Quarterly report pursuant to Section 13 or 15(d)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

or

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

Commission File Number: 001-37854 

 

 

Ekso Bionics Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

Nevada   99-0367049
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

1414 Harbour Way South, Suite 1201
Richmond, CA
  94804
(Address of principal executive offices)   (Zip Code)

 

(510) 984-1761

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer x
     
Non-accelerated filer ¨   Smaller reporting company ¨
(Do not check if a smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

The number of shares of registrant’s common stock outstanding as of November 2, 2016 was: 21,880,959

  

 

 

 

 Ekso Bionics Holdings, Inc.

 

Quarterly Report on Form 10-Q

 

Table of Contents

 

    Page No.
  PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
  Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015 3
     
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited) 4
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited) 5
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
     
Item 4. Controls and Procedures 32
     
  PART II. OTHER INFORMATION  
     
Item 5. Other Items 33
     
Item 6. Exhibits 33
     
  Signatures 34

 

 2

 Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Ekso Bionics Holdings, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except par value)

 

   September 30,   December 31, 
   2016   2015 
Assets  (unaudited)   (Note 2) 
Current assets:          
Cash  $12,800   $19,552 
Accounts receivable, net   2,200    2,069 
Inventories, net   1,915    1,056 
Note receivable, current   34    - 
Prepaid expenses and other current assets   533    436 
Deferred cost of revenue, current   92    2,088 
Total current assets   17,574    25,201 
Property and equipment, net   2,561    2,625 
Note receivable   41    - 
Deferred cost of revenue   -    2,502 
Intangible assets, net   1,162    1,584 
Goodwill   189    189 
Other assets   94    97 
Total assets  $21,621   $32,198 
Liabilities and Stockholders' Equity          
Current liabilities:          
Accounts payable  $1,359   $2,694 
Accrued liabilities   2,982    1,885 
Deferred revenues, current   1,098    3,960 
Capital lease obligation, current   67    80 
Total current liabilities   5,506    8,619 
Deferred revenues   822    4,613 
Warrant liability   6,165    9,195 
Contingent consideration liability   768    768 
Other non-current liabilities   132    195 
Total liabilities   13,393    23,390 
Commitments and contingencies (Note 14)          
Stockholders' equity:          
Convertible preferred stock, $0.001 par value; 10,000 shares authorized          
at September 30, 2016 and December 31, 2015; 0 and 13 shares outstanding at          
September 30, 2016 and December 31, 2015, respectively   -    - 
Common stock, $0.001 par value; 71,429 shares authorized at          
September 30, 2016 and December 31, 2015; 21,393 and 15,027 shares          
outstanding at September 30, 2016 and December 31, 2015, respectively   21    15 
Additional paid-in capital   117,498    100,184 
Accumulated other comprehensive loss   (7)   (1)
Accumulated deficit   (109,284)   (91,390)
Total stockholders' equity   8,228    8,808 
Total liabilities and stockholders' equity  $21,621   $32,198 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

 3

 Table of Contents

 

Ekso Bionics Holdings, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share amounts)

(Unaudited)

                  

   Three months ended September 30,  

Nine months ended

September 30,

 
   2016   2015   2016   2015 
Revenue:                    
Device and related  $1,495   $1,095   $11,003   $3,128 
Engineering services   101    1,820    631    3,590 
Total revenue   1,596    2,915    11,634    6,718 
                     
Cost of revenue:                    
Device and related   1,123    1,095    9,078    2,863 
Engineering services   70    1,352    452    2,482 
Total cost of revenue   1,193    2,447    9,530    5,345 
                     
Gross profit   403    468    2,104    1,373 
                     
Operating expenses:                    
Sales and marketing   2,735    2,380    8,151    6,754 
Research and development   2,216    1,713    6,586    4,438 
General and administrative   2,318    1,556    8,271    5,090 
Total operating expenses   7,269    5,649    23,008    16,282 
                     
Loss from operations   (6,866)   (5,181)   (20,904)   (14,909)
                     
Other income (expense), net:                    
Gain (loss) on warrant liability   (1,620)   -    3,030    - 
Interest and other, net   8    (4)   (20)   (36)
Total other income (expense), net   (1,612)   (4)   3,010    (36)
                     
Net loss   (8,478)   (5,185)   (17,894)   (14,945)
                     
Less: Preferred deemed dividend   (3,016)   -    (10,345)   - 
Net loss applicable to common shareholders   (11,494)   (5,185)   (28,239)   (14,945)
Foreign currency translation adjustments   (17)   -    (6)   - 
Comprehensive loss  $(11,511)  $(5,185)  $(28,245)  $(14,945)
                     
Basic net loss per share applicable to common shareholders  $(0.60)  $(0.35)  $(1.67)  $(1.03)
Weighted average number of shares of common stock outstanding, basic   19,005    14,606    16,888    14,578 
Diluted net loss per share applicable to common shareholders  $(0.60)  $(0.35)  $(1.78)  $(1.03)
Weighted average number of shares of common stock outstanding, diluted   19,005    14,606    17,595    14,578 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

 4

 Table of Contents

 

Ekso Bionics Holdings, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   Nine months ended 
   September 30, 
   2016   2015 
Operating activities:          
Net loss  $(17,894)  $(14,945)
Adjustments to reconcile net loss to net cash used in operating activities          
Depreciation and amortization   1,381    653 
Amortization of deferred rent   (27)   (28)
Stock-based compensation expense   2,552    1,259 
Gain on change in fair value of warrant liability   (3,030)   - 
Changes in operating assets and liabilities:          
Accounts receivable   (131)   (636)
Inventories   (1,026)   (379)
Note receivable   (75)   - 
Prepaid expense and other assets   (94)   (338)
Deferred costs of revenue   4,498    (776)
Accounts payable   (1,335)   1,365 
Accrued liabilities   1,279    (188)
Deferred revenues   (6,653)   931 
Net cash used in operating activities   (20,555)   (13,082)
           
Investing activities:          
Acquisition of property and equipment   (728)   (962)
Net cash used in investing activities   (728)   (962)
           
Financing activities:          
Principal payments on note payable   (58)   (40)
Fees paid related to 2015 issuance of convertible preferred stock   (173)   - 
Proceeds from issuance of common stock   14,694    - 
Proceeds from exercise of stock options   74    80 
Proceeds from exercise of warrants   -    52 
Net cash provided by financing activities   14,537    92 
Effect of exchange rate changes on cash   (6)   - 
Net decrease in cash   (6,752)   (13,952)
Cash at beginning of period   19,552    25,190 
Cash at end of period  $12,800   $11,238 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

  

 5

 Table of Contents

 

Ekso Bionics Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

1. Organization

 

Description of Business

 

On January 15, 2014, a wholly-owned subsidiary of Ekso Bionics Holdings, Inc. named Ekso Acquisition Corp. merged with and into Ekso Bionics, Inc. (the “Merger”). Ekso Bionics, Inc. was the surviving corporation and became a wholly-owned subsidiary of Ekso Bionics Holdings, Inc. As a result of this transaction, Ekso Bionics Holdings, Inc. discontinued its pre-merger operations, acquired the business of Ekso Bionics, Inc. and continues the operations of Ekso Bionics, Inc. as a publicly traded company. Ekso Bionics, Inc. was incorporated in January 2005 in the State of Delaware.

 

As used in these notes to the consolidated financial statements, the term “the Company” refers to Ekso Bionics Holdings, Inc., formerly known as PN Med Group, Inc., and its wholly-owned subsidiaries, including Ekso Bionics, Inc. after giving effect to the Merger; the term “Holdings” refers to the business of Ekso Bionics Holdings, Inc. prior to the Merger, and the term “Ekso Bionics” refers to Ekso Bionics, Inc. prior to the Merger. All common stock share and per share amounts have been adjusted to reflect the one-for-seven reverse stock split completed on May 4, 2016. See Note 11, Capitalization and Equity Structure – Reverse Stock Split.

 

The Company designs, develops, and sells exoskeletons that augment human strength, endurance, and mobility. The Company’s exoskeletons have applications in health care, industrial, military, and consumer markets. 

 

Liquidity

 

Largely as a result of significant research and development activities related to the development of the Company’s advanced technology and commercialization of this technology into its medical device business, the Company has incurred significant operating losses and negative cash flows from operations since inception. The Company has also recognized significant non-cash losses associated with the revaluation of certain securities, which have also contributed significantly to its accumulated deficit. As of September 30, 2016, the Company had an accumulated deficit of $109,284.

