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RWLK > SEC Filings for RWLK > Form 10-K on 17-Feb-2017All Recent SEC Filings

Show all filings for REWALK ROBOTICS LTD.

Form 10-K for REWALK ROBOTICS LTD.


17-Feb-2017

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with "Part I. Item 6. Selected Financial Data" and our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that are based on our management's current expectations, estimates and projections for our business, which are subject to a number of risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Special Note Regarding Forward-Looking Statements and "Part I. Item 1A. Risk Factors." Overview
We are an innovative medical device that derives revenue from selling the ReWalk Personal and ReWalk Rehabilitation exoskeleton devices that allow individuals with paraplegia the ability to stand and walk once again. Since obtaining FDA clearance in June 2014 we have continued to increase our focus on selling the Personal device through third party payors in the U.S. and Germany, and through distributors in other parts of the world.
We expect to generate revenues from a combination of third-party payors, self-payors and institutions. While no uniform policy of coverage and reimbursement by third-party payors currently exists for electronic exoskeleton technologies such as ReWalk, we plan to pursue various paths to obtain broad commercial and government reimbursement coverage. In December 2015, the VA issued a national policy for the evaluation, training and procurement of ReWalk Personal exoskeleton systems for all qualifying veterans across the United States. The VA policy, is the first national coverage policy in the United States for qualifying individuals who have suffered spinal cord injury. Additionally, to date several private insurers in the United States have provided reimbursement for ReWalk in certain cases. For more information regarding reimbursement of our products, see "Part I. Item 1. Business-Third Party Reimbursement and "Part I. Item 1. Business - Other Funding Sources." We have incurred net losses and negative cash flows from operations since inception and anticipate this to continue in the near term. As previously announced, we have set a goal to reduce total operating expenses in 2017 by up to 30% as compared to 2016. These reductions will be achieved through a combination of targeted savings, including the completion of specific projects focused on quality improvement initiatives and efforts to reduce overall product cost, a realignment of and reduction in staffing to match the Company's 2017 business goals, and a reduction in other corporate spending. The Company plans to focus its resources mainly on reimbursement efforts, clinical studies to expand data on the effectiveness of the Spinal Cord Injury products, field sales, service and training efforts for the ReWalk system and the commercialization pathway for the Stroke Softsuit program. Components of Our Statements of Operations Revenues
We currently rely, and in the future will rely, on sales and rentals of our ReWalk systems and related service contracts and extended warranties for our revenue. Our revenue is generated from a combination of third-party payors, institutions and self-payors. Payments for our products by third party payors have been made primarily through case-by-case determinations. Third-party payors include, without limitation, private insurance plans and managed care programs, government programs including the US Department of Veterans Affairs, worker's compensation and Medicare and Medicaid. We expect that third-party payors will be an increasingly important source of revenue in the future. In December 2015, the VA issued a national policy for the evaluation, training and procurement of ReWalk Personal exoskeleton systems for all qualifying veterans across the United States. The VA policy is the first national coverage policy in the United States for qualifying individuals who have suffered spinal cord injury. All of our ReWalk systems are covered by a two-year warranty from the date of purchase, which is included in the purchase price. We offer customers the ability to purchase, any time during the initial warranty period, an extended warranty for up to three additional years. Both warranties cover all elements of the ReWalk system, including the batteries, other than normal wear and tear. Revenues are presented net of the amounts of any provision we record for expected future product returns.


