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spk01: Hello, and welcome to the Exobionics Q2 2022 Financial Results Conference Call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to David Carey. Please go ahead.
spk05: Thank you, operator, and thank you all for participating in today's call. Joining me from Exobionics are Stephen Chairman, Chairman and Chief Executive Officer, Scott Davis, President and Chief Operating Officer, and Jerome Wong, Interim Chief Financial Officer. Earlier today, Exobionics released financial results for the second quarter of 2022. 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 made during this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including statements regarding our business strategy, future financial or operational expectations, or our expectations of the regulatory landscape governing our products and operations, 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 businesses, please see our filings with the Securities and Exchange Commission. Exodus claims any intention or obligation except as required by law to update or revise any financial or operational projections, a regulatory outlook, or other forward-looking statements, whether because of new information, future events, or otherwise, which speak only as of today, July 28, 2022. I will now turn the call over to ExoBionics Chairman and CEO, Stephen Sherman.
spk02: Thank you, David, and thank you to everyone for joining us today. We achieved strong revenue growth in the second quarter, reflecting the continued execution by our team. We are successfully raising awareness of the benefits that our innovative XONR devices are bringing to patients. This is resulting in strong demand with inpatient rehabilitation facilities and network operators. And now with the recent clearance by the US Food and Drug Administration, giving us the ability to market XONR With use with MS patients, we are poised to help a significantly larger patient population. Our ExoWorks business continues to build momentum with large key customers as they more clearly understand the overhead productivity and safety benefits that our Exo EVO devices deliver. We expect this segment to be a significant contributor to our growth in the future. Financially, we are in a solid cash position. Our dedicated team of professionals are constantly improving efficiencies. Our commercial team is deepening customer relationships, and management team is motivated by our core responsibility, which is to maximize shareholder value. Now I will turn the call over to our President and Chief Operating Officer, Scott Davis.
spk04: Thank you, Stephen. ExoBionics generated strong revenue growth in the second quarter, reflecting the continued positive traction we are making with network operators. This momentum resulted in year-over-year revenue growth of 57%, led by our ExoHealth segment, which delivered $3.2 million of revenue. We achieved a couple of major company milestones this quarter. First, we delivered on the largest order in Exo's history. This multi-unit order was comprised entirely of capital purchases. We're proud of this accomplishment and believe that it highlights our commercial team's effort to engage with large network operators who are now choosing to make XONR their standard of care in neurological rehabilitation. Second, as Stephen just mentioned, the FDA's 510K clearance to market XONR for use with MS patients not only gives more patients in need the opportunity to rehab using our leading exoskeleton devices, but it also meaningfully expands our total addressable market. I'll touch more on this in a moment. Turning back to our performance for the quarter, we booked 17 EXO NR units, a majority of which were capital purchases. Demand continues to improve as capital budgets previously restricted by COVID are opening up. Our cumulative conversion and renewal rate remains strong at 82% with approximately $1.9 million of contracted unrecognized revenue under our subscription model. Additionally, we have witnessed an encouraging trend whereby our customers are increasingly committing to multi-year subscription agreements, which indicates their confidence in the value proposition of the XONR. For example, Avera McKinnon, a network operator in Sioux Falls, South Dakota, and our first customer in the state recently secured a multi-year XONR subscription. In the international market, we're pleased to have recorded a strong booking quarter, particularly in Europe. The strength in Europe underscores our investment in lucrative, indirect partnerships in that region. In APAC, we generated a solid number of bookings as well, adding to our optimism. We continue to see these regions as important growth drivers in the years to come. Now, for a discussion on the FDA clearance of the XONR for multiple sclerosis indication and what it means for MS patients and our business. ExoNR is the first exoskeleton device to