Replies to post #1185 on ReWalk Robotics Ltd (RWLK)

[midastouch017]

I see it more like $8.00 +

The more - the merrier!

:-)

[midastouch017]

ReWalk Robotics: Now Or Never Time

Aug. 24, 2020 11:33 AM ET | About: ReWalk Robotics Ltd. (RWLK)

Larry Saunders
Value, growth at reasonable price, long-term horizon, medium-term horizon
(563 followers)

Summary

A July equity raise has brought in enough new capital to keep operations going as the business is primed to grow.

Second quarter results just start to show the real promise from broader German insurance coverage and increasing the average selling price.

The balance of risk is shifting away from insurance never covering the primary product.

Anytime Pinky would ask the Brain what they were going to that night on the classic animated show from the 1990s, the Brain always answered "The same thing we do every night, try to take over the world!" I am no expert on the show, but to my recollection the Brain never answered "try to take over Germany, and then the world," but if he had, it could have been the inspiration for what is turning out to be ReWalk Robotics (RWLK) strategy for trying to dominate the robotic exoskeleton market.


I started my Seeking Alpha writing in March 2016 by writing about ReWalk, noting at the time that the medical device space for exoskeletons used to help injured people walk was getting a well capitalized competitor in Parker Hannifin (PH). My point then was that ReWalk, as a nano-cap company, could be at risk of losing any first-mover advantage it may have had at the time.

ReWalk user in Berlin
(image source: https://rewalk.com/gallery-2/)

ReWalk has survived the competition so far, and over the last four-plus years, I have had times when I thought the future was relatively bright based on management's guidance. As key elements of that guidance failed to materialize in time, I became mostly bearish or neutral at best, even as generally positive developments trickled in. Although I had made some money in trading the stock in 2014 and 2015, I have been sitting on large percentage losses on a position started in November 2017, which I didn't touch again for almost two years, until last fall, when I began averaging down in very small doses in October (the original position was a small one due to the risk profile at the time).

While I may never turn my personal position to net positive, I am more bullish now than I have been in a very long time. After absorbing the Q2 results announced earlier this month, I have turned the corner on this risky company and am continuing to slowly grow my position. This remains far and away my riskiest investment, although the way the pandemic has wrought havoc on my retail holdings and the supply glut in oil has turned my energy holdings upside down, I am not totally convinced of that statement anymore... regardless, this is a thinly traded nano-cap stock in the medical technology sector and remains an extremely risky investment.

ReWind Up To The Present: The More Things Stay The Same, The More Things Change
About four months after starting my current position, in April 2018 I wrote a piece bemoaning the outlook based on a share offering at a low valuation and the general pattern of dilution, even though new financing from China seemed to be coming on board, and I wasn't prepared to bail at that point. At more or less the same time, ReWalk's personal use device, the ReWalk 6.0, was quietly starting to get lined up for approval by German insurance, and the company was developing a second product line, the ReStore soft suit for use with stroke recovery.

As it has turned out, the things that seemed most exciting then have not come together. The $20 million in Chinese financing never fully materialized, and the Timwell fund's board member was removed in April 2020 as a result. The COVID-19 pandemic has made selling the ReStore product to locked-down rehab centers much more difficult. But the company's contract approvals for reimbursement in Germany with a broad swath of insurers started paying reliably as of last quarter, and for the first time in ReWalk's history, there should be an implied steadiness to revenues as a result, with a pronounced impact slowing down cash burn.

ChartData by YCharts
Quarterly revenue for Q2 came in over $1.6 million, a figure ReWalk hasn't hit since Q1 2019, and this in the midst of the worst quarter so far in terms of Covid-19. The revenue was due in large part to those German insurance contracts starting to make payments on claims, in combination with ReWalk's ability to driving a higher selling price per unit of about $89,000. The ReStore sales were mostly irrelevant for the quarter, and management is now pointing to 2021 as effectively when sales might begin in earnest.

ReEvaluating the Future
In Q2, ReWalk placed eight units in Germany, and while only half the placements for the quarter, it is the figure I want to focus on. It is not in and of itself some magic number, but what is significant is that all units were placed with payments from the German insurance contracts. No individual paid out of pocket, and no claims had to be appealed in order to get the payments. Getting that kind of 100% insurance coverage on the ReWalk 6.0 has long been the dream, and it represents the standard that ReWalk is striving for across the board. CEO Larry Jasinski said in his prepared remarks during the Q2 call that (emphasis added):

Until now we have not been able to achieve meaningful market penetration as economic resources in terms of insurance policy and coverage had not yet shifted to this technology. We have now entered the beginning of that shift in Germany and anticipate that the United States will follow the process from a code to coverage contracts in a pathway that is similar to Germany in the coming 12 months to 24 months. We are now on the doorstep to market penetration after years of effort.

