Ekso Bionics Holdings, Inc. (NASDAQ:EKSO) Q3 2018 Earnings Conference Call November 7, 2018 4:30 PM ET
David Carey - Lazar Partners
Jack Peurach - President, CEO & Director
John Glenn - CFO & Secretary
Bruce Nudell - SunTrust Robinson Humphrey
Greetings, and welcome to Ekso Bionics' Third Quarter 2018 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, David Carey of Lazar Partners. Please go ahead, sir.
Thank you, Operator, and thank you all for participating in today's call. Joining me from Ekso Bionics are Jack Peurach, President and Chief Executive Officer; and Jack Glenn, Chief Financial Officer. Early today, Ekso Bionics released financial results for the quarter ended September 30, 2018. 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 contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation or examination of historical operating trends and our future financial or operational expectations, 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 business, 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 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, November 7, 2018.
I'll now turn the call over to Jack Peurach. Jack?
Thanks, David, and thanks to everyone for joining today's call. I'm pleased to report that we had our best third quarter in the history of our company and our second strongest quarter ever from a revenue perspective. This underscores the growing adoption of our innovative products and reflects growing awareness of the benefits that our EksoGT and EksoWorks offerings provide our rehabilitation and industrial customers. We are also very proud of our year-over-year sales growth.
The key takeaway from our third quarter 2018 financial performance is that our commercial strategy continues to deliver results. Notably, our U.S. sales pipeline has more than doubled since the first quarter of 2018. Total revenue in the third quarter was up by 60% from the prior year period, with revenue from our rehabilitation business growing by more than 30%. Additionally, our sales productivity, as measured by units per salesperson, has also increased by almost 50% in the last 3 quarters.
Even more importantly, we are seeing an increase of interest from centers specifically focused on neurosciences and neurological rehabilitation, many of whom operate multiple facilities across an integrated network. We believe this demand is driven by an increasing understanding of the clinical and economic benefits our customers receive from the EksoGT, as they are able to treat more severe patients through a broad continuum of care.
Approximately 1/3 of our U.S. customers have multiple GT systems, and we currently have several multiunit sales in the pipeline. We believe this is a solid indication that our customers are embracing the EksoGT and making it a core part of their rehabilitation programs.
As we increase our sales productivity, we are also getting significant benefits from our rental program, which is helping drive customer adoption of our products. Our rental offerings provide customers with a bridge to capital budgeted purchase, giving them more flexible access to our products outside of annual budgeting processes and constraints. Although the rental program is still in its early days, conversion rates from a rental to a sale are approaching 80%. We believe this high conversion rate is driven by our customers' commitment to incorporate EksoGT into rehabilitation programs supported by its clinical and economic benefits. The potential value of our current rental fleet, assuming that all rental units convert to sales, is in excess of $3 million.
We also had our best revenue quarter ever in our EksoWorks industrial segment, reflecting growing demand for our EksoVest and EksoZeroG units. Our strategy to create greater value and generate sustained levels of profitability through solid partnerships with industrial customers continues to take shape. We are focused on exploring new opportunities to expand with other partnerships similar to the one we announced with Ford last quarter. This remains an important part of our growth strategy, and we are excited with the progress to date. Multiple large-scale manufacturing customers, including several Fortune 500 companies, are piloting our products to validate their effectiveness, and we are optimistic that several of these pilot programs will progress to more substantial sales opportunities.
The key focus, since I became CEO, has been on improving our operational efficiencies. And our third quarter results demonstrate that we are making significant progress in this area. We achieved company-wide gross margins of 42% for the third quarter, an 8 percentage point increase from 34% for the same period in 2017. This is due, in part, to better articulating our value proposition to our customers as well as reducing our costs of goods. Additionally, these operational efficiencies have flowed through our company and helped reduce our cash consumption.
Our operational efficiencies were also enhanced by refinements that we have made in our service business. As a result of these changes, which include improvements in our service model as well as ongoing improvements to the robustness and maturity of our product, the service business reported its first-ever operating profit in the third quarter of 2018. This remains an emerging business for us, and we will continue to explore ways to improve profitability going forward.
Our approach to enhancing broader and more rapid adoption of our products while driving efficiencies in our commercial operations includes the communication of clear, clinical and economic benefits that our innovative technology provides. Toward this end, we are targeting key decision makers and educating them on the EksoGT value proposition. Our research indicates that patients using the EksoGT increase their distance walk, leg strength and endurance as well as gait speed, balance and midline alignment during their recovery. Clinics also benefit from the EksoGT through longer treatment at a high reimbursement rates, increased throughput and greater patient volume.
