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Operator
Good day and welcome to the second quarter 2024 LifeWord, Inc. earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mike Lawless, Chief Financial Officer. Please go ahead.
Mike Lawless
Thank you, Megan. Good morning, and welcome to LifeWord's second quarter 2024 earnings call. I'm Mike Lawless, LifeWord's Chief Financial Officer, and with me on today's call is Larry Jasinski, our Chief Executive Officer, and Amal Ghadar, our Vice President of Finance. Earlier this morning, LifeWord issued a press release detailing financial results. The three and six months ended June 30, 2024. The press release and a webcast of this call can be accessed through the investor relations section of the LifeWord website at golifeword.com. Before we get started, I'd like to remind everyone that any statements made on today's conference 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 LifeWord management as of today and involve risks and uncertainties, including those noted in our press release and our 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. LifeWord 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 our website. For the benefit of those who may be listening to the replay or the archived webcast, this call was held and recorded on August 15, 2024. Since that date, LifeWord 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. With that, I'll turn the call over to LifeWord CEO, Larry Jasinski.
Larry Jasinski
Thank you, Mike. Welcome, everybody, and I appreciate your joining us today. Q2 2021. was entirely a proof of execution quarter. After years of strategic efforts to gain coverage and access, to build an infrastructure and scale to operate, and essentially leading our company and our industry through a door that enables us to create an enduring operating entity, we are succeeding. Revenue has grown to $6.7 million in Q2, an increase of 402% over Q2 2023. We achieved record revenue with 20 Rewalk placements in the quarter. We have now received over $600,000 of our Medicare receivables as the payment system has started flowing. In the first half of 2024, we sold more Rewalk systems than we have in any other prior full year. Our operating loss has stayed level year over year with a much larger commercial footprint in place this year, and multiple waves of cost efficiency will begin to flow into our expense results in the next few quarters to reduce our cash burn. But part one, revenue. Revenue is driven by the successful placement of the Rewalk systems and the addition of anti-gravity technology in Q2. The gate to LifeWords growth was simple achievement of Medicare approvals. We expect another record quarter for rewalking Q3 due to the successful efforts in advocating and establishing a government policy. The anti-gravity technology grew from improved execution as our newly combined sales team gained their footing over Q2 with a significant increase in deliveries. This segment also had some headwinds with high interest rates and consolidation of clinics, which impacted the pace of AlterG placements. Our new product, launched in June, is expected to increase our growth as it offers features and a price point that will allow more clinics access to this innovative technology. Part 2, Rewalk Record Placements and Payment. A great first quarter, with 20 people gaining access to walking and everyday life once again. The infrastructure we established is working and has the capacity to manage our growth targets. Examples of execution that are equally important to our achieved market access is that significant Medicare receivables were paid over the last few weeks and that some of our most recent submissions have made progress in submission to payment in 45 days. The submissions prior to the final establishment of government policies are lagging but are in the process of getting paid. Part three, operating loss trajectory is going the right direction. The combination of revenue growth, margin gains, and a series of operating efficiencies are a requirement with our push to profitable break-even operations. The combination of increased unit sales volumes and improved margin with the new neo-antigravity and operating changes made in late 2023 during 2024 and that will start in 2025 all our key elements in achieving lower operating costs while still growing the company overall. In summary, Q2 has proven our strategy has been well supported by our execution following our achievement with Medicare policies as a part of our mission. We reaffirm our revenue guidance of 28 to 32 million for the year and believe our directional targets for real systems expansion in the coming years will be achieved. We continue to see a path with our models that get us to cash flow break-even and adequate working capital with our current cash. The rate of market growth and uptake is both our opportunity and our risk. I'd now like to turn the call over to Mike for more financial details. Mike?
