Rewalk Robotics Ltd

NASDAQ:LFWD

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to the Q2 2023 ReWalk Robotics Limited Earnings Conference Call. [Operator Instructions] 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.

[Michael Lawless, executive]

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.

[Lawrence Jasinski, executive]

Thanks, Mike. Welcome, everyone, and thank you for joining us today. Q2, along with subsequent events, was an excellent period for the company and specifically in regard to 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, 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, allow movement in new ways with finally calibrated support and reduced pain. We believe the technology is unique, well-accepted replacement in over 4,000 clinics around the world 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 for some time 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, to build our strategic position in the clinic, to expand our organizational skills and add depth for commercialization. We believe the acquisition of AlterG with its patent -- 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 benefit 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 & Medicare Services, CMS, to expand the access of exoskeletons to 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 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 population 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?

[Michael Lawless, executive]

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, up $0.2 million or 8%. The decrease in revenue as compared to Q2 2022, for the second quarter was a result of continued slow exoskeleton sales performance in Germany while the 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 ReWalk product line, the -- for the ReWalk product line, which includes individuals covered by the Veterans Administration and 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 4 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 as 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 the functions, R&D spending decreased $0.1 million or 15%, primarily due to lower spending on subcontractors and consultants due to the completion of the stairs project in the U.S. and the lower spend on the ReWalk 7 project since we are in the final stages towards FDA submission. Selling and marketing expenses increased $0.2 million or 7%, primarily due to higher consulting fees associated with CMS reimbursement-related activity and trade show expenses.

General and administration expenses were $0.6 million -- excuse me, increased $0.6 million or 33% and 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 that were 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 was $4.3 million or a $0.1 million improvement 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 a more aggressive yet prudent cash management policies that resulted in higher interest income -- a higher interest income contribution 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. And 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 for these repurchases. You may recall 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.

[Lawrence Jasinski, executive]

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, to achieve sales growth via our Workers' Compensation and VA activity along with adding more contracted insurers in Germany; and two, 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 increased their submissions in the first half of the year to support growth in the second half. And 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 the closing of 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 exoskeletons 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 -- 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 in 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.

[Operator]

[Operator Instructions] And the first question comes from Swayampakula Ramakanth from H.C. Wainwright.

[Swayampakula Ramakanth, analyst]

Larry and Mike, so as you stated, when you get the brace category out -- if it gets awarded for exoskeletons, including ReWalk, in the November time frame. In terms of the HCPCS code, what -- would that change the category of the HCPCS code and what sort of a benefit is expected out of that?

[Lawrence Jasinski, executive]

Well, the -- 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 -- has to be applied 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 -- 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 why we didn't have a category.

By changing the definition with this rulemaking into a new category or a 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 rulemaking stays on track. And then the price, the HCPCS process is the -- establishing the final price. So there's 3 stages to us here to work through. First one succeeded. 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 after.

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 first quarter next year is probably the best way I can definitively say it. But the timelines are up to the CMS and not up to us. So that's why I'm being a little cautious on the -- was that a better explanation? Or okay?

[Swayampakula Ramakanth, analyst]

Yes, yes, that's good. So what -- you can imagine where I'm heading this question to, I'm just trying to understand, once -- in November once you are given the brace category, do you still need to wait for the reimbursement dollar to be identified before reimbursement starts or as soon as you get the category, it can get reimbursed?

[Lawrence Jasinski, executive]

Well, you were 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. So 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 an 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 met 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...

[Swayampakula Ramakanth, analyst]

I get the answer. So this leads me to the next question. So the 11 submissions that you did in Q2 and expect to get to 35 by the end of this year. So is it really difficult for us to figure out what the lead time will be because they still haven't identified or are in the process of identifying reimbursement amount or is there any regulation that once they've taken the reimbursement -- once you submit, there is an x amount of time by when CMS has to reimburse.

[Lawrence Jasinski, executive]

There are timelines that they should be following, and it will become repeatable. Our conservative approach has been, even though we will have placed at least 35 products in this calendar year at the moment, we're still not planning on any revenue for them until early next year or some time. So we have a fairly large base of delivered products in the hands of people being trained that will get paid for at some point, but we didn't put it in this calendar year.

