Investment in Unconsolidated Affiliate
|3 Months Ended|
Mar. 31, 2020
|Equity Method Investments and Joint Ventures [Abstract]|
|Investment in Unconsolidated Affiliate||Investment in Unconsolidated Affiliate
On January 30, 2019, the Company and its wholly-owned subsidiary, Ekso Bionics, Inc. (“Ekso US”), entered into an agreement with Zhejiang Youchuang Venture Capital Investment Co., Ltd (“ZYVC”) and another partner (collectively, the “JV Partners”), as amended by the Amendment to the Joint Venture Agreement, dated April 30, 2019 (as amended, the “JV Agreement”) to establish Exoskeleton Intelligent Robotics Co. Limited (the “Investee” or the “China JV”), a Chinese limited liability company designed to develop and serve the exoskeleton market in China and other Asian markets and to create a global exoskeleton manufacturing center in the Zhejiang Province of China.
Ekso US entered into a Technology License Agreement, dated October 22, 2019 (the “Technology License Agreement”) with the China JV pursuant to the terms of the JV Agreement. Pursuant to the Technology License Agreement, Ekso US granted to the China JV a nontransferable, non-sublicensable, irrevocable, and exclusive right and license in China, Hong Kong, Singapore, Malaysia and other countries to be mutually agreed upon by the parties to the JV Agreement, but excluding Japan, India and Australia (the “JV Territory”) to patented technologies and non-patented manufacturing technologies (collectively, the “IP”) involved in the manufacture of certain products, including EksoGT, EksoVest and EksoZeroG Arm units (collectively, the “JV Products”) and their improvements, to (i) manufacture, assemble, make and have made, use the JV Products in China and to sell such products in the JV Territory, (ii) provide marketing promotion, technical training and maintenance associated with such products and (iii) make investment in research and development projects undertaken by Ekso US. Under the Technology License Agreement, Ekso US will also provide marketing promotion, maintenance, training and technical support to the China JV in connection with the licensed activities, and the China JV will reimburse the reasonable costs and expenses of Ekso US for the training and technical support services so provided. In consideration for the improvements made by Ekso US to the JV Products, pursuant to the Technology License Agreement, following a specified royalty-free period, Ekso US will receive mid-single digit percentages of the net sales revenue of the JV Products sold by the China JV. The Technology License Agreement will be in effect until terminated for cause by Ekso US or until the earlier expiration or termination of the JV Agreement. Pursuant to the JV Agreement and the Technology License Agreement, the Company will receive a 20% ownership interest in the China JV. As of March 31, 2020, the Company had not transferred the patented technologies pursuant to the Technology License Agreement.
Since the licensed IP was developed internally by the Company, all previous expenditures to develop the technology were recognized as expense in the period incurred and there was no carrying value on the Company’s consolidated balance sheet. The Company expects that it will recognize a gain on the Technology License Agreement based on the fair value of the Company’s equity interest in the China JV once control of the intellectual property is transferred.
The China JV is a VIE for which the Company is not the primary beneficiary as the Company does not have the power to direct the activities that most significantly influence the economic performance of the entity. In addition to the Company’s exchange
of license rights for the manufacturing technology, the China JV will be capitalized through cash investments of up to approximately $92,000 (or RMB 624,000) by the JV Partners over the initial -year term of the JV Agreement. The investment in the Investee is accounted for under the equity method of accounting because the Company has significant influence over the Investee through its ownership interest, technology license and manufacturing service agreements and representation on the board of directors. As of March 31, 2020, there was no impact to the Company’s condensed consolidated balance sheet except for the direct transaction costs which have been capitalized and will be included as part of the investment balance when the intellectual property is transferred. Direct costs of $66 are included in other assets in the Company’s condensed consolidated balance sheets as of March 31, 2020. In addition to contributing the licensed IP, the Company’s obligations to the Investee include assisting the Investee to become proficient in using the intellectual property to manufacture products that meet regulatory standards, and providing supervision of appointed directors. The primary risks that the Company is exposed to from its involvement with the VIE include operational risk, foreign currency exposure risk and foreign regulatory risk. As of March 31, 2020, the Company has no other implied or unfunded commitments related to the Investee and its maximum exposure to risk of loss will be limited to the carrying value of the investment.
Under the JV Agreement, the JV Partners are required, within 90 days of the formation of the China JV, to contribute RMB 62,400, with a further RMB 12,400 capital contribution required from the JV Partners upon notice by the China JV based on the China JV’s then-current operating plan. The remaining RMB 436,800 capital contribution of the JV Partners will be paid by them within the 10 years after the formation of the China JV as previously contemplated under the JV Agreement.
In February 2019, the Department of Defense, or the DOD, inquired about certain aspects of the China JV, including about our products’ classification under U.S. export control regimes and whether the China JV parties intended to notify the Committee on Foreign Investment in the United States, or CFIUS, of the China JV. In July 2019, the Treasury Department - as the chair of CFIUS - made similar inquiries about the China JV and purchase of shares of our common stock by the Joint Venture Partners, or the JV Share Purchase.
The Company and the China JV submitted a joint voluntary notice to CFIUS in December 2019 to review the transaction. CFIUS has determined that the establishment of the China JV is subject to CFIUS’s jurisdiction. CFIUS’s current review and investigation is expected to end by May 28, 2020. The parties have responded to several question sets from CFIUS. On February 20, 2020, CFIUS imposed interim measures to mitigate concerns CFIUS identified pending completion of its investigation. These measures temporarily suspend the company’s contributions to the China JV and its other integration activities for the China JV. The Company continues to engage with CFIUS to address and mitigate its concerns. CFIUS has not yet determined whether its concerns can ultimately be mitigated.
Under the JV Agreement, ZYVC or its designees agreed to invest an aggregate of $10,000 in equity investments in the Company, taking place in two tranches. On January 30, 2019, the Company executed a Share Purchase Agreement (the “JV SPA”) under which the Company sold 205 shares of its common stock for $5,000 at a purchase price of $24.45 per share. The Company recorded $8 in direct issuance costs as a reduction to the gross equity proceeds.
The remaining $5,000 investment by the China JV or ZYVC or its designees is contingent upon the China JV shipping the first batch of EksoGT, EksoVest and EksoZeroG Arm products to Ekso Bionics, its affiliates or a third party. The investment will be made through the purchase of shares of the Company's common stock at a per share price equal to the volume weighted average price of 20 trading days before the issue date, but with a collar so that the equity price will be no greater than 20% of the first investment price.
The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef