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Edited Transcript of EKSO earnings conference call or presentation 30-Oct-19 8:30pm GMT

Q3 2019 Ekso Bionics Holdings Inc Earnings Call

RICHMOND Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Ekso Bionics Holdings Inc earnings conference call or presentation Wednesday, October 30, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jack Peurach

Ekso Bionics Holdings, Inc. - President, CEO & Director

* John F. Glenn

Ekso Bionics Holdings, Inc. - CFO & Secretary

* William R. Shaw

Ekso Bionics Holdings, Inc. - Chief Commercial Officer

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Conference Call Participants

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* K. Pak

Cantor Fitzgerald & Co., Research Division - Analyst

* Nathan S. Weinstein

Aegis Capital Corporation, Research Division - Analyst

* Swayampakula Ramakanth

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

* David Carey

Lazar Partners Ltd. - MD of IR

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Presentation

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Operator [1]

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Greetings, and welcome to the Ekso Bionics Third Quarter 2019 Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce David Carey with Lazar Partners. Thank you. Please begin.

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David Carey, Lazar Partners Ltd. - MD of IR [2]

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Thank you, operator, and thank you all for participating in today's call. Joining me from Ekso Bionics are Jack Peurach, President and Chief Executive Officer; and Jack Glenn, Chief Financial Officer.

Earlier today, Ekso Bionics released financial results for the quarter ended September 30, 2019. A copy of the press release is available on the company's website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements.

All forward-looking statements, including, without limitation or examination of historical operating trends and our future financial or operational expectations, are based upon the 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.

Ekso disclaims any intention or obligation, except as required by law, to update or revise any financial or operational projections or other forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the broadcast today, October 30, 2019.

I'll now turn the call over to Jack Peurach.

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [3]

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Thanks, David, and thanks to everyone for joining today's call. Our financial results for the third quarter of 2019 demonstrate our ongoing commitment to achieving our sales and operational objectives. In what is typically our seasonally weakest quarter, revenues for the third quarter increased 30% compared to the third quarter of 2018 and were up slightly over the second quarter of 2019, highlighted by a strong record revenue quarter for EksoHealth.

We also saw an improvement in gross margins, which increased to a record of 53%, up from 42% in the same period last year. We have continued to improve our operating expenses, achieving a 23% decrease in the third quarter of 2019 compared with the same period in 2018.

Additionally, our rental program continues to yield great results. At the end of Q3, our accumulative conversion rate for -- of a rental to a sale remained strong at 86%. The solid year-over-year improvement in multiple financial metrics achieved in the third quarter reflects the success of our commercial strategy and the value our customers see in adopting our solutions.

As I noted on last quarter's call, we established a near-term goal in both EMEA and APAC regions to continue to expand customer awareness and better support and equip our channel partners to effectively communicate the value our products provide to shorten the sales cycle. We are pleased that the changes we implemented in Europe, while recent, are having a positive impact by improving our sales results in our direct markets, reducing our operating expenses and better supporting our distribution partners.

As mentioned, we are experiencing traction in the direct market in Germany and expect that market will play a significant role in our EMEA growth. We continue to evaluate our European strategy to realize the full potential of our products in this key region.

Let me now review our business segments beginning with EksoHealth. Revenue in the third quarter increased by more than 70% relative to Q3 2018 primarily the result of higher sales to our U.S. and European customers.

In the third quarter, we booked 23 Ekso units, comprising both EksoGT and EksoNR units. This includes 2 new rental units and 7 previously rented units that were converted to sales.

As I've discussed in the past, our primary market focus is the inpatient rehabilitation facility segment, or IRF segment, where much of the acute and post-acute rehabilitation occurs.

Today, 8 of the top 10 U.S. rehab centers have at least 1 EksoGT and roughly 10% of the approximately 1,300 stroke rehab centers in the U.S. are Ekso customers.

