Ekso Bionics: Not Out Of The Woods (NASDAQ:EKSO)

I often marvel at how time seems to sneak by faster than I realize – my kids have six weeks of school done already, but it seems like the school year just started yesterday. In a similar vein, I was dumbstruck to realize that I had not written about the robotic exoskeleton industry player Ekso Bionics (EKSO) since last October. With a year basically gone by, it is worth checking in again on how this small medtech company is fairing and how its prospects may look going forward.

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In brief, Ekso Bionics designs and sells robotic exoskeletons for two broad purposes. The first and larger purpose, in terms of revenue scale, is in the rehabilitation of therapy patients to assist regaining the ability to walk, such as after a stroke or brain injury; this is the EksoHealth division featuring the EksoNR [“NR” as in “neuro-rehab”], which is the latest in the EksoGT line of products, with some nice upgrades. The second, and much smaller segment known as EksoWorks, is applying exoskeleton benefits for use in industrial settings, such as when a human worker would benefit from the support and strength the device can provide for physically demanding work, especially with work requiring the arms to be elevated over their heads while holding up equipment, such as pictured above.

The Good, the Bad and the Ugly of the Last Year

It has been an eventful twelve months for Ekso, both as a company and for its shareholders, so a thorough review is worthwhile. From an investment standpoint, I took a pretty negative view last year, as it was evident then that the cash available was insufficient to keep operations going and the company would need to raise more. Indeed, I was correct, two times over, as Ekso has issued new equity twice since last October – in December 2019 for $5.0 million, and then again in June 2020 to the tune of $7.89 million, which was followed shortly afterwards by a mixed shelf filing, so the company might not be done yet in the near term. In between the actual equity issuance, the shareholders approved a 1:15 reverse split in March 2020, helping the company regain Nasdaq compliance with a share price over $1.00. As might be expected, shares are down more than 50% since in the last year.

Covid-19 has impacted Ekso’s businesses to a degree, and I believe it is fair to say that between the pandemic and some general uncertainty about capex spending generally by industrial clients, 2020 might have been a tough year regardless. The numbers so far bear that out – just on the top line alone, revenue has seen a sharp drop – the pandemic impacted the flow of patients into rehab centers somewhat, and its two substantial industrial partners, Ford (NYSE:F) and Boeing (BA), have been having their own challenges to deal with.

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First-quarter revenue, a period only partially covered by the pandemic, basically fell off by 50% to $1.47 million. It recovered somewhat in the second quarter, but was still well below the fairly steady benchmark of $3 million that Ekso had been hovering around for several quarters previously. The company’s business is heavily tilted to the medical applications versus industrial – of the $2.26 million of Q2 revenues, $2.08 million came from EksoHealth. At the same time, cash from operations, while still negative, appeared to be in an uptrend generally prior to the most recent quarter, which suggests that there are some underlying improvements in the business even if not yet enough to create shareholder value.

Growth can be assessed in other ways, however, and Ekso certainly had some more global ambitions. Since January 2019, it had been working to develop a joint venture for Asia, that had $100 million in cash at stake [spread over a ten-year time frame], but in May 2020, CFIUS determined that the project could not proceed. While a blow in some ways, it has not been a material detriment for shareholders so far, given the other negative overhangs being more serious. On the other hand, growth could start coming from taking the existing technology the company has and moving ahead with using it to treat patients with brain injury. The FDA approved this usage in June 2020, and it opens a new potential area beyond stroke or spinal cord injury for using the device. To be clear, this is a new approved use, not so much a new product, which CEO Jack Peurach had to explain carefully on the second-quarter call, but also to make the case why this was significant:

Just for clarification, the EksoNR is our standard product for all neurological rehabilitation. It was cleared to also be applied to acquired brain injury diagnosing. So the product itself is the same product that was previously cleared for stroke and spinal cord…But our customers are in-patient rehab facilities who see a variety of different patient types that comes through their facilities. Often stroke is a major condition that those in-patient rehab facilities treat, but brain injury is also a very critical part of their patient population. So this allows them to use the product on label on a much broader set of their patient population. And then in some cases where there are in-patient rehab facilities that are more targeted or geared towards TBI [traumatic brain injury] or ABI [acquired brain injury] type of patients, this opens up a new opportunity with those customers.

As this is a recent approval, it is difficult to forecast just what sort of financial impact it will have, but certainly broadens the target market to include rehab centers that may focus on this type of therapy.

Is Ekso Bionics Heading In the Right Direction?