Before I turn the call over to Jack Glenn, I want to welcome him as our new Chief Financial Officer. Jack joined Ekso in August and brings over 25 years of financial leadership experience within public and private companies in the life sciences industry. He's a valuable addition to our leadership team, especially as we continue to grow our business efficiently. We are excited to have Jack on the team.
Now I will turn the call over to Jack G to review our 2018 third quarter financial results.
Thank you, Jack, for the warm introduction. Now turning to our financial results. Total reported revenue for Q3 2018 was approximately $2.6 million compared to $1.6 million in Q3 2017. We already exceeded total 2017 revenue through the first 9 months of 2018, underscoring our strong growth trends. The breakdown for Q3 2018 revenue is as follows. We recognized approximately $1.7 million in medical device and related revenue, up from $1.3 million in Q3 of 2017. The 16 unit placements this quarter, 6 units of which are rentals, is a 45% increase over the 11 units placed in the same period last year. We currently have a total of 335 Ekso rehab units in the field, of which, 33 are rentals.
Our rental program continues to help drive customer adoption and serves as a bridge to a capital purchase. We recognized approximately $800,000 in EksoWorks revenue compared with almost $300,000 in the same period a year ago.
As Jack noted, this quarter was the best ever for EksoWorks in terms of revenue. Our EksoVest continued to gain traction among manufacturing customers as evidenced by the recent adoption by Ford.
Our overall gross profit for the quarter was $1.1 million, representing a gross margin of approximately 42%. This compares to a gross margin for the same period last year of 34%. As Jack noted a few minutes ago, we have taken numerous actions in the past year to strengthen our gross margins in rehab, given that this segment represents nearly 70% of our business. These initiatives include material cost reductions for the EksoGT and operating improvements in our service model that resulted in a first-time positive operating profit for our service department in the quarter. We are extremely pleased with the progress we are making in this respect as our EksoGT gross margins increased from 33% to almost 53% in the quarter. We continue to focus our efforts on increasing the EksoGT gross margins.
Operating expenses for the third quarter of 2018 were $7.2 million compared to $7.6 million for the third quarter of 2017. This is a reduction of $400,000 or close to 6%. The reduction is driven primarily by our actions in the first half of 2018 to proactively operate more efficiently and consolidate our U.S. marketing team with our U.S. sales team as we strive to improve our customer acquisition costs going forward. It also reflects more efficient management of our R&D expenses as we remain focused on realigning our investments in areas that we believe will drive sales and improve our margins.
Loss from operations for the quarter was $6.1 million compared to a loss from operations of $7.1 million in the third quarter of 2017.
Net loss for the quarter was $7 million or $0.11 per share compared to a net loss of $6.3 million or $0.18 per share in the third quarter of 2017.
Turning to year-to-date results. Revenue from the first 9 months of 2018 was $8 million, a 64% increase compared to $4.9 million for the same period in the year prior. 2018 year-to-date gross profit was approximately $2.8 million, representing gross margin of approximately 35% compared to a gross profit of $1.3 million, representing gross margin of approximately 26% in the first 9 months of 2017.
Loss from operations for the first 9 months of 2018 was $21.9 million compared to $23.7 million for the first 9 months of 2017. We are improving our financial standing by reducing the use of cash for each quarter in 2018 on both a sequential and annual basis.
Cash used in operating activities for the 9 months ended September 30, 2018, was $17 million as compared to $25.6 million for the first 9 months of 2017. This reduction in cash burn is exemplified by the cash used in operating activities in the third quarter of 2018 of $4.9 million compared with $7.2 million in the first quarter of 2018.
As of September 30, 2018, we had a cash balance of $13 million. As a result of our pipeline for both rehab and industrial businesses and continued recent improvements to our operating structure, we expect cash used in operating activities to be below $5 million for the fourth quarter of 2018. Please see our 10-Q filed earlier today for further details regarding the quarter.
And with that, I'll now turn it back over to Jack.
Thank you. To summarize, we had another strong quarter of growth and are pleased with the progress we continue to make. As I noted a few minutes ago, we are ultimately focused on protecting and improving human mobility. Recently, Mark Pollock visited us and toured our facility. Mark is an explorer and motivational speaker with a spinal cord injury. He was the first blind person to race to the South Pole, and now he's exploring the potential to use the intersection between humans and technology to cure paralysis. He is truly an amazing individual, and I would recommend watching the talk he gave at the Ted 2018 conference, which is available for viewing online.