In addition to inpatient rehabilitation facilities, we are also seeing increased interest in additional market segments with new pilots happening in the long-term acute care hospitals, or LTAC segment, where the focus is on long-term rehab and treatment of other medical conditions and in the skilled nursing facilities, or SNF segment, where the focus is on long-term rehabilitation. There are about 600 LTACs and 15,000 SNFs in the United States.

For our type of robotic gait therapy, we believe the aggregate post-acute market opportunity is roughly $500 million to $750 million annually. To gain share in these markets, we are focused on IDNs and network operators. We believe they provide opportunities for multiunit sales, which will play an increasingly important role in our growth strategy. And we are adapting our sales practices to facilitate the purchase process for these customers who typically have more complex decision-making processes.

We currently have pilots running at various stages with multiple network operators that represent approximately 400 centers.

An important component of our strategy to increase both our customer base and our sales per customer is to solidify our leadership position at the cutting-edge of robotic neurorehabilitation.

With the unveiling of the EksoNR, our next-generation EksoGT and the expansion of our medical exoskeleton portfolio to include the EksoUE, upper extremity device, our activities in the third quarter of 2019 underscore our ongoing capacity for and commitment to innovating solutions that amplify human motion by enhancing strength, endurance and mobility. These achievements also reflect our ability to address the needs of the customers and the patients that we strive to serve every day. And we remain focused on providing superior customer service, driving continued sales growth and optimizing our cost structure.

We recently hosted many of our customers' clinical staff at our annual clinical users group meeting, and we were pleased that early feedback on EksoNR's new features and software enhancements was highly favorable.

The PT users were particularly excited about the new patient feedback scores and new ways to implement this information for better treatment interventions.

Additionally, the EksoNR's outcome measures allow patient tracking over multiple sessions. Customer enthusiasm has already translated into orders and outstanding quotes for upgrades to existing EksoGT's already in the field, with orders of outstanding quotes already representing greater than 10% of our existing U.S. EksoGT installed base.

Our recently introduced EksoUE is a one-of-a-kind wearable device that gives patients greater range of motion and increased stability to complete tasks during therapy sessions, allowing them to actively participate in longer and more productive sessions.

In addition to its innovative features, EksoUE expands our customer base to include occupational therapists who represent an exciting new user segment within the rehabilitation market.

Our initial commercial activity is focused on existing customers, where we have already placed a small number of units. Patient and clinician feedback so far has been excellent. We expect to ramp commercial activity through Q4 2019 and into Q1 2020, as we continue to educate the market about the unique opportunity this product represents.

Our EksoGT users already recognize the clinical and economic benefits of our rehabilitation solutions, and we are communicating a compelling value proposition that clearly articulates how the EksoUE and upgraded to the EksoNR will help them improve their clinical workflows and patient outcomes.

Additionally, we believe that the EksoUE will be an important component of our strategy for expanding our customer base because it can help rehabilitation providers enhance their patient offerings even if they are not yet in a position to purchase an EksoNR unit.

Additionally, it provides our sales force with another reason to engage with potential customers and to build the trust and understanding that is essential for securing future business.

Going forward, we will continue to improve and evolve our product offerings with a clear focus on improving patient outcomes.

Let me now turn to our EksoWorks industrial segment. Revenues for the third quarter of 2019 were lower compared with the same period a year ago primarily due to slower-than-anticipated customer-purchasing decisions. As we have noted, the time from initial evaluation to adoption is somewhat longer than expected in some of the industrial customers we've been working with, as they've put our product through rigorous qualification processes.

While we are optimistic about the longer-term potential of our industrial offerings, several customer opportunities remain at the early stage. We are taking steps to engage with a broader mix of companies in industries and segments outside of our initial go-to markets, including a variety of construction segments. I look forward to updating you on our progress in the industrial markets as our customer discussions, pilot programs and diversification strategies advance.

In China, we are in the process of transferring production to the JV and expect to qualify our China JV partner as a manufacturer for our industrial products before the end of 2019, with industrial shipments anticipated to commence in the first quarter of 2020.

