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Re: dabonenose post# 278

Monday, 02/26/2018 12:31:08 PM

Monday, February 26, 2018 12:31:08 PM

Post# of 1471
Summary
Dilution continues with $15M new share offering.

The company is close to having its capital needs met and operating expenses under control.

ReWalk earned a positive decision from the German insurer Barmer, which is the most bullish indicator in months.

Through my mother's family tree, I can claim legitimate heritage linking me to a certain historically well known distiller of American rye whiskey that continues on as a national brand today; it is owned now by a foreign multinational, but I always enjoyed thinking about the family drama unfolding of going from riches to rags during Prohibition when the family had to sell the business. For a while after finishing my MBA, I was even working with a relative in an attempt to revive family involvement in distilling, especially given the craving for "craft" brands now. While I have exited that project, I was introduced to an industry I knew little about, as I was not a whiskey drinker myself. One of the little "wow, isn't that great idea" moments I had was when I found out about whiskey stones - little stones or metallic cubes that you can freeze and use in place of ice in your whiskey. Seasoned whiskey drinkers are not new to these, but I had never seen them before, and it is pretty simple genius - your whiskey stays cold and does not get diluted. So much for my little nostalgic stroll, but I really was thinking about the whiskey stones while starting to write up my most recent take on ReWalk Robotics (NASDAQ:RWLK), whose recent investors might think they need a stiff drink.

dilution

The nano-cap Israeli robotics company ReWalk, a maker of medical exoskeletons that help people with spinal cord injuries walk again, could stand to figure out if there is a way to slow down it share dilution problem. At the end of September, the company revealed a further capital raise of $15M in new common shares, and the stock reacted predictably, dropping fairly sharply as the dilution effect takes its toll. The company had laid out in January its three primary goals for 2017: one, increasing commercial insurance coverage of its FDA-approved device; two, prepare to launch a new product for stroke patients, and three, cut operating expenses by as much as 30%. The fact that the ReWalk has managed to make strides in all three areas is a positive sign, and yet it has primarily been scraping by with deep operating cuts, as the effects of the first item are not yet showing up in revenue, and the second item will not lead to any revenue for at least one year. The resulting return to capital markets is on top of a share offering less than a year ago, issuing then 3.25M new shares and 2.4M warrants to raise $12.2M in October 2016; I concluded in my article from November 2016 that,

In the end, any investment thesis for ReWalk comes down to the investor's expectation for growth compared to the firm's need for cash. With cash on hand that should cover next year's loss of cash from operations even if revenue is $18M, where it goes next for cash is not likely to be good for current shareholders. The hard fact, as I see it, is that even under impressive growth models, 2017 and 2018 will result in strong negative free cash flow, requiring either additional debt or additional equity.

In fact, ReWalk has gone both routes since then: 1) By December 2016, ReWalk was maxing out its credit line with Kreos Capital; then 2) by June 2017, it was restructuring $3M of that debt principal into convertible debt at a conversion price of $1.27 a share [8-k dated 6/9/2017], and now 3) the $15M share offering. All together, that is roughly $27M in new equity capital in less than a year plus $10M in new debt; for a company with a market cap of $33M, that is certainly worth noting. With an attempt at reducing SG&A costs by 30% for 2017, asking where exactly that cash is going is not a bad question.

The cost controls are certainly having an effect, although to hit the 30% target, the 3rd and 4th quarter figures are going to be really aggressive. The company recorded 2016 operating expenses of $31M, making a 30% drop somewhere around $22M. Though the first half of 2017, those expenses are close to $13M, although dropping steadily quarter over quarter and clearly on track to be noticeably less than last year. However, on sales of ~ $4.5M through the same period, the math speaks for itself. Still, the additional capital should put it back in the range of $30 in cash on hand, the most capitalized it has been since 2014 when it held its IPO.

ChartRWLK Cash and Equivalents (Quarterly) data by YCharts

The most significant news for those taking the long view, however, is actually beginning in Germany, where the insurer Barmer has signed on to cover the ReWalk system in qualified cases. This agreement is not a token victory for ReWalk - Barmer is a major German player, covering nearly 10 million people, (and was even recognized as a "star brand" in the 2013 book on German companies: The 'Made in Germany' Champion Brands: Nation Branding, Innovation and World Export Leadership by Ugesh A. Joseph). Management has been guiding towards a head start in Germany, and here is the confirmation that guidance was correct. Barmer's decision certainly could be the first of several insurers who now fall in line, although how long that process takes continues to be the major limiting factor, assuming it happens at all. In the SEC documentation submitted on September 20, ReWalk updated its current standing with the US insurance situation as well:

ReWalk continues to engage with U.S. national and regional insurance providers to secure potential coverage policies based on supportive data and appeal rulings that have deemed exoskeleton devices a "medically necessary" standard of care for individuals with SCI [spinal cord injury]. As part of this ongoing initiative, a large national insurance provider has requested additional information from us in order to continue to evaluate a change from its current non-coverage policy. We are also submitting data to two additional U.S. commercial groups for policy reviews.

One German insurer, no matter how significant, is not going to turn ReWalk's fortunes around, but it is the first really good sign that ReWalk can eventually get similar outcomes over time and in other markets. The narrative can change from being one in which victories are on a case by case basis to gaining wholesale coverage. As cautious as I have been since starting to follow the company, this recent development is the most bullish indicator that a good entry point is coming into view, as the combined effect of individual wins and the Barmer decision start to come into focus. The dilution has been brutal for those holding already, as this name has mostly been a one-way ticket to capital loss for investors. However, the opportunity here to pull ahead of its similarly challenged competitor Ekso Bionics (EKSO) could be critical, although the well-funded Parker Hannifin (PH) entrant Indego is lurking in the background as well.

The intriguing final piece of the puzzle rests with the refinancing of $3M of its debt principal into convertible notes with its partners at Kreos; for two reasons. One, it gives the impression that Kreos is willing to be patient and flexible, so additional future refinancing could be possible [and at $1.27 a share for conversion they may score a nice windfall in the end]. Secondly, if sales can improve enough to bring the debt down, and I imagine adding a few more insurers would be enough to do exactly that, then the outlook really starts to brighten. That would be enough to say that a trend is starting to take shape and capital needs can be increasingly met with cash generated from operations (or perhaps more realistically in the short term, cash won't be burned at nearly the rate it has been previously). In fact, my primary concern is that the new capital is burned too quickly on developing the soft suit for stroke victims. While a noble cause, and likely a larger market than serving those with spinal cord injuries, I believe convincing insurers of the "medical necessity" of such a device will be quite challenging, perhaps more so than the existing system. Either way, cash constraints are extremely likely to continue for the medium term, say 2 years, at which point there is a limited chance that operations will start generating free cash flow. That possibility is premised on really strong growth, for example from adding a couple insurers each year, to the point that revenue can get past $50M by 2019. Even then, the current cash will not get ReWalk to the finish line, but it could get it to a better negotiating position with Kreos to refinance its remaining debt on better terms if trends turn positive.

I have not bought in yet, but continue to keep an eye on the space and would say I am on the verge of entering a long position.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RWLK over the next 72 hours.

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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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