticipate that the United States will follow the process from code to coverage contracts in a pathway that is similar to Germany in the coming 12 to 24 months. We are now on the doorstep to market penetration after years of effort. Now let's turn to specific results from Q2 2020. 14 SCI personal systems for home use were placed in the quarter for revenue of $1.668 million. ReStore activity was limited to existing clinics due to the shutdown or limited operations due to COVID. ReStore data for my multicenter clinical study and additional publications from Harvard's exosuit research and a field-based publication of market experience were each published in Q2. Our overall margin was at 61.3%. Operating expenses were reduced to $3.574 million. Our operating loss was reduced to $2.552 million. We continue to pay down our long-term debt and will completely eliminate it over the next three quarters. CMS issued a payment code in July for the ReWalk exoskeleton. Training was completed for our July one launch of the MediTouch systems for therapy of the hands, arms, legs, and overall balance. Training was completed for our July one launch in the MyoCycle system for home and clinic exercise of the spinal cord injured community. I'd next like to turn over the call to Ori for a financial review.

Ori Gon, CFO

Thanks, Larry. Our Q2 revenue was $1.7 million compared to $900,000 in the prior year quarter and $800,000 in the previous quarter. This quarter we delivered several units that we could not complete in the first quarter due to COVID restrictions. As Larry mentioned, the rehab products have generated limited revenue due to the COVID-19 effect during the quarter. On the reimbursement side, we had five new rental approvals and six conversions of previously rented units during the second quarter. At the end of the quarter, we had 12 active SCI rentals and in addition, four restored trials remained active. This rental pipeline represents $1.3 million in revenue. Our total number of SCI pending insurance cases was 98 at the end of the quarter compared to 115 in the previous quarter. 89 of the current cases are in Germany and 9 are in the U.S. Our VA SCI pipeline has currently 40 candidates, which shows great potential as VA clinics start to reopen. Our quarterly gross margin in the second quarter of 2020 was 61.3%, a 0.6% increase compared to our prior best quarter. This is a small, but very important milestone as it shows that we have the ability to reach the level of margin we want to achieve, which is around a 65% margin typical in stable medical device companies. As we completed our unit cost reduction at this stage, the gross margin increase is coming mainly through higher average selling price (ASP). This quarter we sold 15 units and the average selling price was $89,000, not including rental or warranty deferrals and other fees. This is compared to $79,000 in the prior year quarter. Now let's take a look at our operating expenses. Our second quarter operating expenses landed at $3.6 million compared to $4.7 million in the prior year quarter and $4 million in the previous quarter. The main decrease compared to the second quarter of 2019 was in R&D as we completed the ReStore development and clinical trials in 2019. The current quarter results represent our lowest operating expenses since we went public. Although some of this is affected by COVID-19, especially, due to travel restrictions and several initiatives we took to reduce our spending during this period, we are expecting to keep our operating expenses at this range. And of course, we remain alert and flexible to require changes in this aspect in the future. To recap the quarterly results, our net loss for the second quarter was $2.9 million which marks the first quarter our net loss is lower than $3 million since we went public and shows our overall operational focus. This is compared to a net loss of $4.6 million in the second quarter of 2019. Our non-GAAP net loss for the second quarter of 2020 was $2.7 million compared to a non-GAAP net loss of $4.2 million in the second quarter of 2019. We ended the quarter with $14.1 million in cash and our long and short-term loan balance was $4.8 million as of June 30, 2020. The cash balance does not include an additional $9 million of equity raised we closed in July. With that, I'd like to turn the call back to Larry for additional remarks.