Mark's visit was a tangible and potent reminder that the work we do at Ekso Bionics truly matters to individuals living with mobility challenges. We were the first exoskeleton company to receive FDA certification for spinal cord injury and stroke rehabilitation, and we are expanding our technologies and products to support stroke patients on their often difficult roads to recovery. We continue to believe that the EksoGT provides life-changing rehabilitation to our customers, and someday soon expect to see this transformative technology become the standard of care for stroke rehabilitation therapy.
Turning to our outlook. We are taking advantage of positive market dynamics by primarily targeting the large and growing rehabilitation sector across North America as well as high-profile opportunities in Europe and Asia. We are also expanding our EksoWorks offerings into exciting new industrial markets, including automotive, construction and aerospace.
While we may have future quarter-to-quarter lumpiness in our top line results, the overall growth trajectory of our business remains strong. We expect to see continued progress in unit adoption and pipeline visibility as well as improvements in gross margins and customer acquisition costs with the ultimate goal of maximizing our profitability levels and adding value to our shareholders.
Operator, you may now open the line for questions.
[Operator Instructions]. Our first question today comes from Bruce Nudell of SunTrust.
Just some housekeeping questions first. There were 16 shipped units, six were rentals. Could we talk about the U.S., like how many rentals, how many conversions? My math says one worldwide. And how many outright sales?
Bruce. I'm going to turn it over to Jack Glenn. He's got the data right here.
Yes. So there were six rentals, as we said. Of those 10, of the new -- others were -- four of new device, and four were upgrades. And one was also an indirect through one of our distributors or two of them.
So four were upgrades -- so in other words, conversions?
Four, yes, four were...
Sorry, rental conversions?
Yes. That's what I was kind of asking.
Oh, I don't think we had any rental conversions in the quarter.
Okay, okay. And two were, kind of, stocking units as it were?
Well, that fell through our European distributors.
Okay. So they were outright sales to those guys. Okay, perfect. And in terms of Vest and Mounts, what was the split there?
One second, Bruce. We're pulling it up. We filled 53 mounts and 90 vests in Q3.
53 and 90. And the gross margin on GT is clearly showing very nice improvement. And I think it was 53%, if I didn't mishear or misread, this quarter. And some of that was ASP because you're able to charge more. The value proposition is becoming more concrete I guess. And part was what was cost of goods. What is the ceiling on that product?
The ceiling on the product from a...
A gross margin...
A gross margin perspective? Well, we're going to continue to work on all aspects of that, both improving the value that we deliver with the product or maybe expanding the product to enhance the value it delivers. Better articulating it and better validating it and making sure we understand and our customers understand the values it's bringing to them. And then continuing to work on costs. So the -- we're fortunate that our customers are willing to pay a fair price for it, and we're just going to continue to optimize as best we can. I would -- I believe that there is opportunity in both of those -- both the value side and on the cost side in that product. So I think, really, we should see, over the longer term, some continued improvement.
Okay, perfect. And then just in terms of your perception of the competitive landscape in rehab, and competition is defined by label, functionality, convenience, costs, all that stuff. Could you just give us like color on your view of the landscape as you see it? I know the market's like barely scratched. But just your view of where Ekso stands in the continuum of devices.
Sure. Well, in the rehab space, I think it's fair to say that we pioneered this area and continue to have a strong leading position in this area. Both in terms of installed base and in terms of functionality, our product is really designed and developed specifically for rehab and we serve it very well. That said, we are constantly watching and understanding competitors and trying to understand what they are doing. We feel very confident with our position in the market, the value that we bring our customers. And in some sense see some competition as being a little bit healthy because it's validated in the market a little bit more. But we're very confident with our position in the market.
And it sounds like over the last year, your kind of packaging of the medical economic benefit has kind of gelled. Where are you in having like kind of a package that could go from one side to the other and penetrate these IDNs, which are intrinsically very efficient selling mechanisms?
Yes. Bruce, that's a great point. We have spent a lot of time really refining -- understanding, refining and then articulating the economic value proposition we bring. We focused for a long time on the clinical value proposition. And then over the last -- well, at least since I've been here, before that as well, on the -- of the economic value proposition, I think we've got a very good understanding of the levers that the EksoGT brings our customers from an economic perspective. And we've got it fairly well defined such that we can talk to customers. And customers, frankly, will get different benefits out of it, given how they operate their clinics. So some may want to drive throughputs, some may want to drive reimbursement for per patient. And we can help do a lot of those different things. So to answer your question, I think we've really evolved it quite a bit. And we feel -- we've had a number of case studies that we've worked with our customers to develop as well, so these are validated in the marketplace. So yes, we're very confident in that.