Mike Lawless
Thank you, Larry. Before I review the financial results of the quarter, I want to remind everyone that our gap results for the three and six months ended June 30, 2024. contain financial elements that can obscure investors' visibility into the underlying operational performance of LifeWord. In order to facilitate the understanding of both the gap results and the operational results of LifeWord, I'm going to discuss the results of the second quarter on both a standard gap basis as well as a non-gap basis, which excludes the items listed in the reconciliation tables provided in today's earnings release. I encourage you to reference the gap results in the reconciliation tables as I discuss the financials. LifeWord reported revenue of $6.7 million in the second quarter compared to $1.3 million in the second quarter of 2023, up $5.4 million, or approximately 400%. Revenue from the sale of our traditional products and services, including rewalk exoskeletons and myocycles, was $3.1 million in the second quarter of 2024, up $1.8 million, or 72%, from the second quarter of 2023. driven primarily by an increase in REWOC system revenue from the expansion of access through Medicare coverage. Revenue from Alter-G products was $3.6 million in the second quarter, which was a sequential increase of $0.8 million from the first quarter of 2024. We're encouraged with the improvement of Alter-G sales as compared to the first quarter, and we expect further sequential improvement of revenue in the third and fourth quarters as our sales effectiveness continues to improve from the integration of our commercial resources. Our pipeline metrics continue to show healthy activity in the second quarter across our two major product lines. For rewalk systems, at the end of the second quarter, our overall number of rewalk cases in process was 89, with 54 in Germany, consisting of 29 pending insurance claims and 25 court cases, and 35 in the U.S., many of which are for Medicare beneficiaries. The current pipeline of active rentals consists of 30 cases, which is broken down with 26 in Germany and 4 in the U.S. in VHA hospitals. For AlterG systems, we ended the second quarter of 2024 with orders for 63 AlterG systems in backlog. Subsequent to the end of the quarter, we saw a pickup in order activity, and our AlterG backlog currently stands at 104 units, which represents orders that will ship primarily in either the third or the fourth quarter of this year. Gross profit, moving to gross profit in the second quarter of 2024, our GAAP gross profit was 2.8 million or 41.1% of revenue compared to 0.6 million or 43.1% of revenue in the second quarter of 2023. Non-GAAP gross profit was 3.1 million or 46.9% of revenue in the second quarter as compared to 0.6 million or 43.3% of revenue in the second quarter of 2023. The primary factor that contributed to the improved gross margin in the second quarter of 2024 on a non-GAAP basis was the higher volume of Rewalk product sales, which resulted in greater absorption of operations and overhead costs. GAAP operating expenses were $7.2 million in the second quarter of 2024 compared to $5.7 million in the second quarter of 2023. Non-GAAP adjusted operating expenses were $6.9 million in the second quarter of compared to $4.5 million in the second quarter of 2023. The increase is primarily attributable to the acquisition of Alter-G, which added headcount and outside spending, and investment in additional commercial resources to process Medicare claims for a re-walk. We continue to take action to achieve expense efficiencies, and we expect further decline in operating expenses in the second half as these actions take effect. Our GAAP operating excuse me, our gap operating loss in the second quarter was $4.4 million compared to an operating loss of $5.2 million in the second quarter of 2023. Non-gap operating loss was $3.7 million in the second quarter as compared to $3.9 million in the prior year's period. We expect our quarterly operating loss to narrow further as we move through the second half of the year as our sales volume continues to grow. We ended the quarter with 15.1 million in cash and equivalents and no debt. Our cash usage in Q2 was 5.6 million, which was an improvement from the first quarter, but higher than we expected. The two major drivers of the cash burn in the second quarter were an increase in receivables of 1.8 million and an increase in inventory of 1.1 million. I will cover each of these separately. First, with accounts receivable, at the end of the second quarter, we had built up 2.6 million in receivables for Medicare claims that we had submitted in 2023 and the first half of 2024. This represents about half our balance of accounts receivable at the end of the second quarter. Based on our experience, we've learned that the Medicare administrative contractors require significant lead times to set up and begin initial claims payments, especially for entirely new products like the Rewalk. As a consequence, at the end of the second quarter, we had received a very small amount of payments for Medicare claims. The good news is since the end of the second quarter, the pace of payments from the MACs has accelerated and we have received over $600,000 against those receivables during the third quarter so far. We expect these catch-up payments to continue as the MACs work through the backlog of claims and that a significant majority of these payments will be received by us by the end of the year. Also important, since the payment mechanism has been established, future Medicare claims should be paid on a more typical 30 to 45 day cycle from the date that the claim is approved. Both of these factors have positive implications for our second half cash flows as the excess receivables are collected. Second, inventory. During the second quarter, inventory increased by 1.1 million due to two factors. First, in light of the continuing conflict in Israel, we are in the process of building an additional 25 Rewalk systems that we will have on hand in the U.S. in case there are any temporary disruptions in our Israel-based supply chain. Second, with the filing of our 510 application for the Rewalk 7, we have begun procuring material for the inventory bill in advance of the commercial launch, which will follow the FDA clearance. Over time, inventory levels will normalize as the inventory is sold and we convert this to cash. As Larry discussed earlier, we continue to expect full-year 2024 revenue of between $28 to $32 million. The third and fourth quarter revenue should show sequential growth from the second quarter. With the higher revenue, we expect continued margin expansion with adjusted gross margin reaching approximately 50 percent by the fourth quarter. Operating expenses should continue to decline slightly over the next two quarters. The combination of these factors should reduce our non-GAAP operating loss by almost half by the fourth quarter, which will, combined with the collection of the Medicare receivables, translate into much lower quarterly cash burn. With that, I'd like to turn the call back to Larry for further remarks.