 

Cash on hand at September 30, 2016 was $12,800, compared to $19,552 at December 31, 2015. For the nine months ended September 30, 2016, the Company used $20,555 of cash in operations, compared to $13,082 for the nine months ended September 30, 2015. The increase in cash used was driven by general increases in operating expenses such as selling, marketing, and research and development, as the Company continues to build its team and capabilities and expand commercialization efforts for its medical and industrial device businesses. The increase also includes a one-time increase in inventory, as well as some investment in certain inventory which is expected to reverse over the next few quarters.

 

Based upon the Company’s current cash resources, which include cash received from the exercise of warrants since September 30, 2016, the recent rate of using cash for operations and investment, and assuming modest increases in current revenue offset by incremental increases in expenses related to increased sales and marketing and research and development, and a potential increase in rental activity from its medical device business, the Company believes it has sufficient resources to meet its financial obligations into the second quarter of 2017. The Company will require significant additional financing. The Company intends to pursue opportunities to obtain additional financing in the future through public or private equity and/or debt financings, corporate collaborations, or warrant solicitations.  

 

The Company’s actual capital requirements may vary significantly and will depend on many factors. For example, the Company plans to continue to increase its investments (i) in its clinical, sales and marketing initiatives to accelerate adoption of the Ekso robotic exoskeleton in the rehabilitation market, (ii) in its research, development and commercialization activities with respect to an Ekso robotic exoskeleton for home use, and/or (iii) in the development and commercialization of able-bodied exoskeletons for industrial use. Consequently, the Company will require significant additional financing in the future, which the Company intends to raise through corporate collaborations, public or private equity offerings, debt financings, or warrant solicitations. Sales of additional equity securities by us could result in the dilution of the interests of existing stockholders. There can be no assurance that financing will be available when required in sufficient amounts, on acceptable terms or at all. In the event that the necessary additional financing is not obtained, the Company may be required to reduce its discretionary overhead costs substantially, including research and development, general and administrative, and sales and marketing expenses or otherwise curtail operations.

 

 6

 Table of Contents

 

2. Basis of Presentation and Summary of Significant Accounting Policies and Estimates

 

Basis of Presentation

 

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for the presentation of interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to such rules and regulations. The condensed consolidated balance sheet at December 31, 2015, has been derived from the audited consolidated financial statements at that date but does not include all disclosures required for the annual financial statements and should be read in conjunction with our audited consolidated financial statements and notes thereto included as part of our Annual Report on Form 10-K for the year ended December 31, 2015. Unless otherwise indicated, all dollar and share amounts (excluding per share amounts) included in these notes to the financial statements are in thousands.

 

In management’s opinion, the condensed consolidated financial statements reflect all adjustments (including reclassifications and normal recurring adjustments) necessary for a fair statement of its financial position at September 30, 2016, and results of operations and cash flows for all periods presented. The interim results presented are not necessarily indicative of results that can be expected for a full year. The condensed consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to conform to the current period’s presentation.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet, and the reported amounts of revenues and expenses during the reporting period. For the Company, these estimates include, but are not limited to: revenue recognition, deferred revenue and the deferral of the associated costs, future warranty costs, maintenance and planned improvement costs associated with medical device units sold prior to 2016, useful lives assigned to long-lived assets, realizability of deferred tax assets, the valuation of options and warrants, and contingencies. Actual results could differ from those estimates.

 

Concentration of Credit Risk and Other Risks and Uncertainties

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. We maintain our cash accounts in excess of federally insured limits. However, we believe we are not exposed to significant credit risk due to the financial position of the depository institutions in which these deposits are held.  We extend credit to customers in the normal course of business and perform ongoing credit evaluations of our customers. Concentrations of credit risk with respect to accounts receivable exist to the full extent of amounts presented in the consolidated financial statements. We do not require collateral from our customers to secure accounts receivable.

 

Accounts receivable are derived from the sale of products shipped and services performed for customers located in the U.S. and throughout the world. Invoices are aged based on contractual terms with the customer. We review accounts receivable for collectability and provide an allowance for credit losses, as needed. We have not experienced any material losses related to accounts receivable as of September 30, 2016 and December 31, 2015. Many of the sales contracts with customers outside of the U.S. are settled in a foreign currency other than the U.S. dollar.

 

 7

 Table of Contents

 

We do not enter into any foreign currency hedging agreements and are susceptible to gains and losses from foreign currency fluctuations. To date, we have not experienced significant gains or losses upon settling foreign currency denominated accounts receivable.

 

As of September 30, 2016, we had one customer with an accounts receivable balance totaling 10% or more of our total accounts receivable (13%) compared with one customer as of December 31, 2015 (10%).

 

In the three months ended September 30, 2016, we had one customer with billed revenue of 10% or more of total billed revenue (15%), compared with one customer in the three months ended September 30, 2015 (48%). In the nine months ended September 30, 2016, we had no customers with sales comprising 10% or more of our total customer sales, compared with one customer in the nine months ended September 30, 2015 (33%).

 

Medical Device Revenue and Cost of Revenue Recognition

 

The Company builds medical device robotic exoskeletons for sale and capitalizes into inventory materials, direct and indirect labor, and overhead in connection with the manufacture and assembly of these units.

 

When the Company brought its first version medical device to market in 2012, the Company could not be certain as to the costs it would incur to support, maintain, service, and upgrade these early stage devices. Primarily for this reason, prior to January 1, 2016, the sale of a device, associated software, initial training, and extended support and maintenance were deemed as a single unit of accounting due to the uncertainty of the Company’s follow-up maintenance and upgrade expenses, which were forecast to extend over three years. Accordingly, the revenue from the sales of the device and associated cost of revenue were deferred at the time of shipment. Upon completion of training, such amounts were recognized as revenue and cost of revenue over a three year period on a straight line basis, while all service expenses, whether or not covered by the Company’s original warranty, extended warranty contracts, or neither, were recognized as incurred. 

 

Effective January 1, 2016, the Company determined it had established (i) separate individual pricing for training, extended warranty coverage, and out-of-contract service or repairs, (ii) sufficient historical evidence of customer buying patterns for extended warranty and maintenance coverage, and (iii) a basis for estimating and recording warranty and service costs to allow the Company to separate its multiple element arrangements into two distinct units of accounting: (1) the device, associated software, original manufacturer warranty and training if required, and (2) extended support and maintenance. As a result, the Company is able to recognize revenue on such multiple element arrangements related to the device upon delivery to the customer. Revenue relating to the undelivered elements is deferred using the relative selling price method, which allocates revenue to each element using the estimated selling prices for the deliverables when vendor-specific objective evidence or third-party evidence is not available. For sales on or after January 1, 2016, revenue and associated cost of revenue of medical devices is recognized when delivered, or training has been completed, if required. Revenue for extended maintenance and support agreements is recognized on a straight line basis over the contractual term of the agreement, which typically ranges from one to four years. As a result of this change, the Company recognized medical device revenue previously deferred at December 31, 2015 of $6,517 and associated cost of revenue of $4,159, resulting in additional gross profit, reduction in net loss from operations, and reduction of net loss applicable to common stockholders of $2,358 in its results of operations for the nine months ended September 30, 2016.  In addition, the Company recorded $212 for warranty expenses and a one-time charge of $911 for a planned preventative maintenance and upgrade program associated with the devices it had sold prior to 2016 in the same time period.

 


Recent Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions for public companies, including: (1) income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. The amendments in this update are effective for annual periods beginning after December 15, 2016. Management is in the process of evaluating the impact of ASU 2016-09 on the Company’s consolidated financial statements.

 

 8

 Table of Contents

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued an update, ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, to defer the effective date of this update by one year. In April 2016, the FASB issued a further update, ASU 2016-10 Revenue from Contracts with Customers (Topic 606) Identifying Performance Obligations and Licensing. ASU 2016-10 clarifies that contractual provisions that explicitly or implicitly require an entity to transfer control of additional goods or services to a customer should be distinguished from contractual provisions that explicitly or implicitly define the attributes of a single promised license. In May 2016, the FASB issued a further update, ASU 2016-12 Revenue from Contracts with Customers (Topic 606) Narrow-Scope Improvements and Practical Expedients. ASU 2016-12 clarifies key areas concerning: (1) assessment of collectability, (2) presentation of sales taxes and other similar taxes collected from customers, (3) non-cash consideration, (4) contract modifications at transition, (5) completed contracts at transition, and (6) disclosing the accounting change in the period of adoption. The updated standard becomes effective for the Company in the first quarter of fiscal year 2018, but allows the Company to adopt the standard one year earlier if it so chooses. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

 

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 requires entities to adhere to a uniform classification and presentation of certain cash receipts and cash payments in the statement of cash flows. The amendments in this update provide guidance on eight specific cash flow issues. The new standard will be effective for the Company beginning on January 1, 2018 and early adoption is permitted. The Company does not expect the impact of the items identified in the ASU to be material on its consolidated financial statements.