Product qualification and shipments of our Ekso medical devices are expected to follow shortly thereafter. Initiating shipments from the JV is an important milestone in Ekso Bionics' strategy to improve our cost of goods and achieve additional operational efficiencies.

Additionally, achieving medical device production capability will allow the JV to pursue China regulatory compliance, which is required to market and sell the EksoNR in China.

That concludes my opening remarks. Now I will turn the call over to Jack Glenn to review our 2019 third quarter financial results.

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John F. Glenn, Ekso Bionics Holdings, Inc. - CFO & Secretary [4]

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Thank you, Jack. In the third quarter of 2019, Ekso generated revenues of $3.3 million, an increase of $770,000 or 30% compared to the prior year period. The growth reflected the success of our EksoHealth U.S. commercial strategy, improved European and APAC performance and the strategic value of our rental-to-sale program.

The breakdown for Q3 2019 revenue is as follows. We recognized approximately $3 million in medical device and related revenue, a record in the quarter, up from $1.7 million in Q3 of 2018.

We booked 23 EksoGT and EksoNR units in the third quarter, 2 of which were rental units and 7 of which were previously rented units that were converted to sales.

As a reminder, bookings represent orders that we have either been shipped or in the process of being shipped. We recognized approximately $320,000 in EksoWorks revenue compared with approximately $790,000 in the same period a year ago. The decrease is primarily due to slower-than-anticipated customer purchasing decisions.

Our gross profit is up 62% for the quarter at $1.8 million, representing a gross margin of approximately 53%, both records for the quarter.

This compares to a gross margin for the same period last year of 42%. This strong increase in our gross margin is primarily attributed to continued execution of our medical business. We achieved higher average selling prices and lower production costs for our EksoGT and next-generation EksoNR devices.

Going forward, we continue to focus our efforts on increasing total gross margin. Operating expenses for the third quarter of 2019 were $5.5 million compared to $7.2 million for the third quarter of 2018, a reduction of approximately $1.7 million or about 23%. This reduction reflects the continuation of the company-wide initiatives we implemented last year primarily in general and administrative expenses as well as improving overall operational efficiencies.

Our focus remains on optimizing the cost structure of our organization, while growing sales of the commercialized products.

Loss from operations for this quarter was $3.8 million compared to a loss from operations of $6.1 million in the third quarter of 2018.

For the 3 months ended September 30, 2019, we recorded a gain on warrant liabilities of $4.4 million due to the revaluation of warrants issued in 2015 and 2019 compared to a $0.7 million loss associated with the revaluation of warrants issued in 2015 for the same period in 2018.

Net income for the quarter was $0.2 million or about $0 per share compared to a net loss of $7 million or $0.11 per share in the third quarter of 2018.

Turning to year-to-date results. Revenue in the first 9 months of 2019 was $10.2 million compared to $8 million for the same period in 2018, an increase of 27%. The increase in revenue for the first 9 months of 2019 is primarily due to a higher sales volume of EksoHealth sales.

Operating expenses in the first 9 months of 2019 were $18.7 million, a decrease of $6 million or about 24% compared to the prior year period.

Net loss year-to-date was $9.4 million or $0.13 per share compared to $22.9 million or $0.38 per share in the first 9 months of 2018. We are improving our financial standing by reducing the use of cash. Cash used in the operating activities for the first 9 months of 2019 was $14.3 million compared to $17 million in the first 9 months of 2019. As of September 30, 2019, we had a cash balance of $8.1 million.

Please see our 10-Q filed earlier today for further details regarding the quarter. Operator, you may now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Craig Bijou with Cantor Fitzgerald.

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K. Pak, Cantor Fitzgerald & Co., Research Division - Analyst [2]

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This is Dennis on for Craig. So first, net placement stepped up sequentially. Can you give any color on what drove this number up this quarter? And as a follow-up, what do your pipeline of centers look like today compared with a year ago? And how are your new products impacting your pipeline?

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [3]

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Okay. So the first question, net placements and a little color on net placements. The second one, could you repeat that?

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K. Pak, Cantor Fitzgerald & Co., Research Division - Analyst [4]

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So what do your pipeline of centers look like today compared with a year ago? And how are your new products impacting your pipeline?

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [5]

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Got it. Okay. So net placements -- increase of net placements. We've been really focused on driving our product into the market. I think a number of things are helping us accelerate that. We've really, in Europe, made some changes to our go-to-market and sales organization, focused initially on the direct sales force, and we've seen some benefits from that in the relatively short term. So that's a part of it. I think the second thing that's really helped a lot is that we have continued to focus on IDNs in the U.S. and are starting to see some additional pilots with IDNs that are helping with our placements.

And then just continued adoption and progression into the market, and our value proposition is more and more understood and accepted by our customers. So I think it's a combination of all those things.

With the respect to the pipeline of our centers and the role that new products have in bringing those centers on board. So with me is Bill Shaw. Bill is our Chief Commercial Officer. I'll take a start at this, and I'll pass it over to Bill. We continue to build our pipeline, both with individual centers and with network operators. Our product, we've really introduced 2 new products in the last quarter. One our EksoNR, which is the next-generation EksoGT. That's been extremely well received.

We had a -- I mentioned in the call that we had a user group meeting, we brought in a lot of our clinical users. And part of that was to share more about the EksoNR and its benefits. And we've had a, I would say, pretty tremendous response to -- from that customer set to upgrade their existing units to the NR. So I think that has helped us to stay engaged. And with our customers and continuing to bring value to them even after the initial sale.

On the EksoUE, we're in initial trials with a very small number of our key customers. So it's not yet really played in. But I think a lot of -- there's a lot of interest in our installed base, for sure, about that product. And I feel very confident that we're going to see a lot of adoption into that as we release it this quarter and beginning of next quarter.

Bill, anything you'd like to add to that?

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William R. Shaw, Ekso Bionics Holdings, Inc. - Chief Commercial Officer [6]

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No. The only other thing I'd add is just that we're getting more directionally focused on the network operators as well as key markets within our space.

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K. Pak, Cantor Fitzgerald & Co., Research Division - Analyst [7]

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Great. That's helpful. And you mentioned that over like 30% of your customers own multiple rehab units. Is that number trending up? And where do you think that it could get to over the next couple of years?

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [8]

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Yes. That number is trending up. It's a really -- I think it's a -- I'm going to ask Bill to fill in the gaps on this one, but it's actually really exciting because right now, 30% of our customers do have more than one, some have many more than one, but it's something that we haven't really made a focus for us internally.

And as we start to go back and we see customers with high utilization, and we help them with successfully implementing an Ekso program, we start to see them have more and more interest for multiple units.

So that's sort of one key element. The other thing that's driving this is that many centers will have an acute setting, inpatient setting and an outpatient setting, perhaps all in the same facility, but moving a piece of equipment around from location to location is tough. So as utilization comes up, people will add a second unit, maybe for a second part of their facility.

Where do we see this going? In the [entitled] state, when we think about this, we genuinely believe this is the best solution for neurological rehabilitation gait therapy. So we would expect this to happen in the majority of centers to have multiple units. But timing, I don't want to be too aggressive on the timing. But in the end game, we certainly think this is going to be everywhere. So go ahead.

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William R. Shaw, Ekso Bionics Holdings, Inc. - Chief Commercial Officer [9]

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Yes. I'd just say, it's interesting. If we look at the top 10 players in the inpatient space, for example, our penetration is only about 5% at this point. And -- so we have a lot of blue ocean ahead. So I think making sure we execute really well with our pilot programs we're doing. Driving really good clinical focus around outcomes. Hitting key growth objectives with the hospital executives, operational efficiencies. All those things they measure are really important. And -- so I think as we do a better job managing our customer success model, that's going to help us continue to expand in that space.

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K. Pak, Cantor Fitzgerald & Co., Research Division - Analyst [10]

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Okay. Can you talk about your sales force expansion plans for rest of '19 and '20? And what's the ramp to full productivity looks like for a new hire? And then what does full productivity look like from a revenue perspective?