Larry Jasinski
Thank you, Mike. I'd now like to provide more detail on our market development and financial goals that I have laid out for the year in our Q1 call. Our stated goals were, number one, execution with sales. Number two, organizational implementation of infrastructure to support Medicare claim submission to successfully penetrate this new emerging market. Number three, market development in terms of filling the funnel with appropriate potential users of the Reebok system. Number four, managing the reduction in our operating loss queue over queue to demonstrate a path to break-even operations. And number five, launch of the new AlterG product in about mid-year and preparation for the launch of the latest generation of the Rewalk post-FDA clearance. Let me expand on each of these five objectives for the year. First, sales. A record Rewalk quarter and another one on the horizon. Demand is building from our digital communication programs, the education occurring with physicians with our field-based team, and the spinal cord injury centers that are beginning to implement exoskeleton supply programs based on our support program. We have presented our supply program to over 50 centers so far in 2024, and our target for the year is to increase our placements to 100 or more systems. Second, capacity to implement. The Medicare requirements are extraordinarily complex and require extensive infrastructure with skills to process volume and get paid. We have supported our active spinal cord injury centers in multiple ways. They include a dedicated REWALK clinical screening group to properly qualify REWALK users. Next, as patients are qualified, we provide WeWALK trial systems with our direct physical therapist to determine whether a user is fully ready for delivery of a personal system. If successful, we then mobilize our reimbursement team to guide the process of completing the comprehensive Medicare submissions. During training at the clinic, we provide support as needed, and once the WeWALKer goes home with their system, we have a full service warranty and service team for the user. Third objective, market development. Identifying and educating the correct potential users, expansion of the MD referral base with our feet on the ground, creation of practice guidelines with the medical societies, broadening product labeling, and establishing payment policies in multiple payer systems are the key pillars of our market development strategy during 2024 and 2025. We understand these requirements and have the team to build a long-term business. We report on these activities in a summary fashion as we progress. Adoption of life-changing and disruptive technologies takes time and focused development efforts. In simplest terms, we must build a funnel and will present metrics for the market to measure the progress as they mature. Fourth, reducing our operating loss. Top-line growth for 2024 is trending to expectations. The major thrust on efficiency is occurring from actions we initiated in 2023 and that are in process throughout 2024. We will identify the areas of cost reduction as they occur. We continue to forecast a 2024 loss in the low double-digit millions and operating at break-even on current cash by 2026. The revenue growth slope is And the expense reductions levels provide some risk that we must manage in the process. And our fifth objective, new product launches. Our new anti-gravity product was successfully completed with the launch of the new NEO anti-gravity model on June 25th at the National Athletic Trainers Association, known as NATA. This design has features and pricing specifically designed to address the needs of smaller clinics. Also in June, we submitted our FDA 510K for the seventh generation of the reworked design as we had planned. Each of these innovative designs will impact our sales and our operating results. Our leadership of our markets is an advantage of being first and in having the most extensive base of field experience. Our demonstrated results in these first three months since being placed in the federal fee schedule are very encouraging. While we focus on short-term measurements today, it is now time to open the door to the potential magnitude of payment coverage that has started with Medicare and the long-term vision from building upon it with all payers. It is time to envision a market of 1,000 systems a year with proper market development and investment. The potential benefits of exoskeleton utilization can now be realized on a wide scale to help walk-in again and should be highly valued. I opened with our belief that we have proven the first steps in execution. We are on the right road and we have the team in place to execute this. There is every reason to be optimistic about our progress. Thank you all for your time today. And operator, I'd like to open it up to questions, please.
Operator
We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your hands up before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Our first question comes from RK with HC Wainwright. Please go ahead.
Mike
Thank you. Good morning. Larry and Mike, congratulations on a very positive quarter. So let's start with the receivables. Mike, you said that after closing the second quarter, you did receive part of the receivables, about 600,000 has been recognized. based on your conversations or your dealings with the CMS, how long do you think it will take for normalization in terms of time? And it looks like there's another $2 million worth of receivables left. And do you think most of it would come through in the third and the fourth quarter, or some of that could spill into 2025?
Mike Lawless
Hi, RK. Good morning. That's a good question. We have limited visibility to that, but our expectation is that there should be the majority that gets paid during the calendar year 2024, so through Q3 and Q4. Okay.
Mike
And then on the Alter-G business, it's nice to see that growth of almost a million dollars in the third quarter compared to the previous quarter. How much of that Alter-G is pent-up business because of the change of ownership? And how much of it is organic? And you know, how should we think about sustenance of that growth from here onwards?