Typically, once the process is defined, it is not a long process. The submission part and training takes some time, but the actual cycle for payment is typically 30 to 60 days. The government is relatively good once they have a process in place. So answering your -- the timeline should not be extremely long once the process is established, which is where we think we're going to be by Q1 next year based on all the efforts that has gone on with CMS and the feedback we've gotten.

[Swayampakula Ramakanth, analyst]

Perfect. Perfect. So now switching gears to the acquisition. Now we know that AlterG transaction, potentially, is going to complete by the end of today. So in terms of -- I know you stated in your prepared remarks that you could expect about 4 months' worth of revenues from AlterG. Are you folks ready to identify a dollar amount? Or is it too early to talk about what the upside is going to be on the revenue side? And then in terms of synergies, can you give us any -- some sort of high-level commentary as to what sort of synergies we could expect.

[Lawrence Jasinski, executive]

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.

[Michael Lawless, executive]

Yes, sure. Yes, okay. So the AlterG business is -- for 2022 was a $20 million revenue business. It's growing, we would expect -- I think for this -- for the current quarter, for Q3, since it's a partial quarter, we prefer not to provide revenue guidance just -- that's roughly half a quarter's worth of revenue from them. Obviously, since -- if it closes as we expect in -- on August 11 today, on a going-forward basis, when we have the benefit of putting the 2 management teams together and doing quarterly forecasts as a team, I think we will start to consider and think about how we want to be able to provide guidance to the Street. So the benefit of this transaction is that we'll have a little bit more scale now, more predictability and it will be easier -- I shouldn't say easier, we'll have more material to be able to forecast our coming performance. So I think we can look to more definition around what our guidance could be in future quarters.

[Lawrence Jasinski, executive]

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 till 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. And so that will get even more reps 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.

[Swayampakula Ramakanth, analyst]

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.

[Lawrence Jasinski, executive]

Well, I think Mike and I can both give comments, and also on the synergy for both the growth and expense. But from a strategic end, going into the clinics with a much deeper and larger team that has established relationships is going to benefit us most easily with the MyoCycle product lines because it's a very well established and designed clinic product. With the Rewalk product line, the primary area we see that's really helping us is more at the clinician level because if we have CMS we need these clinicians to write prescriptions for the right patients. So we need -- and this gives us a base to -- our synergistic approach is more towards selling personal units using those relationships than anything else. So those are the strategic ways we're approaching it.

Relative to the ReWalk clinic model, it is not a large expectation here because most of the training is done in the unit that they're going to eventually take home. If CMS is playing for this on a lump sum, the clinic will use the product that they -- that fits that specific patient. So we believe that will work well for it.

Well, there's two I'll add in. ReStore also is a product that we've not really been able to push in the clinic. So we will reignite some effort around that. And you would ask a little bit on the synergy. I gave you the revenue strategic synergy. Mike, do you want to comment a little bit on the expense side?

[Michael Lawless, executive]

Yes. So yes. So on the expense side, as you can imagine, there's some duplicate vendor and subscription costs and things like that, which are -- we're going to be working through and able to eliminate relatively quickly. There's also the opportunity as we grow that both businesses and their business plans had the need for future hires as we grew to support more of the resources and the larger businesses that we would have. And because of the talent we're bringing together, there's the opportunity for us to avoid those new hires because we're gaining some of those talents through the combination with our peer companies. So over time, we expect to see annualized savings of about $1 million from this transaction, resulting from the combination of those 2 factors. But I would say that's -- those are going to be things that phase in over time. And so I would expect it would -- within a year's time, we'll be experiencing those $1 million savings.

[Operator]

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

[Lawrence Jasinski, executive]

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 it's a 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 an extensive amount of planning and detailed time on every step of the integration process pre closing this. We are very well prepared, and the next few months will be a very significant period to effectively make this work by doing the integration process correctly. And we understand the importance of that. This is how you make these things work and work well, and we have a team that's experienced in it, and we also have outside expertise that has helped us make sure 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're just as focused on this, is the CMS process is still in process. So 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 that 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 an extensive amount of work in this quarter, which we're really excited about and be able to report on as we get to our next earnings call. Thank you again for your time today.

[Operator]

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.

[Lawrence Jasinski, executive]

Thank you.