receive FDA clearance for rehabilitation use in patients with MS. With this, we are excited to bring our device to a broad group of patients in need. According to the National MS Society, there are nearly 1 million people in the U.S. living with MS and more than 2.8 million globally. Every five minutes, someone is diagnosed with MS. Now these patients will have access to a wearable robotic device potentially improving their mobility and supporting them in their rehabilitation. I'd like to share a story of how a patient with MS benefited from an XONR from the Kessler Foundation, one of the facilities that provided data to help us receive this clearance. Pilar Santiana was diagnosed with MS in 2006, and as the progression of the disease worsened, it impacted her ability to walk. Pilar joined a novel pilot study led by Dr. Geis Andraous at the Kessler Foundation evaluating robotic exoskeleton training in MS using ExoNR. As part of the eight-week study, Pilar learned how to balance, stand up straight, and improve her posture and gait mechanics. At the end of the eight-week training session, Pilar said, what I had done with the exoskeleton three months of physical therapy could never do. Dr. Andrales was quoted as saying, initial findings suggest that robotic exoskeleton training improves mobility and cognition and and they play an important role in the future rehabilitative care for people with MS. We're proud of Pilar's progress and hope to see many more success stories like hers. Turning to an update on the progress with our industrial segment, ExoWorks. We're making inroads with several large customers with sizable employee head counts who can benefit from significant workplace productivity and safety features that Evo provides. We continue to see demand primarily emerging in the automotive, aerospace, and solar energy verticals. Our current strategy is geared toward developing larger customers, which can result in a longer sales cycle, like it did this quarter. For the second quarter, ExoWorks delivered approximately $237,000 of revenue. As construction, general manufacturing, and green energy ramps up across the country, We remain committed to educating and expanding customer access of Evo to a wider number of industrial verticals. As we've previously mentioned, our target industrial verticals represent a vast addressable market opportunity of approximately $5 billion. Moving forward, our commercial team is focused on building customer awareness and engagement to ensure the success and safety of our customers' workforce. I'd like to take a moment to comment on the challenges associated with the global supply chain and our plans to mitigate its effect on our business. Like so many other businesses, we're not immune to the tight supply market. Our devices are comprised of more than 600 unique components. As discussed earlier, we're pleased with the healthy demand environment. However, with that comes a greater need for supplies, resulting in manufacturing pressures. To ensure that we can fulfill current and future orders in a timely manner, we made the decision to order parts well in advance of when we would ordinarily do so. This has led to an increase in our use of cash, and when combined with inflationary pressures, can impact our gross margins. Nevertheless, we are well financed and well prepared to navigate through the current market environment. We have an experienced team of professionals managing our business, allowing us to prudently manage our expenses and limit our cash burn. Finally, I'd like to briefly highlight a corporate update. We're currently in the process of moving our headquarters across the San Francisco Bay to a new facility in San Rafael in Marin County. Our new headquarters aligns with our current management, administrative, and manufacturing needs. We expect to complete this move during the third quarter. Looking ahead to the second half of the year, our outlook remains that of cautious optimism. Driven by the strength of our commercial team, we are increasingly encouraged by the progress of our growing customer engagement levels and international opportunities. Our innovative wearable exoskeletons are among the most studied exoskeleton devices in the industry, with more than 180 unique publications demonstrating significantly improved patient outcomes. Now with the ExoNR receiving FDA clearance for MS, we are excited to bring our game-changing solutions to a greater number of patients. who are in need. Before turning the call over to Jerome Wong, who will discuss our second quarter 2022 financial results, I'd like to recognize his recent appointment as our interim CFO. Jerome has served as the company's controller since May of 2017 and brings more than 20 years of experience in finance, accounting, and strategy to this role. His knowledge of our finance and accounting controls enables a seamless transition. Now, I'd like to turn the call over to Jerome.