 

3. Accumulated Other Comprehensive Loss

 

The change in accumulated other comprehensive loss presented on the condensed consolidated balance sheets and the impact of significant amounts reclassified from accumulated other comprehensive loss on information presented in the condensed consolidated statements of operations and comprehensive loss for the nine month period ending September 30, 2016, are reflected in the table below net of tax:

 

   Foreign 
   Currency 
   Translation 
Balance at December 31, 2015  $(1)
Other comprehensive loss before reclassification   (6)
Amounts reclassified from accumulated other     
comprehensive loss   - 
Net current period other comprehensive loss   (6)
Balance at September 30, 2016  $(7)

 

 9

 Table of Contents

 

4. Fair Value Measurements

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Three levels of inputs, of which the first two are considered observable and the last unobservable, may be used to measure fair value which are the following:

 

  Level 1—Quoted prices in active markets for identical assets or liabilities. The Company considers a market to be active when transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

  Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

  Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The valuation of Level 3 investments requires the use of significant management judgments or estimation.

 

The Company’s fair value hierarchies for its financial assets and liabilities which require fair value measurement are as follows:

 

       Quoted Prices in Active Markets For Identical Items   Significant Other Observable Inputs   Significant Unobservable Inputs 
   Total   (Level 1)   (Level 2)   (Level 3) 
September 30, 2016                
Liabilities                    
Warrant liability  $(6,165)  $-   $-   $(6,165)
Contingent consideration liability  $(768)  $-   $-   $(768)
                     
December 31, 2015                    
Liabilities                    
Warrant liability  $(9,195)  $-   $-   $(9,195)
Contingent consideration liability  $(768)  $-   $-   $(768)

 

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities for the nine month period ended September 30, 2016, which were measured at fair value on a recurring basis:

 

   Warrant Liability   Contingent Consideration Liability 
Balance at December 31, 2015  $(9,195)  $(768)
Gain on decrease in fair value of warrants issued with 2015 financing   3,030    - 
Balance at September 30, 2016  $(6,165)  $(768)

 

Refer to Note 11. Capitalization and Equity Structure – Warrants for additional information regarding the valuation of warrants.

 

 10

 Table of Contents

 

5. Inventories, net

 

Inventories consist of the following:

 

   September 30,   December 31, 
   2016   2015 
Raw materials  $1,380   $783 
Work in process   432    336 
Finished goods   151    19 
    1,963    1,138 
Less: inventory reserve   (48)   (82)
Inventories, net  $1,915   $1,056 

 

6. Deferred Revenues

 

In connection with our medical device sales and engineering services, the Company often receives cash payments before the earnings process is complete. In these instances, the Company records the payments as customer deposits until a device is shipped to the customer, or as customer advances in the case of engineering services until the earnings process is achieved. In both cases, the cash received is recorded as a component of deferred revenue.

 

As described in Note 2. Basis of Presentation and Summary of Significant Accounting Policies and Estimates – Medical Device Revenue and Cost of Revenue Recognition, prior to January 1, 2016, the sale of a device, associated software, initial training, and extended support and maintenance were deemed as a single unit of accounting due to the uncertainty of the Company’s follow-up maintenance and upgrade expenses, which were forecast to extend over three years. Accordingly, the revenue from the sale of a device and associated cost of revenue were deferred at the time of shipment. Upon completion of training, such amounts were recognized as revenue and cost of revenue over a three year period on a straight line basis, while all service expenses, whether or not covered by the Company’s original warranty, extended warranty contracts, or neither, were recognized as incurred.  For sales on or after January 1, 2016, revenue and associated cost of revenue of medical devices are recognized when delivered, or when training has been completed, if required. Revenue for extended maintenance and support agreements will be recognized on a straight line basis over the contractual term of the agreement, which typically ranges from one to four years. As a result of this change, the Company recognized medical device revenue previously deferred at December 31, 2015 of $6,517 and associated cost of revenue of $4,159 in its condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2016.

 

Deferred revenues and deferred cost of revenues consist of the following:

 

   September 30, 2016   December 31, 2015 
Customer deposits and advances  $60   $48 
Deferred medical device revenues   301    7,388 
Deferred rental income   74    71 
Deferred extended maintenance and support   1,485    1,066 
Total deferred revenues   1,920    8,573 
Less current portion   (1,098)   (3,960)
Deferred revenues, non-current  $822   $4,613 
           
Deferred medical device unit costs  $92   $4,590 
Less current portion   (92)   (2,088)
Deferred cost of revenue, non-current  $-   $2,502 

 

 11

 Table of Contents

 

7. Intangible Assets

 

On December 1, 2015, the Company acquired substantially all of the assets of Equipois, LLC, a New Hampshire limited liability company, for an initial payment of $1,071, payable in shares of the Company’s common stock, and recorded $768 of estimated contingent consideration. The transaction resulted in the Company recording $1,610 of intangible assets with an estimated life of three years. The following table reflects the amortization of the purchased intangible assets as of September 30, 2016:

 

   Cost   Accumulated Amortization   Net 
Developed technology  $1,160   $(323)  $837 
Customer relationships   70    (19)   51 
Customer trade name   380    (106)   274 
   $1,610   $(448)  $1,162 

 

Estimated future amortization for the remainder of 2016 is $135, and $537 and $490 for the years 2017 and 2018, respectively.

 

8. Accrued Liabilities

 

Accrued liabilities consist of the following:

 

   September 30,   December 31, 
   2016   2015 
Salaries, benefits and related expenses  $1,988   $1,464 
Maintenance   579    - 
Warranty expense   186    - 
Professional fees   137    257 
Other   92    164 
Total  $2,982   $1,885 

 

9. Maintenance and Warranty

 

Sales of devices generally include an initial warranty for parts and services for one year in the U.S. and two years in Europe, the Middle East, and Africa. During the nine months ended September 30, 2016, the Company determined it had sufficient historical experience of warranty costs to estimate future warranty costs for devices sold. As a result, and beginning during the nine months ended September 30, 2016, a liability for the estimated cost of product warranty is established at the time revenue is recognized based on the historical experience of known product failure rates and expected material and labor costs to provide warranty services. From time to time, specific additional warranty accruals may be made if unforeseen technical problems arise. Alternatively, if estimates are determined to be greater than the actual amounts necessary, a portion of the liability may be reversed in future periods. Warranty costs are reflected in the condensed consolidated statements of operations and comprehensive loss as a component of costs of revenue.

 

In addition, in the nine months ended September 30, 2016, the Company recorded in its condensed consolidated statements of operations and comprehensive loss a one-time charge of $911 for a preventative maintenance and improvement program for devices sold prior to 2016 to bring the devices to second generation GT-level functionality.

 

 12

 Table of Contents

 

A reconciliation of the changes in the maintenance and warranty liabilities for the period ended September 30, 2016 is as follows: 

 

   2016 
   Maintenance   Warranty   Total 
Balance at December 31, 2015  $ -   $ -   $ - 
Additions for estimated future expense   911    356    1,267 
Incurred costs   (332)   (161)   (493)
Balance at September 30, 2016  $579   $195   $774 
                
Current portion   579    186    765 
Long-term portion   -    9    9 
Total  $579   $195   $774 

 

The long-term portion of warranty accrual is included as a component of other non-current liabilities in the condensed consolidated balance sheets.

 

10. Lease and Note Obligations

 

In November 2011, the Company entered into an operating lease agreement for its headquarters and manufacturing facility in Richmond, California. The lease term commenced in March 2012 and expires in May 2017, with one option to renew for an additional five years. In November 2016, the Company signed the five-year lease extension option for its Richmond headquarters. The option lease term will commence in June 2017 and expire in May 2022, which is included in the table below. The Company also leases nominal office space in Germany.

 

In 2012, the Company entered into a note agreement in connection with the lease for its Richmond, California facility. The note, for an aggregate principal of $200, with an interest rate of 7%, minimum monthly payments of $4, and a May 31, 2017 maturity, was used to fund leasehold improvements. This note is classified as a component of capital lease obligation-current and other non-current liabilities in the condensed consolidated balance sheets. Commencing in August 2015, the Company entered into a long-term capital lease obligation for equipment. The aggregate principal of the lease is $166, with an interest rate of 4.7%, minimum monthly payments of $3 and a July 1, 2020 maturity. This capital lease is classified as a component of capital lease obligation-current and other non-current liabilities in the condensed consolidated balance sheets.

