ReWalk: Dilution And Dreams

| About: ReWalk Robotics (RWLK)

Summary

ReWalk has built up a cash buffer at the expense of diluting initial shares.

Even if the company achieves the market's great expectation for revenue growth, it will be hard pressed to deliver positive free cash flow from operations anytime soon.

While the technology is promising, the near-term future for creating value is quite challenging.

ReWalk Robotics (NASDAQ:RWLK) is an Israeli company that developed a first of its kind exoskeleton robot that can help those who have lost use of their legs to be able to walk again. The company has been publicly traded since September 2014. I have watched ReWalk off and on and have become increasingly bearish, for reasons I will lay out here.

With the recent sharp decline in share value, it can be tempting for a retail investor to wonder if there is value to be found. RWLK Chart

The narrative behind the decline in share value is not a mystery - I anticipated it a few months ago, in June 2016, when I wrote about the likelihood of dilution for the stockholders. In fact, that is precisely what has happened, with ReWalk raising some $12.2M in cash through issuing 3.25M new ordinary shares and additional 2.4M warrants late last month, which basically doubled their cash on hand at the end of Q3 2016. The result was swift and clear - the shares have dropped by around 50% in a span of 3 weeks.

Those new shares were issued at $3.75 each and with the current market value at around $2.70, it is worth checking into whether or not there is an opportunity here. The challenge, in large part, is how to do a valuation on a company like ReWalk. Some other firms are entering the same market (for example, see my article from March 2016, and Seeking Alpha contributor Brian Marckx's excellent, deep overview of the exoskeleton market), but comparisons are difficult to make at this stage. To keep it (relatively) simple, I decided to think instead about how close ReWalk appears to be to generating positive cash flow from operations. I am not going to be concerned with discounting it, but rather focusing on whether it is reasonably likely to stop being negative anytime soon.

To think about ReWalk's future, I wanted to start with understanding revenues and I got a clue from the Q3 earnings call about expectations in the market. In the call, Kyle Rose, an analyst for Canaccord Genuity, asked about 2017 revenue:

I understand you're not giving formal guidance for '17 and beyond, but just consensus contemplates a pretty big step up there just as far as '16 to '17 and just I think - the number of consensus is looking for is somewhere in the $19 million to $20 million range for '17 revenues, just from a high level when you think about that, are the pieces in place to drive to that type of revenue growth year over year? And just how do you feel about how the streets you're modeling '17?

This sort of expectation seems to be a promising start, if it can stand up. To be clear, $19-20 million in 2017 revenue would represent about a 200% revenue growth YoY, as 2016 looks to end up around $6.5M in revenue, which is itself a 75% increase from 2015. It is entirely possible that type of revenue growth is on the horizon and CEO Larry Jasinski indicated that he believed it, although was clear in his response that the timing was beyond the company's control, but rather up to insurance companies deciding to provide coverage for ReWalk's products. As more and more insurers decide to get on board with providing coverage for ReWalk's units, revenue is no doubt poised for growth. However, even making generous assumptions does not paint a rosy portrait for ReWalk's ability to translate revenues into free cash flow in the next few years. Assuming:

  1. Revenue does hockey-stick growth for the next five years, with figures doubling or more for the next two years and still growing substantially afterwards.
  2. SG&A and CapEx costs both remain relative flat.
  3. Gross margins, currently around 25%, are able to inch up to around 40%.
  4. Working capital needs don't skyrocket along with revenue.

Then it is true that free cash flow could turn positive within a few years, assuming ReWalk can manage to survive that long. As with any model, the results depend on the assumptions and these assumptions would have to be considered, in my opinion, beyond what is realistic. Even if a lot of favorable factors combine, but without such lavish expectations for revenue expansion, cash flow can turn positive in around 3 years' time. For example, keeping all the other assumptions the same, but maximizing revenue predictions at a mere $70 to $75M range (still ten-fold growth over five years), cash flow will be barely positive.

Conclusion

What clearly emerges is that ReWalk is at least 3 years out from turning cash-flow positive, and in the meantime, the share price is reflective of some fancy dreams coming true. In the end, any investment thesis for ReWalk comes down to the investor's expectation for growth compared to the firm's need for cash. With cash on hand that should cover next year's loss of cash from operations even if revenue is $18M, where it goes next for cash is not likely to be good for current shareholders. The hard fact, as I see it, is that even under impressive growth models, 2017 and 2018 will result in strong negative free cash flow, requiring either additional debt or additional equity. ReWalk has access to some more credit, roughly $10M remain available, but tapping that is likely to keep the stock depressed in the short term, compounding the effect of the dilution. Between the combination of effects of the company's uncertain timing of revenues and continued high rate of burning cash, and not to mention the risks of new entrants to the market in the coming years, I cannot justify taking anything but a bearish view on ReWalk.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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