And just like -- for a lot of investors not familiar with the story, how far away -- how much critical mass this year has to be in the market before -- like if you're -- you have 335 units. I don't have the U.S., x U.S. breakdown here but -- in front of me. But like how many units have to be out there before everybody says, you know what? If we don't have some sort of exoskeleton assistance, we're just going to fall behind in being able to attract patients and/or get maximum reimbursement or whatever the hook is. Like how far are -- like in terms of units or time, how far are we away from achieving that critical mass?
Yes. We talk about that all the time here. So we think there are about, I mean, 1,000 and 1,200 leading stroke in neurological rehabilitation centers in the U.S. We believe once we get to about 50% of those, so call it, 500 to 600 centers, this becomes a de facto standard of care, if you want to call it that. The -- you have to have it to be considered a leading stroke rehabilitation center. We're in about between 125 and 150 U.S. centers today and are continuing to march down that path. So we're very focused on that. We think once we get to that point, it will become something that most centers will not be trying to understand whether they should or not but just timing and budgeting around it.
And when I went out to the plant and tried on the Vest and the Mount, played with the mount, I mean, I was -- I just thought they were great. And so my question is, where are you in cultivating other corporate partners and/or -- and tangentially, how's the Ford relationship evolving?
Yes. First, the Ford relationship's evolving extremely well. We're in, what I would say, broad pilot deployment with Ford there, evaluated in a number of plants around the world, 15 plants. And they're continuing to gather data. That relationship is very strong. The -- in terms of general adoption, maybe first, let me explain how we think of the customers' decision-making process. They go through a, sort of, discovery, education phase. This is new, so there's an educational element to it. Then they trial it. Then they may go to a broader pilot. That may be at a single site or at multiple sites. And then, ultimately, go into a deployment stage. We have a number of large-scale manufacturers that are in the -- somewhere in the trial to pilot phase with our product. It's -- everyone makes decisions on different timescales, so it's difficult to actually predict. But we are very confident that as these customers continue to evaluate and learn more about our product and how it helps them, we will see more and more of conversions.
So just thinking about Ford, Ford is still in the, kind of, advanced pilot stage. And if they get to, aha, will that be both -- just in terms of their capacity to absorb product or Ford be -- like become a very major customer. And if Ford opts to go that way, do you think that, that will send a signal to other manufacturers that, "Hey, this is really something we should very seriously look at?"
Yes, that's very perceptive, Bruce. The -- first of all, I think Ford is very much a leader in this area. And so -- and other companies really look to companies like Ford to inform them on what the future looks like. So that will definitely -- having Ford as a customer continues to support our adoption with other customers for sure. I think the other thing you asked about was, if -- as Ford moves forward, and if they decide on deployment, what does that mean to Ekso? We certainly want to earn Ford's business and become a supplier to Ford, and ideally, make that a very material part of our business. So, yes.
Okay. And my final question is about cash burn. I think if I heard right, there's around $13 million left or it's about $5.25-ish million. And what are your just general thoughts about financing avenues and/or the magnitude of the raise? Is it like -- are you thinking of one big gulp? Or proving your spurs and incrementally building, husbanding your cash reserves?
Got it. I'm going to turn that over to Jack.
Yes, Bruce. So I think as we said that we are looking to continually reduce that burn on a quarter -- sequential-to-quarter basis going into 2019. We are -- we did put an ATM in place in Q3, and we're able to raise around $4 million through that. But I think we are looking at several options. And the best way to fund our growth in 2019, and we'll continue to do that and what we think is the best for the company.
There are no additional questions at this time. I would like to turn the call back to Jack Peurach for closing remarks.
Thank you all for joining us today. We're very excited to have already exceeded the full year 2017 revenues through the first 9 months of 2018 and believe there remain significant growth opportunities in the fourth quarter. Our healthy pipeline is a clear sign of the growth strategy and user adoption remains strong. Going forward, we will remain focused on demonstrating the clinical and economic benefits of our exoskeleton offerings across the rehab and industrial markets where we see tremendous growth potential. We appreciate the continued support from our employees, customers and shareholders. And I look forward to sharing our progress with you in the months ahead. Thank you.
This concludes today's conference. You may now disconnect your lines. Thank you for your participation.