 

The Company estimates future minimum payments as of September 30, 2016 to be the following:

 

Period  Operating Lease   Note Payable   Capital Lease   Total Minimum Payments 
2016 - remainder  $116   $12   $11   $23 
2017   461    20    40    60 
2018   483    -    37    37 
2019   494    -    37    37 
2020   504    -    22    22 
Thereafter   610    -    -    - 
Total minimum payments  $2,668    32    147    179 
Less interest        (1)   (12)   (13)
Present value minimum payments        31    135    166 
Less current portion        (31)   (36)   (67)
Long-term portion       $-   $99   $99 

 

Rent expense under the Company’s operating leases was $101 and $86 for the three month periods ended September 30, 2016 and 2015, respectively, and was $299 and $258 for the nine month periods ended September 30, 2016 and 2015, respectively.

 

 13

 Table of Contents

 

11. Capitalization and Equity Structure

 

Reverse Stock Split:

 

After the close of the stock market on May 4, 2016, the Company effected a 1-for-7 reverse split of its common stock. As a result, all common stock share amounts included in this filing have been retroactively reduced by a factor of seven, and all common stock per share amounts have been increased by a factor of seven, with the exception of our common stock par value. Amounts affected include common stock outstanding, including the issuance of new shares of common stock as a result of the conversion of preferred stock and the exercise of stock options and warrants.

 

Summary:

 

The Company’s authorized capital stock at September 30, 2016 consisted of 71,429 shares of common stock and 10,000 shares of convertible preferred stock. At September 30, 2016, 21,393 shares of common stock were issued and outstanding and no shares of convertible preferred stock were issued and outstanding.

 

2016 Common Stock Offering:

 

On August 12, 2016, the Company issued 3,750 shares of common stock at a price to the public of $4.00, resulting in proceeds to the Company of $13,696, net of the underwriting discount and issuance costs. On August 17, 2016, the Company issued an additional 267 shares of common stock as a result of the partial exercise of the underwriters’ overallotment option for additional proceeds of $998, net of the underwriting discount. The Company plans to use the proceeds from this offering for its operations.

 

As discussed below, the Series A Convertible Preferred Stock issued in December 2015 (the “Preferred Shares”) and the common stock warrants issued in December 2015 (the “2015 Warrants”) included price-based anti-dilution provisions providing for the adjustment of the conversion price and the exercise price, as applicable, in the event the Company sells common stock or common stock equivalents (subject to exceptions for certain exempt issuances) at a price lower than the then-conversion price of the Preferred Shares or the then-exercise price of the 2015 Warrants. Because the sale price to the underwriters of the common stock in the August 2016 common stock offering was less than the then-conversion price of the Preferred Shares and the then-exercise price of the 2015 Warrants, there was an anti-dilution adjustment to the number of shares of common stock issuable upon conversion of the Preferred Shares and the exercise price of the 2015 Warrants was reduced, as discussed in more detail below.

 

Convertible Preferred Stock:

 

In December 2015, the Company issued 15 Preferred Shares and 2015 Warrants to purchase 2,122 shares of the Company’s common stock for which the Company received gross proceeds of $15,000. Each Preferred Share was initially convertible into 0.141 shares of common stock (after giving effect to the reverse stock split) at any time at the election of the investor. Conversion of the Preferred Shares triggers the amortization of a discount related to a beneficial conversion feature and to the 2015 Warrants. The terms of the Preferred Shares and 2015 Warrants included price-based anti-dilution provisions providing for the adjustment of the conversion price and the exercise price, as applicable, in the event the Company sold common stock or common stock equivalents (subject to exceptions for certain exempt issuances) at a price lower than the then-conversion price of the Preferred Shares or the then-exercise price of the 2015 Warrants. Because the sale price to the underwriters of the common stock in the August 2016 common stock offering was less than the conversion price of the Preferred Shares at the time, the conversion price of the Preferred Shares was adjusted downwards from $7.07 to $3.74 per share, which resulted in each outstanding Preferred Share becoming convertible into 0.267 shares of common stock at any time at the election of the investor. As a result, the 3 Preferred Shares then outstanding became convertible, for no additional consideration, into a total of 921 shares of the Company’s common stock.

 

 14

 Table of Contents

 

At December 31, 2015, 13 Preferred Shares were outstanding. As of September 30, 2016, no Preferred Shares remain outstanding and the warrant discount was fully amortized. During the three month period ended September 30, 2016, 1 Preferred Share was converted into 60 shares of common stock at a conversion price of $7.07 per share and 3 Preferred Shares were converted into 921 shares of common stock at a conversion price of $3.74 per share. During the nine month period ended September 30, 2016, 10 Preferred Shares were converted into 1,389 shares of common stock at a conversion price of $7.07 per share, and 3 Preferred Shares were converted into 921 shares of common stock at a conversion price of $3.74 per share. The conversions triggered the amortization of the warrant discount of $3,016 and $10,345 during the three and nine month periods ended September 30, 2016, respectively, which were recorded in the condensed consolidated statements of operations and comprehensive loss as non-cash preferred deemed dividends.

 

Warrants:

 

Warrant share activity for the nine month period ended September 30, 2016 is as follows:

 

Source  Exercise Price   Term (Years)   At December 31, 2015   At September 30, 2016 
December 2015 warrants  $3.74    5    2,122    2,122 
                     
2014 PPO and Merger                    
Placement agent warrants  $7.00    5    426    426 
Bridge warrants  $7.00    3    371    371 
PPO warrants  $14.00    5    1,078    1,078 
                     
Pre 2014 warrants  $9.66    various    88    88 
              4,085    4,085 

 

In connection with the December 2015 issuance of Preferred Shares discussed above, the Company issued 2015 Warrants to purchase up to an aggregate of 2,122 shares of common stock. The 2015 Warrants have a 5 year term. Because the sale price to the underwriters of the common stock in the August 2016 offering was less than the exercise price of the 2015 Warrants at the time, the exercise price of the 2015 Warrants was adjusted downwards from $8.75 to $3.74 per share.

 

The Company estimates the fair value of the warrant liability by using a Black Scholes Option Pricing Model. The warrant liability is measured at fair value using certain estimated inputs, which are classified within Level 3 of the valuation hierarchy. The following assumptions were used in the Black Scholes Option Pricing Model to measure the fair value of the warrants as of September 30, 2016:

 

Current share price  $4.70 
Conversion price  $3.74 
Risk-free interest rate   1.04%
Term (years)   4.23 
Volatility of stock   75%

 

The warrants were valued at $9,195 at December 31, 2015. Due to a decrease in the Company’s common stock price from December 31, 2015 to September 30, 2016, the fair value of the warrants decreased by $3,030, which resulted in a non-cash gain recorded in the Company’s consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2016. For the three months ended September 30, 2016, the fair value of the warrants increased by $1,620, due to an increase in the Company’s common stock price from June 30, 2016 to September 30, 2016, which resulted in a non-cash loss recorded in the Company’s consolidated statements of operations and comprehensive loss for the period.

 

 15

 Table of Contents

 

Subsequent events:

 

During the fourth quarter through October 30, 2016, the Company received proceeds of $1,825 and issued 488 shares of common stock for the exercise of 488 warrants at an exercise price of $3.74.

 

12. Stock-based Compensation

 

See Note 11, Capitalization and Equity Structure – Reverse Stock Split.

 

The Company’s Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”) allows for the issuance of an aggregate of 3,714 shares of common stock, of which 965 are available for future grant as of September 30, 2016.

 

The following table summarizes information about the Company’s stock options outstanding at September 30, 2016, and activity during the nine month period then ended:

 

           Weighted-     
           Average     
       Weighted-   Remaining     
       Average   Contractual   Aggregate 
   Stock Awards   Exercise Price   Life (Years)   Intrinsic  Value 
Balance as of December 31, 2015   1,963   $7.09           
Options granted   776   $5.44           
Options exercised   (30)  $2.40           
Options forfeited   (207)  $8.11           
Options cancelled   (28)  $9.58           
Balance as of September 30, 2016   2,474   $6.51    7.66   $1,322 
Vested and expected to vest at September 30, 2016   2,294         7.53   $1,279 
Exercisable as of  September 30, 2016   1,180         6.03   $1,089 

 

As of September 30, 2016, total unrecognized compensation cost related to unvested stock options was $5,360. This amount is expected to be recognized as stock-based compensation expense in the Company’s condensed consolidated statements of operations and comprehensive income over the remaining weighted average vesting period of 2.8 years.