Larry Jasinski, CEO

Thanks, Ori. I'd now like to discuss the activities within each of our four product franchises and then close with an outline of the key objectives for the second half of 2020. I'll start with the ReWalk system for community use. Targeting the next 12 to 24 months, we currently have 89 German submitted insurance cases. And in the U.S. we have 143 qualified patients in the pipeline covered by different payers and 40 qualified VA patients. The pace and success with processing these will be determined by the insurance payment process. We believe that the German cases with insurers where we already have contracts will move forward reasonably quickly and the contracts we expect to add in 2020 will drive many of our 2021 placements. Our current German contracted coverage includes 83 million lives with 36 payers in the public arena through DGUV for workplace and other public groups for injuries along with over 20 million covered lives through commercial insurers. We are currently in contract negotiations with groups covering an additional 39.6 million lives and expect to end the year with commercial contracts covering approximately 70% of all German cases. The process of expanding placements and infrastructure will be deliberate over the next 24 months, but it represents a fundamental change in the manner in which the ReWalk exoskeleton is provided for home and community use in everyday life. The U.S. cases for the VA and workers' compensation will advance as COVID allows the markets to reopen. The majority of the remaining total within the Medicare, Medicaid and private payers groups will depend on our progress with pricing, contracts, and policies in 2020 and 2021. The pathway with the Centers for Medicare & Medicaid Services has multiple steps. The establishment of a specific code from the ReWalk application has enabled the stages of establishing the CMS fee schedule or pricing for the code, meaning coverage by government and private payers and setting policy all in a manner that was similar to our experience in Germany. We have also applied for accreditation to be recognized as a supplier that meets the quality standards set forth by CMS, an important step in our goal of achieving Medicare coverage and facilitating billing for ReWalk devices. We have the personnel and support and materials in place to move forward within our existing team and network. These steps to seek coverage policies will occur over the next one to two years. And if we have continued success, it will change the landscape for those who are medically qualified, who wish to begin rewalking in their community and everyday life. In parallel, ReWalk has the largest database of SCI community users worldwide and specifically within the VA. As these have been built over the last six years, we have a database of medical experience and will be able to build effectiveness use data and economic data from the space that we will seek to publish in the early part of this cycle. Second, I want to move on to our second franchise, the ReStore system. The results of the multi-site clinical study conducted at five of the leading U.S. centers were published in June. The primary outcome measure of the study was safety, but several secondary outcome measures were also explored. ReWalk achieved the safety-related expectations and promising results such as the majority of participants increasing their walking speeds by a clinically meaningful margin in just five treatment sessions. These improvements in such a short timeframe are encouraging, and we eagerly anticipate results of longer-term intervention and exploring further endpoints in studies that are currently being conducted. We also had a publication in Neuro Rehabilitation Times from a ReStore customer in the U.K. In this editorial, the lead clinicians noted using ReStore led to better gait biomechanics, which in turn led to increases in walking distances, faster walking speeds and greater confidence to walk. Importantly, for the clinic business models, the therapists also noted that traditional gait training often requires two therapists, and the effort is extensive by the therapy team. ReStore allowed them to reduce the need for the second therapist, which can lead to a reduction in the clinic's labor costs. The launch of the ReStore system and many of the capital planning applications were paused by the onset of the COVID virus. While the initial centers have had good results, they have had limited numbers of patients. We continue to see limited activity within the clinics and expect the effective launch will not restart in full until 2021. Our focus will be on the continuing studies, establishing educational content to inform the market and working with selected national accounts to build data on effectiveness and economic value. Longer-term, we may pursue a CPT code for robotic stroke therapy. Our third franchise with MediTouch rehab systems for home and clinic use. We have completed training and are launching the product during Q3 as clinics reopen. This rehab glove, leg, arm and balance system will apply to the stroke segment we serve as well as other rehab needs. We expect this product to be synergistic with our ReStore stroke launch and also to be an attractive product for the growth of home, telehealth, rehabilitation particularly with concerns of COVID or other viruses in the clinics. The launch will be limited by the capital equipment cycle and the access to clinics, and we are exploring the direct-to-patient acquisition pathway. And our fourth franchise, our Myolyn systems for exercise in the clinic and at home. The functional electrical stimulation product known as FES complements our SCI offering as any rewalker can also benefit from a home-based cycle for exercise. This home exercise can help with conditioning to complement the use of ReWalk in the community, at work or at home. This product has been placed on the ReWalk Federal Supply Schedule FSS with the VA and is under contract for supply to any qualified veteran. It does not fall under the capital equipment requirements for the VA and many workers' compensation groups. The product is easier to use and its simple design is less expensive than existing therapies. We expect this line to gain some reasonable home penetration along with being an effective product for the clinic. It should also help increase rehab leads for ReWalk as we build the reimbursement systems. So to conclude today, here are our key measurements and objectives for the remaining six months of 2020. Number one, expansion of contracts in Germany. With four contracts in place to cover over 20 million lives, we are seeking to add two to four more contracts by year's end. Number two, with CMS achieve accreditation, establish pricing and initiate interaction on contracts that we target for closure in 2021. Third, expansion of data with ReWalk through use of medical records and experience now that we have a database of users with longer-term use of over three years. Fourth, expansion of supporting data for ReStore through targeted strategic locations utilizing the system. Fifth, an effective relaunch of ReStore once clinics reopen at a higher level. And sixth, measurable placements of MyoCycle and MediTouch. In conclusion, we are encouraged by the Q2 revenue results that we achieved through the contracts in the last few weeks of the quarter as the clinics partially reopened. As we achieved growth in all four product categories through contracts and access have a level of margin improvement, expense management to further reduce our operating burn and complete paying off all debt in the next three quarters. We can now see the pathway to achieve breakeven to profitable operations. Thank you very much for your time and interest today. And I'd like to turn the call over for questions at this stage. So operator, if you can move forward with the instructions for Q&A.

Operator, Operator

Our first question comes from Swayampakula Ramakanth of H.C. Wainwright. Your line is open.

Swayampakula Ramakanth, Analyst

This is RK from H.C. Wainwright. Good morning, Larry, and Ori. Congratulations. Obviously, this is one of the best quarters for your team both on the top line and also on the gross margin. So as you mentioned, you had some spill-over from the first quarter into the second quarter. Can you provide insight into what sort of backlog you could have entering the third quarter? Is there anything of that sort, just to see the rhythm of the top line for the second half of the year?

Larry Jasinski, CEO

Both Ori and I can answer. We placed almost everything that we wanted to in Q2, so there's not a specific backlog of patients that didn't make it in, but the clinics are operating at a reduced rate still. So we're just not moving as fast as we'd like. Our expectations in Q3 and Q4 are that the clinics are going to stay at least at the current levels. So we will be able to place a number of products, but it's going to vary depending on COVID and what it may do to us. That's the risk we face. I think we gave the general numbers on what we have out there. The German contracts will advance nicely, while the U.S. will be a little bit slower. Ori, is there anything you'd like to add?

Ori Gon, CFO

Yes. Just on the Q2 question, RK. In this quarter, we saw approximately $300,000 of revenue that we wanted to complete in Q1, but could not due to the shutdowns and lockdowns we experienced in different regions. So that's also something that kicked in this quarter. And as Larry mentioned, we have completed everything we wanted to in the second quarter. So I can't say we have the same type of deferrals for this quarter. We have our normal warranty and some rental aspects that are part of the ordinary course of business.

Swayampakula Ramakanth, Analyst

Okay. And on the topic of Germany, with eight systems being placed during the second quarter, most of these were likely with current contracts you have. What have you learned in terms of working with these different organizations that you could apply for the 89 systems still pending in the pipeline?

Larry Jasinski, CEO

All of the units— all eight that we placed were under our contracts, which was very encouraging and exactly what we hoped for. Out of the group of 89, I believe 83 fall within contracted groups that we either already have or the four that are in late-stage negotiations. Therefore, that pipeline aligns well with our contracted efforts, and it will be critical for us to keep that pipeline filled and to get patients into it. Ori, anything you'd add?

Ori Gon, CFO

Yes, I think we don't have a lot of data yet from contracts completed and announced in the first quarter. However, we do observe that the cases, submissions, and approvals have been coming in a much more orderly fashion. In general, all of the conversions we had over the last quarter or three to four months since we announced it are generally taking between two to three quarters, depending on the time it takes for the trial itself, as well as the rental and training processes, which still requires three to six months. So it's encouraging to see that we don't have many cases being paused and that the process is well defined now.

Larry Jasinski, CEO

To be more specific on the applications, 35 of the 89 are from companies where we currently have contracts, while 48 are with new groups we are negotiating with. So, of the 89, it accounts for 83.

Swayampakula Ramakanth, Analyst

Thanks for all this color, both of you. Out of the 89 systems, do you have a sense of how many are in trial basis or how many are just starting off their application? And based on what Ori was saying, it appears that it can take between two to three quarters before they can convert completely. Is that a typical timeframe for Germany?

Larry Jasinski, CEO

In the contracting phase, once the application is submitted, we have ensured that the patient has undergone medical qualification and that an initial trial of the unit has been completed comfortably, and they can physically manage the product. Training comes after that and typically involves either a rental or a purchase based on how they do within the specific group. So the 89 applications are more definitive for those that have gone into the application process. There is a subset that is in training. I don’t have a specific number on that.

Ori Gon, CFO

It's 12 Larry and RK. We have 12 active rentals in Germany currently being conducted and paid for. This is a - we receive payment for the rental fee.

Swayampakula Ramakanth, Analyst

Of the 16 units sold at an average price of $89,000, do the contracts make up most of this price? Would Germany units be priced slightly lower than what you would expect with the VA or in the U.S.? Any insights on how to consider this average price?

Ori Gon, CFO

So, first of all, we sold 15 units during the quarter—10 in Germany and five in the U.S. When I refer to the $89,000, we are taking only the revenue from the sold units, excluding rental fees, warranty deferrals, and service fees that are not directly connected to the core transaction. We see generally similar ASP now in Germany and the U.S. as we had a nice increase in both regions. The average conversion price is stabilizing, and both regions will likely maintain these average numbers moving forward. In 2018, we adjusted our pricing strategy and included a five-year warranty, which had taken some time for the market to adjust, but it is now stabilized.

Swayampakula Ramakanth, Analyst

On the topic of the VA, could you provide commentary on the 40 or so cases that are pending approval at this point? Based on what you mentioned earlier, what sort of timeline can we expect?

Larry Jasinski, CEO

The patient flow into us has increased significantly since the study accrual was completed, resulting in a total of about 40 cases currently pending. However, the process of approval for these cases is slow due to the virus and the VA clinics not reopening aggressively. Until those clinics open up, we're building a pool of patients. Most of them are expected to be placed by Q4, but they've been more cautious than private clinics. We expect to see some placements this year, but many will likely fall into next year.

Swayampakula Ramakanth, Analyst

In the VA, is the process the same as previously discussed, with a two to three-quarter timeframe, or is the VA approach different where they purchase the unit first and then get trained?

Larry Jasinski, CEO

There will be a mix. The majority will likely follow a longer process like you described, but a subset includes patients who participated in clinical studies and have already been trained. The majority of new VA candidates will likely see the unit taking six months to be delivered, while quicker placements may come from those who have previously participated in the study.

Swayampakula Ramakanth, Analyst

Thank you. I’ll step aside and then come back later. Thank you for taking my questions.

Larry Jasinski, CEO

Thanks.

Operator, Operator

There are no further questions. I would like to hand the call back to Larry Jasinski for any closing remarks.

Larry Jasinski, CEO

Thank you, Michelle, and for everybody who joined us today. I appreciate the time. Please stay tuned to our ongoing publications at our data, and have a great day. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.