spk03: Thank you for those kind words, Scott. Now onto a summary of our second quarter 2022 financial results. XO generated second quarter 2022 revenue of $3.5 million compared to $2.2 million for the second quarter of 2021, an increase of 57%. This increase in revenue was primarily driven by an increase in the volume of XO NR device sales. Our gross profit for the second quarter was $1.6 million, representing a gross margin of approximately 47% compared to a gross margin of 58% for the same period in 2021. The overall decrease in gross margin was primarily due to the increase in EXO Health service and inventory costs due to the continued global supply shortage, partially offset by favorable change in product mix. As we noted on previous calls, gross margin tends to fluctuate from quarter to quarter, based on channel and product mix, as was the case this quarter. Operating expense for the second quarter of 2022 were $4.9 million compared to $4.6 million for the second quarter of 2021. During the second quarter of 2022, the company incurred increased expenses related to increased sales and marketing activities and higher research and development expenses due to sustaining engineering activity for the XONR and the development of next generation products. net operating loss in the second quarter of 2022 was $3.2 million, compared with a net operating loss of $3.3 million in the prior year period. Gain on warrant liabilities for the quarter ended June 30, 2022, associated with the revaluation of warrants issued in 2019, 2020, and 2021 was $1 million, compared with a gain of $0.9 million due to the revaluation of warrants issued in 2019, 2020, and 2021 for the same period in 2021. Turning to our 2022 first half results, revenue increased 1.9 million, or 46%, to $6 million for the six months ended June 30, 2022, compared to $4.1 million in the same period of 2021. The increase in revenue was primarily driven by an increase in the volume of EXO and our device sales, and the recognition of previously deferred prepaid royalties associated with a license and distribution agreement that expired. Gross profit for the six months ended June 30, 2022, was approximately $2.9 million, representing a gross margin of approximately 47%, compared to a gross profit of $2.5 million for the same period in 2021, representing a gross margin of 61%. Operating expenses for the six months of 2022 were $10.3 million compared to $9 million for the same period in 2021. During the first half of 2022, the company incurred increased general and administrative expenses, primarily due to non-cash stock-based compensation and severance expense, and higher research and development expenses due to an increase in product development activities. Net operating loss in the first half of 2022 was $7.5 million, compared with $6.5 million for the comparable period in 2021. Gain on warrant liabilities for each of the first half of 2022 and 2021 was $.9 million in each case from the revaluation of warrants issued in 2019, 2020, and 2021. Cash used in operating activities in the first half of 2022 was $8.5 million. As of June 30, 2022, the company had a strong cash balance of $31.9 million. Please see our 10-Q filed earlier today for further details regarding the quarter. Operator, you may now open the line for questions.
spk01: Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question Q, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from R.K. from H.C. Wainwright. Your line is now live.
spk07: Thank you. Good afternoon, Scott and Steve and Jerome.
spk02: And R.K.,
spk07: Hi. A couple of quick questions from me. You know, it's great to see that, you know, most of your sales came from the multi-year subscription. So in terms of, I mean, sorry, multi-unit orders. So in terms of that, of the 17 units that got sold under this, Can you give us a little bit more color on that? And also, when you start doing trials with some of these potential clients, do you gravitate more towards the multi-unit order clients or you're going to be agnostic at this point?
spk04: Okay, thank you for your question. So a really two-part question, talking about the 17 bookings that were made in the quarter. And of those bookings, we had a mix of both capital as well as subscription, 11 of those bookings. I'm sorry, five of those being subscription and the balance being capital of that, you know, of the orders that we had. In terms of selling into IDNs relative to some of the, you know, smaller clinics that are out there, our sales team is really has a focus and with focused focus sales professionals that are targeting the larger IDNs and then also the slightly larger regional IDNs. But we still have a sales focus on some of the smaller clinics as well. We have a portion of our sales team that continues to work with those network providers, with those IRFs. But if you look at the bulk of what we're really working on is really the larger customers, and that is absolutely paying off as we've seen a significant increase over the years in sales to those larger IDNs. From 2019 and 20, somewhere around 30%. of sales and now upward of 70 in 2021 and 2022.
spk07: Perfect. And then you also said in XUS, especially in APAC, you had solid numbers. So I would like to understand what that solid number means.
spk04: Okay. So, you know, in... In APAC, we had two bookings that were in Hong Kong. And in Europe, we had eight total bookings that were capital and driven through distribution in that market this quarter. All of them were actually through distribution in Europe. Perfect.