 

The per-share fair value of each stock option was determined on the date of grant using the Black-Scholes option pricing model using the following assumptions:

 

   Three months ended September 30,  Nine months ended September 30,
   2016  2015  2016  2015
             
Dividend yield       
Risk-free interest rate  1.25% – 1.26%  1.68%  1.24% - 1.78%  1.41% - 2.50%
Expected term (in years)  6  6  5-10  6-10
Volatility  80%  75%  77-80%  73% - 75%

 

 16

 Table of Contents

 

Total stock-based compensation expense related to options granted to employees and non-employees was included in the condensed consolidated statements of operations and comprehensive loss as follows:

 

   Three months ended September 30,   Nine months ended September 30, 
   2016   2015   2016   2015 
Sales and marketing  $103   $147   $541   $440 
Research and development   127    133    499    295 
General and administrative   221    187    1,512    524 
   $451   $467   $2,552   $1,259 

 

In connection with the resignation of the Company’s then Chief Executive Officer in February 2016, the Company accelerated the vesting of options that would have vested in the subsequent twelve months and extended the exercise period of the resulting options from three months to six years. In addition, the Company extended the exercise period for an employee that was terminated in March 2016 from three months to one year. These modifications resulted in incremental stock-based compensation expense of $59 and $774 included in research and development and general and administrative, respectively, for the nine months ended September 30, 2016 in the condensed consolidated statements of operations and comprehensive loss.

 

13. Income Taxes

 

There were no material changes to the unrecognized tax benefits in the nine months ended September 30, 2016, and the Company does not expect significant changes to unrecognized tax benefits through the end of the fiscal year. Because of the Company’s history of tax losses, all years remain open to tax examination.

 

14. Commitments and Contingencies

 

Contingencies

 

In the normal course of business, the Company is subject to various legal matters. In the opinion of management, the resolution of such matters will not have a material adverse effect on the Company’s condensed consolidated financial statements.

 

Material Contracts

 

The Company enters into various license, research collaboration and development agreements which provide for payments to the Company for government grants, fees, cost reimbursements typically with a markup, technology transfer and license fees, and royalty payments on sales.

 

The Company has two license agreements to maintain exclusive rights to patents. The Company is also required to pay 1% of net sales of products sold to entities other than the U.S. government. In the event of a sublicense, the Company will owe 21% of license fees and must pass through 1% of the sub-licensee’s net sales of products sold to entities other than the U.S. government. The agreements also stipulate minimum annual royalties of $50.

 

In connection with acquisition of Equipois, the Company assumed the rights and obligations of Equipois under a license agreement with Garrett Brown, the developer of certain intellectual property related to mechanical balance and support arm technologies, which grants the Company an exclusive license with respect to the technology and patent rights for certain fields of use. Pursuant to the terms of the license agreement, the Company will be required to pay Mr. Brown a single-digit royalty on net receipts, subject to a $50 annual minimum royalty requirement.

 

The Company entered into a supply agreement with Equipois to purchase mechanical arm products on a quarterly basis commencing on December 1, 2015 through December 31, 2016, with a minimum annual price of $157.

 

 17

 Table of Contents

 

U.S. Food and Drug Administration Clearance

 

On April 4, 2016, the Company received clearance from the U.S. Food and Drug Administration (“FDA”) to market its Ekso GT robotic exoskeleton for use in the treatment of individuals with hemiplegia due to stroke, individuals with spinal cord injuries at levels T4 to L5, and individuals with spinal cord injuries at levels of T3 to C7 (ASIA D), in accordance with the device’s labeling. On July 19, 2016, the Company received clearance from the FDA to expand/clarify the indications and labeling to expressly include individuals with hemiplegia due to stroke who have upper extremity function of at least 4/5 in only one arm. The Company’s prior cleared indications for use statement required that individuals with hemiplegia due to stroke have upper extremity function of at least 4/5 in both arms.

 

The Company believes that prior to April 4, 2016, the Company’s Ekso GT robotic exoskeleton had been appropriately marketed in the United States as a Class I 510(k) exempt Powered Exercise Equipment device since February 2012. On June 26, 2014, the FDA announced the creation of a new product classification for Powered Exoskeleton devices. On October 21, 2014, the FDA published the summary for the new Powered Exoskeleton classification and designated it as being Class II, which requires the clearance of a 510(k) notice. On October 21, 2014, concurrent with the FDA’s publication of the reclassification of Powered Exoskeleton devices, the FDA issued the Company an “Untitled Letter” which informed the Company in writing of the agency’s belief that this new product classification applied to the Ekso GT device. On December 24, 2014, the Company filed a 510(k) notice for the Ekso robotic exoskeleton which was accepted by the FDA for substantive review on July 29, 2015. As discussed above, the Company received FDA clearance to market the Ekso GT in accordance with the device’s labeling on April 4, 2016.

 

From September 2, 2015 to September 11, 2015, the Division of Bioresearch Monitoring Center for Devices and Radiological Health of the FDA conducted an inspection of the Company’s facility in Richmond, California. At the conclusion of the inspection, the FDA issued a Form FDA 483 with four observations. These observations were inspectional and did not represent a final FDA determination of non-compliance. The observations pertained to informed consent requirements, reporting of adverse results and records maintenance. On October 2, 2015, the Company responded to the FDA describing the corrective and preventive actions that the Company had implemented and continued to implement to address the FDA’s concerns. On March 30, 2016, the FDA accepted the Company’s corrective actions for the Form 483 observations that were generated during the FDA’s inspection.

 

15. Net Loss Per Share

 

The following table sets forth the computation of basic and diluted net loss per share:

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2016   2015   2016   2015 
Numerator:                    
Net loss applicable to common stockholders                    
Basic  $(11,494)  $(5,185)  $(28,239)  $(14,945)
Adjustment for revaluation of warrant liability   -    -    (3,030)   - 
Diluted  $(11,494)  $(5,185)  $(31,269)  $(14,945)
                     
Denominator:                    
Weighted-average number of shares, basic   19,005    14,606    16,888    14,578 
Effect of dilutive warrants   -    -    707    - 
Weighted-average numbers of shares, diluted   19,005    14,606    17,595    14,578 
                     
Net loss per share, basic  $(0.60)  $(0.35)  $(1.67)  $(1.03)
Net loss per share, diluted  $(0.60)  $(0.35)  $(1.78)  $(1.03)

 

Recognition of previously deferred revenue and cost of goods in the nine months ended September 30, 2016 reduced net loss applicable to common stockholders by $2,358, or $0.14 per share (see Note 2. Basis of Presentation and Summary of Significant Accounting Policies and Estimates – Medical Device Revenue and Cost of Revenue Recognition).

 

 18

 Table of Contents

 

The following table sets forth potential shares of common stock that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented:

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2016   2015   2016   2015 
Options to purchase common stock   2,474    1,832    2,474    1,832 
Warrants for common stock   4,085    1,963    1,963    1,963 
Total common stock equivalents   6,559    3,795    4,437    3,795 

 

16. Segment Disclosures

 

During the third quarter of 2016, the Company determined industrial sales to be a reportable segment as a result of progress in commercialization and sales of its industrial devices. We have recast certain prior period amounts to conform to the way we internally manage and monitor segment performance.

 

The Company has three reportable segments, Medical Devices, Industrial Sales, and Engineering Services. The Medical Devices segment designs and engineers technology for, and commercializes, manufactures, and sells exoskeletons for applications in the medical markets. The Industrial Sales segment designs, engineers, commercializes, and sells exoskeleton devices to allow able-bodied users to perform heavy duty work for extended periods. Engineering Services generates revenue principally from collaborative research and development service arrangements, technology license agreements, and government grants where the Company uses its robotics domain knowledge in bionic exoskeletons to bid on and procure contracts and grants from entities such as the National Science Foundation and the Defense Advanced Research Projects Agency.

 

The Company evaluates performance and allocates resources based on segment gross profit margin. The reportable segments are each managed separately because they serve distinct markets, and one segment provides a service and the others manufacture and distribute unique products. The Company does not consider net assets as a segment measure and, accordingly, assets are not allocated.