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William R. Shaw, Ekso Bionics Holdings, Inc. - Chief Commercial Officer [11]

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Yes. I'll take that. So right now, we are expanding. So we've expanded in Europe. We're continuing to expand in the U.S., but we're trying to be really strategic with the type of people we're bringing on board. So we've made some personnel changes. As we get more focused on the network operators, we believe there's a different skill set you have to have. So with our current sales org, we're investing in some training, but we're also looking to bring more experienced people that have worked with these network operators on board. And -- so that's something that we'll continue to focus on through 2020.

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K. Pak, Cantor Fitzgerald & Co., Research Division - Analyst [12]

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Okay. And then on your JV, is there anything that changed with your recent announcement? And when can we expect any revenue contribution from the JV?

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [13]

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Yes. So for the first part of it, the contract that we signed, agreement, was just part of normal course of business with the -- with our JV partner, I think it's progressing extremely well. Right now, we -- as a reminder, the 3 primary motivators for that. Number one, to establish a manufacturing center in a low-cost area and help us with our cost of goods and our working capital, that we're going to see benefit from in 2020 for sure.

The second was to expand into the Chinese market, which is a very large market opportunity for us. There are -- our revenue that we will see from that is largely through a royalty stream. We will see that. There's a few year holiday on that. So we won't really see revenue from royalty until a few years from now, from the China market.

However, there's a third dimension, which is, we are an equity owner in that joint venture. And as this gets adopted into China, we see that value being quite significant.

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K. Pak, Cantor Fitzgerald & Co., Research Division - Analyst [14]

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Great. And then last one from me. So I mean really strong pickup in gross margins so far in 2019. I mean what specifically is driving the improvement in production costs and ASP? And then where can we see gross margins go in 2020 and beyond?

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [15]

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Well, first, thank you. We've really tried hard to improve in that area. I think 2 things are driving it. One, the way we sell our product and communicate the value proposition, demonstrate it, I think, is acknowledged. So that's allowed us to maintain relatively high ASPs, in fact, increasing a little bit over time.

The second thing is just really focusing on the cost of our product. And we've done that internally. I think next year, we'll see some improvements as we move to China. And so where do we expect to get on that, I think we've got some relatively conservative targets in the 60 -- low 60% gross margins, but we feel pretty confident about that.

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Operator [16]

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Our next question will come from the line of Swayampakula Ramakanth with H.C. Wainwright.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [17]

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As you stated, we placed 23 units in the third quarter of '19 versus 22 in the second quarter. But I'm just trying to understand what was the total number of units currently in the rental program at this point? And also the 7 conversions of rentals to sales, how many of those were with an IDN, maybe I guess it's Kindred at this point? And how many were with outside of IDNs?

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John F. Glenn, Ekso Bionics Holdings, Inc. - CFO & Secretary [18]

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Sure. I can take that one, RK. So yes, currently, in our rental fleet, there's 23 units and let's see [in the course,] there were [7] conversions, I believe, about close to around 4 of those were with an IDN, with Kindred in the quarter. And then also those 23 units, you could -- it correlates to about $3 million of potential conversion revenue going forward and about $0.5 million of contract revenue currently. Oh, by the way, that's all -- I'm giving you all the U.S. numbers, yes.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [19]

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Yes. Okay. And then -- so obviously, on the second quarter, you placed quite a few units with Kindred and now -- 4 units with Kindred. So is there more room to grow within that customer at this point? Or for the next sort of expansion in the IDN market, we need to look at current pilots who will be converting into, at least, a rental? I'll stop just with this question, and then I'll come back with a follow-up.