The setbacks on the joint venture, slow sales, and multiple capital raises do not inspire a lot of confidence looking backwards, but attempting to peek ahead could portray a new direction. The new FDA clearance for brain injuries could be a big deal, gaining a new revenue stream at what would hopefully be marginal cost. Gross margins have definitely moved up – almost 800 bps from 47.8% to 55.6% from Q2 of 2019 to Q2 of 2020, and a few more sales for brain injury rehab would likely help that margin to continue to expand. If quarterly sales return quickly to the $3 million threshold that appeared to have been established prior to the new approval, then I would expect that to be the new floor barring another global crisis, and we might see quarters with $3.25-3.50 million become regular quarters.

I continue to have two major concerns with Ekso Bionics, however. At the risk of sounding like a broken record, the cash position is just weak. The cash infusion has left it with $13.3 million cash on hand as of June 30, but operations alone are burning through at least $2 million a quarter – and that’s in a good quarter. In other words, I anticipate that yet more cash will have to be forked over in the next 4-6 quarters, even if revenue gets a modest bump from the brain injury application.

Secondly, the EksoWorks division seems highly promising, yet has been mired in no growth. Understandably, the capex spending in some industries is getting hit here and there in the current environment, but by all appearances, 2020 will turn out to be exceptionally bad. For context, full-year 2018 saw EksoWorks deliver almost $2.50 million in sales, followed in 2019 with a still respectable $1.96 million [for segmented revenues data for 2018 and 2019, see the 2019 annual report, note 6 on revenue recognition, and 2020 figures from the second quarter 2020 10-Q, note 7]. For the first 6 months in 2020, total EksoWorks sales stand at $0.414 million. Given the challenges from Covid-19, nobody would expect this segment to be on pace to match 2019, but this seems to be even rougher than I would have expected, and I am not hearing a lot of direction from management about where they are trying ahead with it. CEO Peurach had only this to say regarding EksoWorks on the most recent call:

To alleviate capital barriers, we are excited to launch a new service model allowing customers to access Ekso’s technology without an upfront capital purchase. By quickly adapting to challenging business conditions, this service offering has already generated traction with new customers. Our focus continues to be on driving adoption in a high-value exchange regarding EksoWorks devices based on their productivity and safety benefits. We are pleased with the initial customer interests and look forward to sharing additional updates on future calls.

It sounds like a leasing or almost subscription model and that customer response has been receptive. Comparing revenues year over year going forward may get a little trickier, but the bottom line is that I don’t yet see evidence of organic growth from EksoWorks. However, I believe the industrial side of things could have equal or greater potential even than the medtech side, and it continues to generate positive press. In order for Ekso to really step up for its shareholders, I think there is no question that EksoWorks needs to start realizing much more of its potential. It is definitely not stalled out on this front – a new product, the Evo, was just introduced in August 2020, offering similar benefits but with more freedom of motion and less cumbersome to wear. Clearly, it will take time to see if the product is sufficient to fire up some growth, but its release is a promising turn.

Conclusion

As much as I may want to find reasons to like Ekso Bionics as an investment, I cannot make that case yet. For me to get there would really require at least two things:

  1. A strong trend line of improving cash from operations; once we come through this pandemic environment fully, will the negative cash from operations continue moving in the direction of breakeven? To plainly state the obvious, losing $2.0 million in actual cash from the business operations in a good quarter cannot continue to attract new capital forever, and I think management will need to do a better job explaining how it plans to get to that point of generating free cash flow eventually. Even if Ekso achieves this, I think it is highly likely that there will be more capital raising in the relatively near future. As a result, I would plan to wait until knowing what steps the company is taking to reduce cash burn and how it shores up its cash position.
  2. The second point is not as much of a “requirement” as it is a very strong preference, and that is to see EksoWorks make real strides. Having a diversified product portfolio beyond medical therapy uses is a benefit in its own right, but only if it gains enough scale to matter. The sales decline in 2019 was slightly concerning, and 2020 will be a major bust. Will the new sales model asking less upfront capital from its industrial partners help gain customers? In my view, actually, the EksoWorks segment may well be the better business to try and expand internationally, given the regulatory hurdles for the medical exoskeletons, and the industrial product could have a speed advantage in terms of getting approvals. I can imagine a nice market for the Ekso vest product in mature European markets, for example. In fact, its vest was tested back in 2018 for use in construction in Wales, and Ford has made it available to some workers both in the United States and abroad.

I cannot say that I have great confidence in either requirement being met. On both of these fronts, I think the company is likely at least a year away, and likely more as the pandemic itself is not exactly out of the picture in terms of its impact. I will continue to keep an eye on how things develop for Ekso Bionics, but continue to keep a bearish rating on it for the near term.

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

Additional disclosure: I am long in ReWalk (RWLK), not mentioned in the article but a competitor to Ekso Bionics.

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