 

Segment reporting information is as follows:

 

   Medical   Industrial   Engineering     
   Devices   Sales   Services   Total 
Three months ended September 30, 2016                    
Revenue  $1,089   $406   $101   $1,596 
Cost of revenue   833    290    70    1,193 
Gross profit  $256   $116   $31   $403 
                     
Three months ended September 30, 2015                    
Revenue  $1,095   $-   $1,820   $2,915 
Cost of revenue   1,095    -    1,352    2,447 
Gross profit  $-   $-   $468   $468 
                     
Nine months ended September 30, 2016                    
Revenue  $10,321   $682   $631   $11,634 
Cost of revenue   8,543    535    452    9,530 
Gross profit  $1,778   $147   $179   $2,104 
                     
Nine months ended September 30, 2015                    
Revenue  $3,128   $-   $3,590   $6,718 
Cost of revenue   2,863    -    2,482    5,345 
Gross profit  $265   $-   $1,108   $1,373 

 

 19

 Table of Contents

 

Geographic information for revenue based on location of customer is as follows:

 

   Three months ended September 30,   Nine months ended September 30, 
   2016   2015   2016   2015 
North America  $1,243   $2,379   $6,940   $5,272 
All Other   353    536    4,694    1,446 
   $1,596   $2,915   $11,634   $6,718 

 

 20

 Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion of our financial condition and results of operation in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements include all statements other than statements of historical facts contained or incorporated by reference in this prospectus, including statements regarding (i) the plans and objectives of management for future operations, including plans or objectives relating to the design, development and commercialization of human exoskeletons, (ii) a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure or other financial items, (iii) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the SEC, (iv) our beliefs regarding the potential for commercial opportunity for exoskeleton technology in general and our exoskeleton products in particular, (v) our beliefs regarding potential clinical and other health benefits of our medical devices, and (vi) the assumptions underlying or relating to any statement described in points (i), (ii), (iii), (iv) or (v) above. The words “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro-forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future,” and similar expressions (including the negative of any of the foregoing) are intended to identify forward-looking statements.

 

The following factors, among others, including those described in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015, could cause our future results to differ materially from those expressed in the forward-looking information:

 

·our ability to obtain or maintain regulatory approval to market the Company’s medical devices;
·the anticipated timing, cost and progress of the development and commercialization of new products or services, and improvements to our existing products, and related impacts on our profitability and cash position;
·our ability to effectively market and sell our products and expand our business, both in unit sales and product diversification;
·our ability to achieve broad customer adoption of our products and services;
·our ability to complete clinical trials on a timely basis and that completed clinical trials will be sufficient to support commercialization of our products;
·existing or increased competition;
·rapid changes in technological solutions available to our markets;
·volatility with our business, including long and variable sales cycles, which could have a negative impact on our results of operations for any given quarter;
·our ability to obtain or maintain patent protection for the Company’s intellectual property;
·the scope, validity and enforceability of our and third party intellectual property rights;
·significant government regulation of medical devices and the healthcare industry;
·our customers’ ability to get third party reimbursement for our products and services associated with them;
·our failure to implement our business plan or strategies;
·our ability to retain or attract key employees;
·our ability to obtain adequate financing to fund operations and to develop or enhance our technology;
·stock volatility or illiquidity;
·our ability to maintain adequate internal controls over financial reporting; and
·overall economic and market conditions.

 

Although we believe that the assumptions underlying the forward-looking statements and forward-looking information contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements and information included in this Quarterly Report on Form 10-Q may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements and forward-looking information included herein, the inclusion of such statements and information should not be regarded as a representation by us or any other person that the results or conditions described in such statements and information or that our objectives and plans will be achieved. Such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

 21

 Table of Contents

 

Overview

 

Ekso Bionics designs, develops and sells exoskeletons that have applications in healthcare, industrial, military, and consumer markets. Our exoskeleton systems are worn over the user’s clothing to enhance human strength, endurance and mobility. These systems serve multiple markets and can be used both by able-bodied users as well as by persons with physical disabilities. We or our partners have sold, rented or leased devices that (a) enable individuals with neurological conditions affecting gait (for example, spinal cord injury or stroke) to rehabilitate and to walk again; (b) allow industrial workers to perform heavy duty work for extended periods; and (c) permit soldiers to carry heavy loads for long distances while mitigating lower back, knee, and ankle injuries.

 

Our long-term goal is to have one million persons stand and walk in Ekso exoskeletons by February 2022. The first step to achieving that goal is for us to focus on selling our medical exoskeletons to rehabilitation centers and hospitals in the United States and Europe. Ekso Bionics began that effort with the February 2012 sale of the first Ekso, an exoskeleton for complete spinal cord injuries (“SCI”). We have expanded that effort with the launch of our Variable Assist software and the announcement of our newest hardware platform, Ekso GT. The Variable Assist software enables users with any amount of lower extremity strength to contribute their own power for either leg to achieve self-initiated walking. The Ekso GT builds on the experience of the Ekso and incorporates Variable Assist, allowing us to expand our sales and marketing efforts beyond SCI-focused centers to centers supporting stroke and related neurological patients. In the U.S. there are about 5.9 million stroke and SCI rehabilitation sessions conducted on about 680,000 stroke and SCI patients at 16,900 facilities. Globally, there are an estimated 50,000 rehabilitation facilities.

 

In parallel to the development and early commercialization of medical exoskeletons, we have begun to work on the commercialization of exoskeletons for able-bodied users, specifically for industrial and construction applications.

 

As the Company continues to develop, commercialize, and market its various exoskeleton technologies, the Company may seek to establish new strategic relationships with third parties.  Potential relationships may be in the form of technology or product development agreements, sales or distribution agreements, equity investments, or license agreements.

 

Clinical Update

 

The Company’s strategy continues to be to expand clinical data associated with robotic exoskeleton use and, in particular, the Company’s Ekso GT. To that end, in the second quarter of 2016, the Company initiated its first company-sponsored clinical trial, which is led by Professor Dylan Edwards, Ph.D., P.T., of The Burke Medical Research Institute. The study, entitled WISE (Walking Improvement for SCI with Exoskeletons), evaluates improvement in independent gait speeds of SCI patients undergoing rehabilitation with the Ekso GT and compares it to both conventional therapy and a control group. The US-based, multi-center study seeks to enroll approximately 160 community dwelling people with chronic incomplete SCI.

 

In addition, the Company plans to provide support to two separate registries in Canada and the United States with the intent to gather data on the commercial use of the Ekso GT. The Company may be able to use data from the registries to identify potential expanded indications for use and to support the Company’s efforts to build the economic case for reimbursement of the Ekso GT. The Company also continues to work with investigators who have independently initiated large clinical trials to study the use of the Ekso GT, including: a Kessler Foundation study that is enrolling acute stroke patients in a grant-funded randomized, controlled trial with the goal of demonstrating the benefits of early intervention with gait therapy using the Ekso GT; a study by the Rehabilitation Institute of Chicago focusing on the clinical efficacy of the Ekso GT in both SCI and stroke survivors; a study being conducted by nine European rehabilitation centers working in collaboration to study the progression of SCI patients over 8 weeks of therapy; and a study being conducted by the Moritz Klink entitled The MOST Study (Mobility improved after stroke when a robotic device was used in comparison to physical therapy) investigating the impact of gait training with the Ekso GT™ on functional independence of 80 patients with impaired gait as a consequence of stroke when compared to conventional physiotherapy alone.

 

 22

 Table of Contents

 

Sales and Marketing Update

 

In conjunction with our FDA clearance in April 2016, including a label that includes patients with hemiplegia due to stroke, we completed a full review of our sales and marketing efforts. We have begun to broaden the launch of our Ekso GT and our go-to-market plan in the U.S. and in Europe, including an increase in marketing campaigns to educate the market on the benefits of stroke rehabilitation using exoskeletons, arranging product demonstrations with stakeholders at our target customers, and expanding our sales team.

 

Regulatory Update

 

On April 4, 2016, the Company received clearance from the FDA to market its Ekso GT robotic exoskeleton for use in the treatment of individuals with hemiplegia due to stroke, individuals with spinal cord injuries at levels T4 to L5, and individuals with spinal cord injuries at levels of T3 to C7 (ASIA D), in accordance with the device’s labeling. On July 19, 2016, the Company received clearance from the FDA to expand/clarify the indications and labeling to expressly include individuals with hemiplegia due to stroke who have upper extremity function of at least 4/5 in only one arm. The Company’s prior cleared indications for use statement required that individuals with hemiplegia due to stroke have upper extremity function of at least 4/5 in both arms.