In Germany alone there are an additional 89 pending insurance cases, compared to only 9 in the United States currently, but that US figure will likely go up (the number of "qualified cases" is much higher than actual pending insurance claims, with more than 140 US patients deemed by ReWalk to be qualified). I believe the US insurance cases will see a significant rise because the Centers for Medicare and Medicaid Services approved what is known as the "Healthcare Common Procedure Coding System" code (generally referred to by its initial as a "HCPCS code" ) in June, effective on October 1, 2020. The code does not mean that insurers will cover the device, but it does greatly simplify the possibility for billing insurance claims. If management is correct about the United States following a similar path as Germany over the next 24 months (bearing in mind that management has a history of presenting overly optimistic timelines), then revenue should not only stabilize and even grow at a higher level from German insurance coverage, but then start to truly take off around 2023 as American insurers start to cover the system like their German peers.

Expectations for revenue growth have been sorely disappointed in the past several years - some analysts were thinking the company could be hitting $19 million in 2017 - but some of the key pieces are actually now in place to see the top line growth be more of a sure thing, and that is barely factoring in their own ReStore product line or the new distribution deals with MediTouch (another Israeli company) or MYOLYN. With gross margins above 50% and reduced SG & A costs, I fully expect to see the cash burn rate continue to fall. Presently (end of Q2), ReWalk had $14 million in cash, plus an additional $9 million raised in July. With well over $20 million in cash, debt of just under $5 million and cash from operations still negative by $3 million per quarter but declining (hopefully rapidly), reliance on further equity raises in the next 12 to 15 months are fairly muted. If cash burn declines to $2.5 million per quarter and just stays there without further improvement, that still leaves more than 20 months of runway based on a net cash position of $18 million ($23 million cash less $5 million in debt).

Dilution could still happen, not just in case the company decides to raise more equity, but also because there are outstanding warrants. However, the associated exercise prices to convert to common shares and the deadlines make many of them frankly irrelevant in the near term. As an extreme example, almost 100,000 of the warrants issued in 2016 expire in November 2021 with an exercise price of $118.75. Nearly 1.6 million warrants are priced at $7.50 with a variety of expirations, some several thousand more priced at higher points and some others priced lower. Needless to say, new investors might not mind that dilution if the shares were to move over those sorts of values. With ReWalk's history, I certainly would never want to discount the potential for dilution, but for the present moment, cash is sufficient, and as the business becomes more consistent, debt financing at more attractive rates could come back into the picture. The publically stated goal is to have the $5 million in debt currently owed paid off by the end of Q1 2021.

Even after issuing the additional $9 million in shares in July, ReWalk is back to having some institutional investor support. Intracoastal Capital LLC came onboard at a ~9.9% stake in February 2020, and CVI Investments (a Cayman Island entity with a spotty record according to Utopia Capital Research, a short-selling focused site) invested via Heights Capital Management for a ~6.5 stake. In the past, ReWalk has had big chunks owned by Kreos Capital, but Kreos seems to primarily own the debt now without any sizable equity position (Kreos does hold some of the aforementioned warrants). I don't think that institutional investors are necessarily bullish indicators, but given the positions are relatively recent, they are worth noting. From what I can tell, neither entity currently has any influence on the board.

Conclusion
In my four years of covering ReWalk, I have never assigned a price target, and I think I am probably one or two quarters away from making any sort of specific call in that regard. However, as it is has been for some time, buying shares in the current range of $1.25 is essentially picking up an option on its long-term viability. The question of whether or not ReWalk would make it even this far was by no means assured, but through dilution and debt and stringent cost improvements, the company has stuck it out. While it has been a mostly joyless ride for past investors, the present moment seems in many ways like an ideal time to step in.

ChartData by YCharts
The market did not seem to take much note of the second quarter results; the stock has spiked more on news and rumors than on actual fundamental results. While I expect that sort of spiky volatility to continue in the short and medium term, I do believe that the improving growth profile paired with more stable and predictable revenues will in time result in a re-rating that pushes the company's value higher. In other words, as long as fundamentals show regular improvement quarter by quarter, the significance of the fundamentals in determining the market's valuation will steadily increase, and $1.25 entry point will evaporate.

In one sense, the risk has not really changed, by which I mean for ReWalk to really generate a market beating return will depend on getting positive insurance decisions from American insurers. The German coverage is an excellent start, to be sure, and if ReWalk determined it wanted to operate more or less solely as a European med tech company on a smaller scale and maybe still serve the American Veterans department, perhaps it could do so profitably. But the passion and hopes remain of getting this technology into the hands of everyday Americans who have suffered from spinal cord injury, and I expect ReWalk will push as hard as possible towards that goal, and if that goal starts to be met, additional global growth ambitions will too.


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.

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