spk07: And then in terms of multiple-year subscription, and you said that there's increasingly more interest in having multi-year subscriptions. Obviously, it's good news on one end. On the other side, how are these set up in the sense You know, what is a multi-year? Is it more than two years? And if so, is there a clause as to conversion to a capital purchase at the end of, you know, the second or the third year, whatever is the term?
spk04: Sure. Great question. In general, when we talk about a multi-year subscription, we're selling 24-month subscriptions within our program. Typically, if it's reaching beyond that, we would consider capital procurement options, whether through a direct capital purchase or through a capital lease for the customer. 24 months has a, part of the reason for that is as our, as clinics are rolling out new programs with EXO, we want to give them sufficient time to really realize the benefits of implementing a neural rehab program using the XONR. And what we found is, you know, within a 12-month period, certainly they can experience those benefits. But, you know, it really takes, you know, 18 months to really start to, you know, enjoy the benefits of that. And as a result, we anticipate that driving, you know, customers who will resubscribe at the end of that term because they've had successful programs.
spk07: Very good. Then moving to the new indication, MS, you gave us the number of patients in terms of annual incidence, but what is the real market opportunity for you in terms of rehab and and when your commercial folks go out there, is that a different call point, or is the same rehabilitation unit handles both stroke and other patients along with MS, or are they two different places that they need to go to?
spk04: Yeah, great question. We are very excited over our MS indication largely because we can help an entirely new segment of patients with these great outcomes. One of the things that's quite different about an MS patient relative to some of the other neuro patients that we have with SCI or acquired brain injury is that these patients will have a continuation of sort of degradation over, you know, over the period of having their, you know, this disease. So we like to say that, you know, with EXO, patients walk out of an EXO. And with MS, this is something that can be used as a treatment to prolong and preserve their health and fight against this illness and give them all the health benefits from that. To that end, yes, there's a large addressable market that exists for this. There is crossover. For some patients who have acute spells of this, certainly inpatient rehabilitation is an area that they would use it. But this expands our reach into outpatient rehabilitation We have crossover into outpatient right now, but this is effectively bringing us down the continuum of care into outpatient as well.
spk07: Very good. And then my last question here before other folks can jump in. On the supply chain, I know you talked about this during the last quarter call, and it looks like you have a handle on this right now. What is the status in terms of managing the supply chain? And I also see that your inventories number has gone up quite a bit, more like a 50% than last quarter. I mean, than December, rather. So does that mean over time... you know, your gross margins should improve because some of these inventories that are currently on books will get reduced.
spk04: That's correct. As we've talked about for the last couple of quarters, supply chain challenges have been just something that's been plaguing not only us but everybody. Anyone who's dealing with circuit boards or even mechanical parts, it's been challenging. So we did place orders much more aggressively than we ordinarily would have to ensure that we maintain the supplies necessary to meet our growing demand. As you can see, the inventory, the result of that is that our inventory is up. And yes, of course, it also is having an impact on margins. So what we expect over time is As we've gotten ahead of this and assuming at least consistency and no further degradation in the supply chain environment, we expect that over time that will begin to normalize, and we are obviously looking for ways to improve those costs as we move through the crisis and get us back to a margin position that is more along what we expect.
spk07: Thank you. Thanks for taking all my questions.
spk01: Thank you, RK. Thank you. Our next question is coming from Kyle Bowser from Lake Street Capital. Your line is now live.
spk06: Great. Thanks, Stephen, Scott, and Jerome for all the updates here. Congrats on a really strong quarter. Maybe I'll follow up on the MS opportunity, and sorry if I missed this, Scott, but can you talk just a little bit more about maybe the broader opportunity as you kind of outlined it in terms of incidents, but also prevalence. I mean, is there an opportunity to treat the prevalence pool here? And then separately, you know, if that's the broader opportunity in your assessment, what would be kind of the smaller, more focused near-term opportunity, whether that's in terms of number of patients or facilities, just kind of curious how you... on kind of attaching that new opportunity.