The U.S. government regulates the medical device industry through various agencies, including but not limited to, the FDA, which administers the federal Food, Drug and Cosmetic Act. The FDA classifies medical devices into one of three classes (Class I, II or III) based on the degree of risk the FDA determines to be associated with a device and the extent of control deemed necessary to ensure the device’s safety and effectiveness. Devices requiring fewer controls because they are deemed to pose lower risk are placed in Class I or II. Class I devices are deemed to pose the least risk and are subject only to general controls applicable to all devices, such as requirements for device labeling, premarket notification, and adherence to the FDA’s current good manufacturing practice requirements, as reflected in its Quality System Regulation (“QSR”). Class II devices are intermediate risk devices that are subject to general controls and may also be subject to special controls such as performance standards, product-specific guidance documents, special labeling requirements, patient registries or post-market surveillance. Class III devices are those for which insufficient information exists to assure safety and effectiveness solely through general or special controls, and include life-sustaining, life-supporting, or implantable devices, and devices not “substantially equivalent” to a device that is already legally marketed. Most Class I devices, and some Class II devices are exempted by regulation from the 510(k) clearance requirement and can be marketed without prior authorization from FDA. Class I and Class II devices that have not been so exempted are eligible for marketing through the 510(k) clearance pathway. By contrast, devices placed in Class III generally require premarket approval, or PMA, prior to commercial marketing.

 

To obtain 510(k) clearance for a medical device, an applicant must submit a premarket notification application to the FDA demonstrating that the device is “substantially equivalent” to a predicate device, which is typically a legally marketed Class II device in the United States. A device is substantially equivalent to a predicate device if it has the same intended use and (i) the same technological characteristics, or (ii) has different technological characteristics and the information submitted demonstrates that the device is as safe and effective as a legally marketed device and does not raise different questions of safety or effectiveness.

 

The Company believes that prior to April 4, 2016, the Company’s Ekso GT robotic exoskeleton had been appropriately marketed as a Class I 510(k) exempt Powered Exercise Equipment device since February 2012. On June 26, 2014, the FDA announced the creation of a new product classification for Powered Exoskeleton devices. On October 21, 2014, the FDA published the summary for the new Powered Exoskeleton classification and designated it as being Class II, which requires the clearance of a 510(k) notice.

 

On October 21, 2014, concurrent with the FDA’s publication of the reclassification of Powered Exoskeleton devices, the FDA issued the Company an “Untitled Letter” which informed the Company in writing of the agency’s belief that this new product classification applied to our Ekso GT device. On December 24, 2014, the Company filed a 510(k) notice for the Ekso robotic exoskeleton, which was accepted by the FDA for substantive review on July 29, 2015. As discussed above, the Company received FDA clearance to market its Ekso GT in accordance with the device’s labeling on April 4, 2016.

 

 23

 Table of Contents

 

From September 2, 2015 to September 11, 2015, the Division of Bioresearch Monitoring Center for Devices and Radiological Health of the FDA conducted an inspection of the Company’s facility in Richmond, California. At the conclusion of the inspection, the FDA issued a Form FDA 483 with observations pertained to informed consent requirements, reporting of events to FDA, and records maintenance. These observations were inspectional and did not represent a final FDA determination of non-compliance. On October 2, 2015, the Company responded to the FDA describing the corrective and preventive actions that the Company had implemented and continued to implement to address the FDA’s observations. Due to the nature of the findings, the Company does not expect that the Form FDA 483 will result in a warning letter or other action that could interfere with the Company’s operations. On March 30, 2016, the FDA accepted the Company’s corrective actions for the Form 483 observations that were generated during the FDA inspection.

 

Since July 1, 2015, we have been informed of seven events with respect to our Ekso GT devices that are reportable pursuant to the FDA’s medical device reporting, or MDR, regulations. There were no reported patient injuries related to any of these events, and in each case we have filed the required adverse event reports with the FDA. We have analyzed the root causes of these issues and have improved the design and strengthened our manufacturing processes as a result. In addition, we have proactively adjusted the device maintenance schedules based on field usage to address these issues.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our estimates form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the condensed consolidated financial statements. We believe that our critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the condensed consolidated financial statements.

 

The Company builds medical device robotic exoskeletons for sale and capitalizes into inventory materials, direct and indirect labor, and overhead in connection with the manufacture and assembly of these units.

 

When the Company brought its first version medical device to market in 2012, the Company could not be certain as to the costs it would incur to support, maintain, service and upgrade these early stage devices. Primarily for this reason, prior to January 1, 2016, the sale of a device, associated software, initial training, and extended support and maintenance were deemed as a single unit of accounting due to the uncertainty of the Company’s follow-up maintenance and upgrade expenses, which were forecast to extend over three years. Accordingly, the revenue from the sales of the device and associated cost of revenue were deferred at the time of shipment. Upon completion of training, such amounts were recognized as revenue and cost of revenue over a three year period on a straight line basis, while all service expenses, whether or not covered by the Company’s original warranty, extended warranty contracts, or neither, were recognized as incurred. 

 

 24

 Table of Contents

 

Effective January 1, 2016, the Company determined it had established (i) separate individual pricing for training, extended warranty coverage, and out-of-contract service or repairs, (ii) sufficient historical evidence of customer buying patterns for extended warranty and maintenance coverage, and (iii) a basis for estimating and recording warranty and service costs to allow the Company to bifurcate its sales transactions into two separate units of accounting: (1) the device, associated software, original manufacturer warranty and training if required, and (2) extended support and maintenance. The Company has therefore now begun to recognize revenue related to its sales transactions on a multiple element approach in which revenue is recognized upon the delivery of the separate elements to the customer. Revenue relating to the undelivered elements is deferred using the relative selling price method, which allocates revenue to each element using the estimated selling prices for the deliverables when vendor-specific objective evidence or third-party evidence is not available. For sales on or after January 1, 2016, revenue and associated cost of revenue of medical devices will be recognized when delivered, or when training has been completed, if required. Revenue for extended maintenance and support agreements will be recognized on a straight line basis over the contractual term of the agreement, which typically ranges from one to four years. As a result of this change, the Company recognized medical device revenue previously deferred at December 31, 2015 of $6.5 million and associated cost of revenue of $4.2 million, resulting in additional gross profit, reduction in net loss from operations, and reduction of net loss applicable to common stockholders of $2.4 million in its results of operations for the nine months ended September 30, 2016.  In addition, the Company recorded $0.2 million for warranty expense and a one-time charge of $0.9 million for a planned preventative maintenance and upgrade program associated with the devices it had sold prior to 2016 at the same time. 

 

 25

 Table of Contents

 

Results of Operations

 

The following table presents our results of operations for the three month period ended September 30 (in thousands):

 

   Three months ended September 30,         
   2016   2015   Change   % Change 
Revenue:                
Device and related  $1,495   $1,095   $400    37%
Engineering services   101    1,820    (1,719)   -94%
Total revenue   1,596    2,915    (1,319)   -45%
                     
Cost of revenue:                    
Device and related   1,123    1,095    28    3%
Engineering services   70    1,352    (1,282)   -95%
Total cost of revenue   1,193    2,447    (1,254)   -51%
                     
Gross profit   403    468    (65)   -14%
                     
Operating expenses:                    
Sales and marketing   2,735    2,380    355    15%
Research and development   2,216    1,713    503    29%
General and administrative   2,318    1,556    762    49%
Total operating expenses   7,269    5,649    1,620    29%
                     
Loss from operations   (6,866)   (5,181)   (1,685)   33%
                     
Other income (expense), net:                    
Gain (loss) on warrant liability   (1,620)   -    (1,620)   - 
Interest and other, net   8    (4)   12    -300%
Total other income (expense), net   (1,612)   (4)   (1,608)   - 
                     
Net loss   (8,478)   (5,185)   (3,293)   64%
                     
Less: Preferred deemed dividend   (3,016)   -    (3,016)   - 
Net loss applicable to common shareholders  $(11,494)  $(5,185)  $(6,309)   122%

 

The following table presents our results of operations for the nine month period ended September 30 (in thousands):

 

  

Nine months ended

September 30,

         
   2016   2015   Change   % Change 
Revenue:                
Device and related  $11,003   $3,128   $7,875    252%
Engineering services   631    3,590    (2,959)   -82%
Total revenue   11,634    6,718    4,916    73%
                     
Cost of revenue:                    
Device and related   9,078    2,863    6,215    217%
Engineering services   452    2,482    (2,030)   -82%
Total cost of revenue   9,530    5,345    4,185    78%
                     
Gross profit   2,104    1,373    731    53%
                     
Operating expenses:                    
Sales and marketing   8,151    6,754    1,397    21%
Research and development   6,586    4,438    2,148    48%
General and administrative   8,271    5,090    3,181    62%
Total operating expenses   23,008    16,282    6,726    41%
                     
Loss from operations   (20,904)   (14,909)   (5,995)   40%
                     
Other income (expense), net:                    
Gain on warrant liability   3,030    -    3,030    - 
Interest and other, net   (20)   (36)   16    -44%
Total other income (expense), net   3,010    (36)   3,046    - 
                     
Net loss   (17,894)   (14,945)   (2,949)   20%
                     
Less: Preferred deemed dividend   (10,345)   -    (10,345)   - 
Net loss applicable to common shareholders  $(28,239)  $(14,945)  $(13,294)   89%

 

 26

 Table of Contents

 

Revenue

 

For the three months ended September 30, 2016:

 

Device and related revenue was $1.5 million for the quarter ended September 30, 2016. This amount includes $0.9 million for medical device sales during the period, $0.2 million of medical device service revenue, and $0.4 million for industrial sales. Device and related revenue was $1.1 million for the quarter ended September 30, 2015. This amount includes $0.9 million of previously deferred medical device revenue that was recognized during the period and $0.2 million of medical device service revenue. See Note 2 in the notes to our condensed consolidated financial statements under the caption Basis of Presentation and Summary of Significant Accounting Policies and Estimates – Medical Device Revenue and Cost of Revenue Recognition for a discussion on the Company’s 2016 change in an accounting estimate related to revenue recognition.