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Cost of Revenues and Gross Profit (Loss) Cost of revenue consists primarily of systems purchased from our outsourced manufacturer, Sanmina, salaries, personnel costs including non-cash share based compensation, associated with manufacturing and inventory management, training and inspection, warranty and service costs, shipping and handling and manufacturing startup and transition costs. Prior to the first quarter of 2014, when we completed the manufacturing transition to Sanmina, cost of revenues also included costs of components, compensation related costs associated with manufacturing and costs to transition manufacturing to Sanmina. Cost of revenues also includes royalties and expenses related to royalty-bearing research and development grants and sales and marketing grants.
In the future we expect our unit cost to decrease as our sales increase due to product cost improvements including economies of scale realized in connection with larger quantities and increased efficiency.
Our gross profit (loss) and gross margin as a percentage of sales is influenced by a number of factors, including primarily the volume and price of our products sold and fluctuations in our cost of revenues. Certain one-time expenses also impact gross margins including a 2014 expense relating to the early settlement, at a discount, of a royalty-bearing grant to the BIRD Foundation and 2015 and 2016 costs to transition manufacturing to the ReWalk Personal 6.0 model. We expect gross profit (loss) as a percentage of sales will improve in the future as we increase our sales volumes and decrease the product manufacturing costs.

Operating Expenses
Research and Development Expenses, Net
Research and development expenses, net, consist primarily of salaries, related personnel costs including share-based compensation, supplies, materials and expenses related to product design and development, clinical studies, regulatory submissions, patent costs, sponsored research costs and other expenses related to our product development and research programs. We expense all research and development expenses as they are incurred. We believe that continued investment in research and development is crucial to attaining our strategic product objectives.
Research and development expenses are presented net of the amount of any grants we receive for research and development in the period in which we receive the grant. We previously received grants and other funding from the BIRD Foundation and the Israel Innovation Authority, or "IIA", (formerly known as the Office of the Chief Scientist). Certain of those grants require us to pay royalties on sales of ReWalk systems, which are recorded as cost of revenues. We may receive additional funding from these entities or others in the future. See "Grants and Other Funding" below.
Sales and Marketing Expenses
Our sales and marketing expenses, consist primarily of salaries, related personnel costs including share-based compensation for sales, marketing and reimbursement personnel, travel, marketing and public relations activities and consulting costs. Also included in the sales and marketing expenses are the costs associated with our reimbursement activities in the United States and Germany.
General and Administrative Expenses
Our general and administrative expenses consist primarily of salaries, related personnel costs including share-based compensation for our administrative, finance, and general management personnel, professional services and insurance. Financial Income (Expenses), Net
Financial income and expenses consist of bank commissions, foreign exchange gains and losses, interest earned on investments in short term deposits, and revaluation of the fair value of warrants to purchase our preferred shares and expenses related to our convertible loans, which were issued in 2013 and are no longer outstanding.
Warrants to purchase our convertible preferred shares were classified as a liability on our consolidated balance sheet at fair value. The warrants were subject to revaluation at each balance sheet date and any change in fair value is recognized as a component of financial income (expense), net, on our consolidated statements of operations. All such warrants were exercised, expired or converted into warrants to purchase ordinary shares in connection with our initial public offering, and therefore as of December 31, 2014 and for periods beginning with the fourth quarter of 2014, we no longer record any liability in respect of them on our balance sheet or financial expenses in respect of them on our statement of operations.
Interest income consists of interest earned on our cash and cash equivalent balances. Interest expense consists of interest accrued on, and certain other costs with respect to any indebtedness. Foreign currency exchange changes reflect gains or losses related to transactions denominated in currencies other than the U.S. dollar.


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As described above in Item 5. "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Unregistered Sales of Equity Securities", on December 30, 2015 we entered into the Loan Agreement with Kreos pursuant to which Kreos extended a line of credit to us in the amount of $20.0 million. In connection with the Loan Agreement we issued to Kreos a warrant to purchase up to 119,295 of our ordinary shares at an exercise price of $9.64 as we drew down $12 million under the Loan Agreement, which amount was increased to167,012 ordinary shares upon an additional drawdown of $8 million. For further discussion of the Loan Agreement with Kreos, see "-Liquidity and Capital Resources" below and also Note 6 to our audited consolidated financial statements below.