spk04: Sure, understood. And so using XONR for MS is not a new thing. You know, we've had, you know, our customers and researchers using the product for that purpose, sort of out of band, historically. new MS indication gives us is the ability to market this. And so what that means is we can go back into our existing customers that we have, and we've already started this with our sales and our clinical teams, to go back into our existing customers and let them know about the great potential outcomes that they can have with MS patients. So near term, this is something that we're doing is just getting the word out to our existing customers. As we move a little bit further out, again, this expands our reach into a broader continuum of care and allows us to knock on the doors of some of the outpatient facilities as well as this better aligns with their patient population. So it's, you know, from a, you know, resourcing perspective, you know, one of the strengths that EXO has is our great commercial team, including our sales and our clinical teams, and as well as our marketing team. And we are basically leveraging those teams and getting them out there to be able to, to spread the good word of how we can help more patients.
spk06: Oh, God, I appreciate that. And maybe following up on that, now that you are able to market this on label, it sounds like you've already kind of deployed marketing and commercialization resources towards this. So I guess the question is, in terms of OPEX and incremental overhead and potentially the changing any sort of marketing strategy? How should we think about kind of the run rate of SG&A going forward for the balance of the year?
spk04: You know, we don't anticipate any changes relative to this indication. We've anticipated this for some time.
spk06: Sure. Got it. And then just lastly, housekeeping, if it's handy, what was depreciations.com in the quarter? Just so I can back into you, but... Thank you.
spk04: One moment. We are just digging up the detail on that right now. One moment.
spk06: And then maybe while we're digging that up, Scott, just lastly, in terms of the new headquarters, sorry, what did you say about Q3? I mean, is that – maybe you could just outline briefly again the timing of that.
spk04: Sure. So timing – so we have been in a long-term lease over here in Richmond, and in a rather – interesting and sizable facility, and we are extremely excited over finding our new location in San Rafael. So we're in Richmond. Currently, San Rafael is just over the Richmond Bridge, not far from where we are. We went from one side of the bay to the other side of the bay over in Marin County. So the facility is is right-sized for our organization. It just fits our needs much better than the facility that we've been in. And on top of all that, it represents a savings to us, you know, as well. So, you know, it's a positive move for us, but we are making this relocation and we're doing this in Q3. So we'll be officially in before the end of Q3. Does that answer your question, Kyle?
spk06: That's perfect. Thank you.
spk04: Okay, and now back to your depreciation question. Jerome can answer this.
spk03: So depreciation is about $125,000, and then stock comp was $519,000. And it's all for Q2.
spk06: Excellent. Okay, great. Hey, thanks, guys, for all the updates, and congrats on the quarter.
spk04: Yeah, we appreciate it, Kyle. Thank you.
spk01: Thank you. We reach the end of our question and answer session. I'd like to turn the floor back over to Scott for any further or closing comments.
spk04: Thank you, Kevin, and thanks to everyone for joining us today. We're thrilled with the progress and milestone achievement in our second quarter. Highlighted by the largest multi-unit capital purchase order in our company's history, We're pleased to have accelerated our revenue growth in the quarter. Additionally, receiving 510 clearance from the FDA to market our ExoNR for use in patients with MS not only gives us a greater pool of patient access to access, but it allows them to have this as part of their rehabilitative solutions. And it also significantly expands our market opportunity. Underscoring our success is our ability to execute under difficult market challenges that continue to impact the broader macro market. We're doing this for the patients who desperately need treatment options and are pleased that we've developed, that we have helped elevate the standard of care for neurorehabilitation. Strengthening relationships with top network operators, we are generating more multi-unit deliveries that have yielded a stronger pipeline to support our future growth. Combined with deeper customer relationships across a variety of industrial verticals for EVO and proactive management of supply chain constraints, we are poised to sustain our momentum for the second half of 2022 and beyond. In closing, I'd like to express my gratitude to the entire XO team and our valued shareholders. We look forward to providing additional updates throughout the year. Thank you all, and have a great day.
spk01: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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