Larry Jasinski
Okay, it's Larry. I'll answer this one. This is really all organic growth. We have begun to build with the team we had in place. Mike noted what we have seen in our backlog, that we've gone from the... I forgot where we ended last year at, but we've gone... more recently from the mid-60s to over 100 in our backlog, and this is from our field team knocking on doors and doing their job.
Mike
Perfect. My last question is regarding Germany. I would like to understand how business is progressing in Germany since the court court case settlement that you received last year. Is that a slow growth business or how are the insurers responding to those decisions?
Larry Jasinski
Germany is having a good year is the best way I can measure it, including Barmer, who is in the core case, who has processed a good number of cases. So we're progressing equally well, frankly, in both Germany and the United States. The United States are bigger numbers just because of the size of our insurance group and size of our country. But we are seeing growth in both markets that we're quite happy about.
Mike
Thank you. Thanks for taking my questions.
Operator
Again, if you have a question, please press star then one. Our next question comes from Ben Hainer with Lake Street Capital Markets. Please go ahead.
Ben Hainer
Good day, gentlemen. Thanks for taking the questions. First off for me, just on the gross margin, it was quite a bit ahead of where we were looking at. It doesn't sound like there was a lot of accounts receivable from Medicare patients that came through during the quarter where the COGS would have been realized in a previous quarter and revenue in this quarter. Was there any kind of one-time-ish impact on anything there, or is this a straight-up improvement in gross margin sequentially?
Mike Lawless
No. Hi, Ben. How are you? Good morning. This is Mike. Yeah, no, that's a good question. There were no one-time items, nothing unusual in the quarter. I would say that part of that is indicative of the higher volumes we were generating on the Alter-G side. We have a factory in California where we manufacture, and we were able to leverage all of those production costs much more effectively with the top line that we generated in the second quarter relative to what we did in the first quarter.
Ben Hainer
Okay, that's helpful and makes sense. Generally speaking, we probably should expect gross margin to continue to improve through the balance of the year as some of the Medicare payments begin flowing through with the new launch and hopefully more Alter-G revenue.
Mike Lawless
That's correct. Yeah, as I mentioned, by Q4, we expect our gross margins to reach 50%. Okay, great.
Ben Hainer
And then on the R&D expenses, what should we expect there now that you've submitted the seventh generation version and launched NEO?
Mike Lawless
I think that we expect that – I would expect them to be roughly flat, maybe slightly down a little bit. I mean, there's still ongoing activity that we have taking place, so – But I would expect that it would be sort of flattened down slightly over the next couple quarters relative to the Q2 levels.
Ben Hainer
Okay, got it. That's helpful. I'm just curious, you know, any more color you can kind of share on the reaction to NEO in the early days here?
Larry Jasinski
Well, we launched it on June 25th, so you've got about six weeks. We sold the model right on the floor at the trade show. We took that as a very good reaction. It is resonating as intended, at least in the early results.
Ben Hainer
Okay, fair enough. And then on the seventh generation unit, can you kind of refresh our memories on what the enhancements are there? Is it more COGS enhancements? Is it product enhancements? Just refresh our memories there, please.
Larry Jasinski
This is a very user-based improved design. We got the experience with hundreds of users of what they'd like and not like and wanted to see the device offer. So what we've done is add in features that came from our customers. I'll give you a few examples. One is having multiple speeds. So if you're walking down a busy street and you've got to go slower because the people in front of you aren't going fast enough, you could slow your re-walk down. and we've done other real fundamental things to bring more up-to-date off-the-shelf battery systems that you can use now to power the system as opposed to the custom batteries that we had before. We've added a lot of data components and connectivity to the system through a smartwatch, and that is really important, we believe, for the users to communicate, for us to know about utilization. So those are just examples of some of the features. Our customers told us what they'd like. We did it. That's basically what the RealArk 7 is.
Ben Hainer
Okay, great. We're looking forward to that. That's all I have for now, gentlemen. Thank you very much. Thank you, Ben.
Operator
This concludes our question and answer session. I would now like to turn the conference back over to Larry Jasinski, CEO, for any closing remarks.
Larry Jasinski
Well, first, I appreciate everyone's attendance today, and I'd encourage you to come to us if you have other questions about the business. You know, I closed the scripted part of the session with talking about the magnitude of this market. Now that we see real execution, and we've achieved it, and it's growing, thinking about the ultimate size of this market is something that I would encourage all of us to think about. because we've talked about it in 10s and 20s. It is not unreasonable, given the total addressable market for this to be 1,000 systems a year. Now, that takes time to build. It's not easily done, but it's a value that the vision of our company with our founders started with, widespread ability for people to walk again, and that's what this industry now has in front of it, proven out, I think, by the success we've had in this first 90 days after gaining United States coverage with Medicare. So thank you everybody for your time today and we look forward to speaking to you in the future.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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