Taxes on Income
As of December 31, 2016, we had not yet generated taxable income in Israel. As of that date, our net operating loss carry forwards for Israeli tax purposes amounted to approximately $83.8 million. After we utilize our net operating loss carry forwards, we are eligible for certain tax benefits in Israel under the Law for the Encouragement of Capital Investments, 1959. Our benefit period currently ends ten years after the year in which we first have taxable income in Israel provided that the benefit period will not extend beyond 2024.
Our taxable income generated outside of Israel will be subject to the regular corporate tax rate in the applicable jurisdictions. As a result, our effective tax rate will be a function of the relative proportion of our taxable income that is generated in those locations compared to our overall net income.

Grants and Other Funding
BIRD Foundation and AO&P
In July 2009, we entered into a grant agreement with the BIRD Foundation and Allied Orthotics & Prosthetics Inc., or the AO&P. AO&P was the distributor of our products at the time. We received $500,000 and AO&P received $60,000. The agreement with the BIRD Foundation required us to pay a royalty at a rate of 5% on sales of ReWalk systems and related services. The repayment requirement is equal to the amount of the grant multiplied by an increasing contractual percentage in an amount up to 150%.
Under the agreement AO&P is responsible for repayment of its grant. However, pursuant to the agreement, we are required to make any payments on which AO&P defaults. As of December 31, 2015 and through December 31, 2016, there was no contingent liability to the BIRD Foundation.
In 2014, we recorded an expense of $466,000 as a settlement for the prepayment, at a discount, of amounts due under the agreement.
Israel Innovation Authority (formerly known as Office of the Chief Scientist) From our inception through December 31, 2016 we have received a total of $740,000 in funding from the IIA, $340,000 of which are royalty-bearing grants, while $400,000 were received in consideration for an investment in our preferred shares. Out of the royalty-bearing grants received, we have paid royalties to the IIA in the total amount of $50,000. We may apply to receive additional grants to support our research and development activities in 2017. The agreements with IIA require us to pay royalties at a rate of 3% to 3.5% on sales of ReWalk systems and related services up to the total amount of funding received, linked to the dollar and bearing interest at an annual rate of LIBOR applicable to dollar deposits. If we transfer IIA-supported technology or know-how outside of Israel, we will be liable for additional payments to IIA depending upon the value of the transferred technology or know-how, the amount of IIA support, the time of completion of the IIA-supported research project and other factors. As of December 31, 2016, the aggregate contingent liability to the IIA was $300,000.


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Results of Operations

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenues
Our revenues for 2016 and 2015 were as follows (dollars in thousands, except
unit amounts)
                                   Years Ended December 31,
                                       2016                2015
Personal units placed                  109                    53
Rehabilitation units placed             10                    20
Total units placed                     119                    73
Personal unit revenues       $       5,197               $ 2,766
Rehabilitation unit revenues $         672               $   980
Revenues                     $       5,869               $ 3,746

Revenues increased $2.1 million, or 57%, during 2016 compared to 2015 explained by our increased sales of ReWalk Personal devices of $2.4 million, or 88%, derived primarily from 22 ReWalk Personal devices placed with the VA for use in the VA's clinical studies. This increase also reflects 51 positive reimbursement coverage decisions in 2016 compared to 23 in 2015. Revenues from ReWalk Rehabilitation units decreased by $308 thousand, or 31% during 2016 compared to 2015, primarily driven by the personal market and third-party payors. In the future we expect our growth to be driven by sales of our ReWalk Personal device to third-party payors as we plan to focus our resources on reimbursement policies with third-party payors.
Gross Profit (Loss)
Our gross profit (loss) for 2016 and 2015 were as follows (in thousands):

Years Ended December 31,
2016 2015
Gross profit $ 736 $ 214

Gross profit was 13% of revenue for 2016, compared to gross profit of 6% of revenue for 2015. The increase in gross profit was driven by the increase in units sales, as described in "Revenues" above, partially offset by increased service costs and personnel and personnel-related costs.
We expect our gross profit to gradually improve as we increase revenue and lower our unit manufacturing costs through specific cost reduction projects and economies of scale.
Research and Development Expenses, Net
Our research and development expenses, net for 2016 and 2015 were as follows (in thousands):

                                             Years Ended December 31,
                                                 2016                2015
Research and development expenses, net $       9,028               $ 5,937

Research and development expenses, net, increased $3.1 million, or 52%, during 2016 compared to 2015. The increase in expenses was primarily attributable to costs associated with the License Agreement and Collaboration Agreement with Harvard to develop the "soft suit" exoskeleton, increased personnel and personnel-related expenses and increased expenses for our 522 post-market surveillance study.
We expect to focus our research and development expenses in the near future on our ReWalk soft suit exoskeleton for individuals who have suffered a stroke, as well as continue to devote resources for developing the next generation of our current products.


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Sales and Marketing Expenses
Our sales and marketing expenses for 2016 and 2015 were as follows (in
thousands):
                                  Years Ended December 31,
                                      2016               2015
Sales and marketing expenses $      13,961             $ 13,056

Sales and marketing expenses increased $905 thousand, or 7%, during 2016 compared to 2015. This increase is attributable to an increase in personnel and personnel-related costs, as well as reimbursement related costs for expanding the commercialization of the ReWalk Personal device.
In the near term our sales and marketing expenses are expected to be driven by our commercialization efforts and reimbursement for the ReWalk Personal device as we continue to pursue insurance claims on a case- by- case basis and invest in efforts to expand coverage.
General and Administrative Expenses
Our general and administrative expenses for 2016 and 2015 were as follows (in thousands):

                                 Years Ended December 31,
                                     2016                2015
General and administrative $       8,188               $ 6,395

General and administrative expenses increased $1.8 million, or 28%, during 2016 compared to 2015. The increase is primarily attributable to personnel and personnel-related costs, professional services and legal expenses. Financial Expenses, Net
Our financial expenses, net for 2016 and 2015 were as follows (in thousands):

Years Ended December 31,
2016 2015
Financial expenses, net $ 2,059 $ 188

Financial expenses, net, increased $1.9 million, or 995% during 2016 compared to 2015. This increase is mainly attributable to interest expense related to the Loan Agreement with Kreos.
Income Tax
Our income tax for 2016 and 2015 were as follows (in thousands):

Years Ended December 31,
2016 2015
Income tax $ 3 $ 53

Income taxes decreased $50 thousand or 94% during 2016 compared to 2015. This decrease is mainly related to the utilization of tax benefits.


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Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenues
Our revenues for 2015 and 2014 were as follows (dollars in thousands, except
unit amounts):
                                   Years Ended December 31,
                                       2015                2014
Personal units placed                   53                    43
Rehabilitation units placed             20                    31
Total units placed                      73                    74
Personal unit revenues       $       2,766               $ 2,191
Rehabilitation unit revenues $         980               $ 1,760
Revenues                     $       3,746               $ 3,951

Revenues decreased $205 thousand, or 5%, during 2015 compared to 2014. Increased sales of the Personal devices of $575 thousand, or 26%, were offset by a decrease in sales of Rehabilitation devices by $780 thousand, or 44%. During 2015 our sales transitioned to focus on third party payors of our Personal devices, compared to 2014 when initial demand from FDA clearance in June 2014 drove a majority of self funded and donated Personal device sales. Gross Profit (Loss)
Our gross profit (loss) for 2015 and 2014 were as follows (in thousands):

Years Ended December 31,
2015 2014
Gross profit (loss) $ 214 $ (621 )

Gross profit was 6% of revenue for the year 2015, compared to gross loss of 16% of revenue for the year 2014. The increase in gross profit is driven by the manufacturing economies of scale which resulted from the completing of our process of transitioning all manufacturing to Sanmina in the second half of 2014, partially offset by costs associated with the transition of that manufacturing with respect to the ReWalk Personal 6.0 in 2015. Additionally, in the fourth quarter of 2014 we incurred a one-time charge related to the early settlement, at a discount, of a royalty-bearing grant from the BIRD Foundation in the amount of $466 thousand.
Research and Development Expenses, Net
Our research and development expenses, net for 2015 and 2014 were as follows (in thousands):