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William R. Shaw, Ekso Bionics Holdings, Inc. - Chief Commercial Officer [20]

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Okay. So yes, to answer your question, there is an opportunity to continue to expand with the customer you mentioned. We also are working with several other IDNs right now or network operators, where we have pilots started. So that is something that we'll continue to focus on. The opportunity, really, when you look at these network operators, our core market has been the inpatient rehabilitation market. We're also starting to pilot outside of that in the skilled nursing space, also long-term acute care. So some of these network operators play in multiple market segments. So that's where we would expand with them to new areas. But we continue to focus on our primary market right now of inpatient as the primary focus.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [21]

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Okay. I know you did say there are pilots going on with other network operators or IDNs. Is there -- is it possible for you to tell us how many pilots there are? And also from your experience with Kindred and some learnings from that experience, how should we think about future pilots, conversion into a rental, at least into a rental?

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [22]

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Yes. I'll take that. So in terms of number of pilots that we've got actively underway right now, we've got between 5 and 10 pilots with large network operators at various stages. So I think the second part of your question is, what's the -- I'll at least say, what's the sales cycle for those pilots? And I think it's -- I think the sales cycle is much more complicated sales cycle, the evaluation of pilots is one aspect of it, but there are other aspects as well that Bill alluded to earlier. The -- we've really invested in the ability to support our customers, we call customer success programs. So they can have a successful experience with Ekso as they're working through the pilots.

But we think the sales cycle is going to be somewhere between probably 9 months on the front end and 12 to 15 months on the back end before we get really good visibility in terms of what the success of this and real interest and magnitude of the opportunity going forward. So that's -- I think that's where we're at right now. We're learning all the time on this opportunity, but that's where we're at right now.

Yes. RK, let me just -- one more comment, just to clarify the Kindred, who is -- which is our first real network operator that we worked with. They -- that came around as a rental that then converted into a capital sale. That may -- that's not necessarily always the case. Many of our rentals are not with network operators. And then of course, some network operators may not choose to go rental right away, just to clarify that.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [23]

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During your initial commentary, I was trying to take notes, and at the same time, listen to you, so probably I'm trying to make sure that whether I heard this correctly or not. So when you were talking about the pilots running in various IDN centers. You said some -- I understood that some of these centers right now, if you add them up, it would make up to nearly 400 centers. Did I hear something -- was that correct? Or did I hear something by mistake? I didn't get that thing correctly.

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [24]

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No. You heard it correctly, but maybe let me clarify it. So we have pilots running right now. With network operators, and those network operators represent approximately 400 centers. We don't have 400 pilots right [indiscernible]

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [25]

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Yes. Yes. Got it. Got it.

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [26]

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Okay. But we think it's a tremendous opportunity.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [27]

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That's right. That's right. That's what I was trying to underscore, basically. So last quarter, I think you gave us -- gave the market a number saying that your units are approximately in about 270 centers or something like that. So how many -- in the U.S. So how many centers do you have at this point? And I'm just trying to understand how the trajectory is improving? And also now that you have you have Bill on board and also with the sales force who are more focusing on these larger networks, how should we think about that trajectory because that also kind of plays a little bit into how the growth should be in the EksoGT placements?

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [28]

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Okay. I got the question. Let me -- I just need to get the number for you. So the question is really about the number of centers we're in, in the United States, right?

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [29]

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Yes.

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [30]

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Okay. So I think the number that you quoted maybe was a global number. We're in between 130 and 140, Bill is saying, closer to 150 centers in the United States. And those are principally -- not entirely, but 95% plus in inpatient rehab facility segment. As we -- the second part of your question is around, what's the expected growth rate or penetration into those centers going forward? We've -- we're very optimistic that our, call it, recent shift and focus on IDNs and really understanding the customer better at all levels, not just at the individual center, but throughout the organization and helping to address the variety of challenges that may be associated with adopting our technology, so we can accelerate that process will help us penetrate into those centers, and that becomes a much more efficient way for us to serve our customers and bring our technology to the market.

So we're very optimistic in terms of I don't -- I don't think we're in a position to really forecast a growth rate as we do that, but we generally believe it's going to be much more efficient, and ultimately, will deliver a higher growth rate for us, into the market. That said, it's a small number of customers, and it's lumpy, and decisions are complicated. So it makes it, initially to get started, difficult to forecast things. But, but it's also -- I think, once we get rolling on this, it's going to be a lot more stable for our business.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [31]

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Just 2 more questions, and then I'll get back to the queue. On the NR product, you said there was quite a bit of an interest in the NR. I mean there are several people who are looking to convert or upgrade their GT to NR. So how does that revenue look like in the sense, would it be just an upgrade? So if you -- I'm not sure what the upgrade cost is. Or is it going to be like placement of a new unit, which could be obviously quite a bit of revenue? So I'm just trying to understand what that would mean? And also is your outstanding orders that you were talking about, most of them are only the upgrades? Or some of them -- or is it a decent percentage who are actually looking for purchasing a fresh, new NR unit and who have had no experience with GT?

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [32]

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Okay. Great question. So I'll try to break it down. Number one, in terms of upgrading the unit, we have -- our EksoGT, we have a number of different, call it, vintages in the field. Depending on the vintage, the upgrade can be -- it's always a hardware and software upgrade, but it's relatively straightforward. We're selling that in the market for between $10,000 and $15,000. And that's really what a number of our customers are kind of driving for. So that's the first point.

The second point is that, depending on the vintage, it could also be a significant upgrade to bring an EksoGT up to an NR level of capability. In those cases, where those units are usually older, they have more use on them. So we've had discussions with customers about upgrading and do have some quotes out to upgrade units to -- sorry, not upgrade, but replace effectively EksoGT unit with an EksoNR unit. I think those are -- that's a much smaller percentage of the population out there. But -- and I think the interest is certainly there to do that. But the principal near-term opportunity to us, is really in the upgrades. And Bill is in the field. So maybe he can add a little bit to that?

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William R. Shaw, Ekso Bionics Holdings, Inc. - Chief Commercial Officer [33]

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Yes. I think it's [indiscernible] covered it.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [34]

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Okay. So as I said, one last question. On the JV and I can hear your excitement about the JV in terms of what it brings to the table. So in terms of what it can drive your gross margin. How should we think about this? I know you cannot give a guidance for like 2020, but that's only with the EksoWorks fully operating for next year. But once the EksoHealth business also starts getting manufactured out of the JV, I'm just trying to figure out how quickly you can move that gross margin to a better number? I'm just trying to understand how to think through that happening? And what is required for a qualification? Is it a lot of bureaucracy? I know you're expecting it, and I'm sure you already have your i's and t's crossed, but I'm just trying to understand for my own sake, to get a comfort level with that expectation.

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [35]

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Got it. Okay. So on the product cost side, the -- our product costs have been reducing approximately 20% annually. We would expect to do better than that in 2020, both on the -- certainly, on the industrial products and on the medical products. So a lot of that will be driven by the JV rather than driven by us, which is part of the benefit of the JV.

The second part of your question, what's involved in qualification. And -- so for non-FDA regulated products, the qualification process is entirely internal, just as we would qualify any vendor as long as they met our quality requirements, they would become a vendor, a qualified vendor. For the medical products, there are some additional qualification requirements around implementing a ISO quality program, that we've been working with our JV partner on implementing. And that's the second part of it to become a qualified vendor of medical products to us, at the degree that we're talking about. Those are not heavily bureaucratic, but there is work involved in it. It's -- we would expect to be qualified by the -- certainly, this quarter for the industrial and probably in Q1 for the medical, with shipments at least of subassemblies in Q2 for the medical and starting to get some benefit from the -- all the other aspects of the JV over that period of time.

The last thing I'll say is that there is a third qualification element that's related to selling a medical product into China. That qualification is not an internal qualification process. It's an external qualification process. It includes the Chinese equivalent of the FDA, and that's -- think of it as a 12- to 18-month process in China. That affects the revenue -- the go-to-market in China for the medical product, and how many -- the types of customers they can approach before versus after getting that kind of certification.

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Operator [36]

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Our next question comes from the line of Nathan Weinstein with Aegis Capital.