                                             Years Ended December 31,
                                                 2015                2014
Research and development expenses, net $       5,937               $ 8,563

Research and development expenses, net, decreased $2.6 million, or 31%, during 2015 compared to 2014. The decrease in expenses is attributable to a one-time, non-cash, share-based compensation award to our founder at the time of our initial public offering in 2014, which is offset by increased personnel and personnel-related costs related to regulatory, quality and research and development activities during 2015.


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Sales and Marketing Expenses
Our sales and marketing expenses for 2015 and 2014 were as follows (in
thousands):
                                   Years Ended December 31,
                                       2015                2014
Sales and marketing expenses $       13,056              $ 7,389

Sales and marketing expenses increased $5.7 million, or 77%, during 2015 compared to 2014. This increase is attributable to an increase in personnel and personnel-related costs and marketing and reimbursement related costs as we expanded commercialization of the ReWalk Personal and Rehabilitation systems. General and Administrative Expenses
Our general and administrative expenses for 2015 and 2014 were as follows (in thousands):

                                 Years Ended December 31,
                                     2015                2014
General and administrative $       6,395               $ 3,352

General and administrative expenses increased $3.0 million, or 91%, during 2015 compared to 2014. The increase in expenses is primarily attributable to personnel and personnel-related costs, professional services and other expenses related to our being a publicly traded company for the first full year. Financial Expenses, Net
Our financial expenses, net for 2015 and 2014 were as follows (in thousands):

Years Ended December 31,
2015 2014
Financial expenses, net $ 188 $ 1,698

Financial expenses, net, decreased $1.5 million, or 89% during 2015 compared to 2014. This decrease is attributable mainly to the revaluation of the fair value of warrants to purchase preferred shares and the issuance of convertible preferred shares and warrants to purchase convertible preferred shares during 2014.
Income Tax
Our income tax for 2015 and 2014 were as follows (in thousands):

Years Ended December 31,
2015 2014
Income tax $ 53 $ 45

Income taxes increased $8 thousand for the year ended December 31, 2015, compared to the year ended December 31, 2014.


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Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles. The preparation of our financial statements requires us to make estimates, judgments and assumptions that can affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates, judgments and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known. Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. See Note 2 to our audited consolidated financial statements presented elsewhere in this annual report for a description of the significant accounting policies that we used to prepare our consolidated financial statements. The critical accounting policies that were impacted by the estimates, judgments and assumptions used in the preparation of our consolidated financial statements are discussed below. Revenue Recognition
We recognize revenues in accordance with ASC 605, "Revenue Recognition," when delivery has occurred, persuasive evidence of an agreement exists, the fee is fixed and determinable, collectability is reasonably assured and no further obligations exist. Provisions are made at the time of revenue recognition for any applicable warranty cost expected to be incurred. The timing for revenue recognition among the various products and customers is dependent upon satisfaction of such criteria and generally varies from either shipment or delivery to the customer depending on the specific shipping terms of a given transaction, as stipulated in the agreement with each customer. Other than pricing terms which may differ due to the different volumes of purchases between distributors and end-users, there are no material differences in the terms and arrangements involving direct and indirect customers. Our products sold through agreements with distributors are non-exchangeable, non-refundable, non-returnable and without any rights of price protection or stock rotation. Accordingly, we consider all the distributors as end-users. We generally do not grant a right of return for our products. There have been a few occasions in which we experienced a return of our products. Therefore, we record reductions to revenue for expected future product returns based on our historical experience.

For the majority of sales of Rehabilitation systems, we include training and consider the elements in the arrangement to be a single unit of accounting. In accordance with ASC 605, we have concluded that the training is essential to the functionality of our systems. Therefore, we recognize revenue for the system and training only after delivery, in accordance with the agreement delivery terms, . . .

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