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Nathan S. Weinstein, Aegis Capital Corporation, Research Division - Analyst [37]

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If I could just ask a question about your prepared remarks, Jack, I think you may have mentioned a total addressable market number. Did you say that could be over $500 million? And then if you could sort of decompose that? Does it include SNFs, LTACs? Or what else is in there?

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [38]

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Yes. Sure. I did say that. We've really looked a lot at the market to try to understand the opportunity in front of us in a little more detail. So that includes [UBS], that number includes all 3 LTACs, skilled nursing facilities, and invasion rehab facilities. And we've included in those segments high penetration into the inpatient rehab facilities, we actually believe that this will be -- as it becomes standard of care in every one of those centers, inpatient rehab and LTACs. And in skilled nursing facilities, the rehab is still a major focus in a subset of the skilled nursing facilities, albeit maybe in a slightly different, easier-to-use form than we currently offer, but we believe that, that will have some significant penetration as well. And in our model, we're now 50% to 60% adoption into the SNF segment in small units though. So maybe one unit per SNF versus multiple.

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Nathan S. Weinstein, Aegis Capital Corporation, Research Division - Analyst [39]

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Okay. And then the conversion ratio at 86%. It looked like it moved up from recent quarters. Can you call out anything that may have driven that conversion ratio higher?

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [40]

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Yes. Well, it's a cumulative conversion ratio and everything that was up for conversion converted. And I think that what's driving that, I think there are multiple things. One is, as we're out in the field selling the product, we're really -- I think early units that didn't convert were likely related to, "Hey, maybe this wasn't a great match to begin with." So there's part of it is that. Second is that we really focused on customer success and helping our -- making sure our customers are successful with our technology and addressing challenges when we see them. So we don't have a conversion problem. I think that would be the second. Overall, just general improvement of our ability to serve them. And their, I think, pleasure with the product and with our company.

As I've said before, this is really -- in my mind, this exceeds our internal targets, going back to my days on the Board. I think it's really a testament to the whole company in the way that we serve our customers and help them address things. Remember, they've got a whole year to evaluate working with us, not just our product, but our customer service, our field service, our clinical training team. And for them to say, "Yes, I'm going to buy this product" after working with us for a year is just a really strong vote of confidence.

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Nathan S. Weinstein, Aegis Capital Corporation, Research Division - Analyst [41]

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Okay. And last one from me. And just in discussing the margins, I know you covered it quite extensively, but you called out both ASPs and lower production costs as both benefiting margins. And if you had to think about those 2 buckets, is there room to draw from both of those? Or do you feel like you're getting close to a limit on either of them?

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [42]

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Good question. We're very careful on ASP. We do not want to price ourselves to the point that we're impacting demand. I don't think we've done that yet, but it's a learning process. So I think that there's probably some room there, probably some room. I think on the cost side, I think there's still significant opportunity on the cost side as we really transition to the JV and more importantly, to really a low-cost supply chain in addition to a low-cost manufacturing center. So I think there are opportunities in both. I'd probably say, there's probably a little more opportunity on the cost side than the ASP side, but we're working both.

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Operator [43]

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We have reached the end of our question-and-answer session. Allow me to turn the floor back over to Jack Peurach for closing remarks.

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Jack Peurach, Ekso Bionics Holdings, Inc. - President, CEO & Director [44]

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Okay. To summarize, we had multiple achievements in the third quarter of 2019, including exciting new product introductions, increased revenues, expanded gross margins and decreased operating expenses. These achievements helped to strengthen our financial position while providing resources to invest in our sales and marketing efforts and to continue innovating products that meet customer, patient and worker needs. The introduction of the EksoNR and the EksoUE highlight our ability to advance and expand our product portfolio in a strategic and cost-effective manner.

As we move through 2019 and into 2020, we remain focused on increasing our sales to existing customers and expanding our customer pipeline in both the medical and industrial segments. We also continue evaluating areas of our business in which we can reduce operating expenses, while maintaining a robust sales effort, highest quality customer service and strategic innovation.

I look forward to updating you on new progress in the months ahead. I'd like to thank everyone for joining today's call. Have a great afternoon.

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Operator [45]

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Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.