 

Engineering service revenue was $0.1 million for the quarter ended September 30, 2016 compared to $1.8 million for the same period in the prior year. This result reflects the strategic decision earlier in the year to shift our engineering resources away from billable engineering services and to the Company’s internal development efforts both for our next generation home/wellness device and for able-bodied industrial offerings.

 

For the nine months ended September 30, 2016:

 

Device and related revenue was $11.0 million for the nine month period ended September 30, 2016. Contributing to this revenue was $6.5 million of previously deferred revenue that was recognized as a result of a change of an accounting estimate related to revenue recognition. Revenue also includes $3.2 million of revenue derived from medical device sales during the period, $0.6 million of medical device service revenues, and $0.7 million of industrial sales revenue. Device and related revenue was $3.1 million for the nine month period ended September 30, 2015. This amount includes $2.6 million of previously deferred medical device revenue that was recognized during the period and $0.5 million of medical device service revenue. See Note 2 in the notes to our condensed consolidated financial statements under the caption Basis of Presentation and Summary of Significant Accounting Policies and Estimates – Medical Device Revenue and Cost of Revenue Recognition.

 

In conjunction with the aforementioned shift in focus of engineering efforts, engineering services revenue was $0.6 for the nine months ended September 30, 2016, a $3.0 million decrease when compared to the same period in the prior year.

 

 27

 Table of Contents

 

Gross Profit

 

For the three months ended September 30, 2016:

 

Gross profit for the quarter ended September 30, 2016 of $0.4 million was primarily derived from device and related revenue. This amount includes a gross profit of $0.3 million from medical device sales and service and gross profit of $0.1 million from industrial sales.

 

For the nine months ended September 30, 2016:

 

Gross profit for the nine months ended September 30, 2016 was $2.1 million, of which $1.9 million was attributable to device and related revenue. Medical device sales gross profit primarily includes $2.4 million from our change in accounting estimate for shipments made prior to January 1, 2016 and $1.3 million for medical device sales made in 2016, offset primarily by $0.9 million of maintenance and $0.2 million of warranty expenses, both of which relate to devices sold prior to 2016. See Note 2 in the notes to our condensed consolidated financial statements under the caption Basis of Presentation and Summary of Significant Accounting Policies and Estimates – Medical Device Revenue and Cost of Revenue Recognition.

 

Operating Expenses

 

For the three months ended September 30, 2016:

 

Sales and marketing expenses increased $0.4 million, or 15%, for the three months ended September 30, 2016 compared to the same period of 2015 primarily due to a $0.3 million increase in costs associated with our sales and marketing efforts related to our industrial products.

 

Research and development expenses increased $0.5 million, or 29%, for the three months ended September 30, 2016 compared to the same period of 2015 due to the shift of our resources away from billable engineering services to internal development efforts of our next generation of products.

 

General and administrative expenses increased $0.8 million, or 49%, for the three months ended September 30, 2016 compared to the same period of 2015, primarily due to an increase of $0.3 million of employee compensation expenses, $0.2 million related to a decrease in absorption of operating direct and indirect costs into inventory, $0.2 million increase in depreciation and amortization primarily related to acquiring assets from Equipois in December 2015, and $0.1 million related to the NASDAQ uplisting.

 

For the nine months ended September 30, 2016:

 

Sales and marketing expenses increased $1.4 million, or 21%, for the nine months ended September 30, 2016 compared to the same period in 2015. The increase is primarily due to an increase of $0.8 million in compensation expense. The use of marketing consultants also contributed to an increase of $0.4 million.

 

Research and development expenses increased $2.1 million, or 48%, for the nine months ended September 30, 2016 compared to the same period in 2015.  The increase was primarily driven by $1.3 million related to the aforementioned shift of resources to internal development efforts, $0.8 million related to developing our industrial business, and $0.2 million of non-cash stock-based compensation expenses.

 

General and administrative expenses increased $3.2 million, or 62%, for the nine months ended September 30, 2016 compared to the same period in 2015. The increase was primarily driven by an increase of $2.1 million in employee compensation expense, which included a non-cash stock-based compensation expense increase of $1.0 million and one-time severance expense of $0.3 million. Stock-based compensation expense included a one-time $0.8 million non-cash charge related to the modification of stock options previously granted to our former Chief Executive Officer. Depreciation and amortization expenses in general and administrative expenses increased $0.5 million, primarily related to acquiring assets from Equipois in December 2015. A decrease in absorption of direct and indirect operating costs contributed $0.3 million to the increase.

 

 28

 Table of Contents

 

The increase in operating expenses in sales and marketing, research and development, and general and administrative was primarily the result of the Company’s effort to build its team and capabilities and expand commercialization efforts for its medical and industrial device businesses. Specifically, in conjunction with the Company’s receipt of clearance from the FDA, we began to grow our sales and marketing team and we also initiated our first company-sponsored clinical trial in order to gather clinical data to support marketing and build the economic case for reimbursement of the Ekso GT. In addition, the Company made a strategic decision earlier in the year to shift almost all of our engineering talent away from engineering services and to Ekso internal development efforts both for our next generation home/wellness device and for able-bodied industrial offerings, which also contributed to the increase in operating expenses.

 

Other Income (Expense), Net

 

Other income (expense) reflects a non-cash loss on the revaluation of the common stock warrants issued in December 2015 of $1.6 million for the three months ended September 30, 2016 and a non-cash gain of $3.0 million for the nine month period ended September 30, 2016 with no comparable amounts in the prior periods. See Note 11 on our condensed consolidated financial statements under the caption, Capitalization and Equity Structure – Warrants for a description of the warrants, including the method and inputs used to estimate their fair value.

 

Preferred Deemed Dividend

 

During the three months ended September 30, 2016, 3,867 shares of convertible preferred stock were converted to 980,594 shares of common stock, and during the nine months ended September 30, 2016, 13,263 shares of convertible preferred stock were converted to 2,309,531 shares of common stock. The conversions resulted in the recognition of non-cash preferred stock dividends of $3.0 million and $10.3 million for the three and nine month periods ended September 30, 2016, respectively. See Note 11 on our condensed consolidated financial statements under the caption, Capitalization and Equity Structure – Convertible Preferred Stock for additional information.

 

Financial Condition, Liquidity and Capital Resources

 

Since the Company’s inception, we have devoted substantially all of our efforts toward the development of exoskeletons for the medical, military and industrial markets, toward the commercialization of our medical exoskeletons to rehabilitation centers and toward raising capital. Accordingly, we are considered to be in the early commercialization stage. We have financed our operations primarily through the issuance and sale of equity securities for cash consideration and convertible and promissory notes, as well as from government research grant awards and strategic collaboration payments.

 

Cash and Working Capital

 

Since the Company’s inception, we have incurred recurring net losses and negative cash flows from operations. The Company incurred net losses of $17.9 million for the nine months ended September 30, 2016, and $19.6 million for the year ended December 31, 2015.

 

In addition, our operating activities used $20.6 million for the nine months ended September 30, 2016, and $18.3 million for the year ended December 31, 2015.

 

Liquidity and Capital Resources

 

Largely as a result of significant research and development activities related to the development of the Company’s advanced technology and commercialization of this technology into its medical device business, the Company has incurred significant operating losses and negative cash flows from operations since inception. The Company has also recognized significant non-cash losses associated with the revaluation of certain securities, which have also contributed significantly to its accumulated deficit. As of September 30, 2016, the Company had an accumulated deficit of $109.3 million.

 

 29

 Table of Contents

 

Cash on hand at September 30, 2016 was $12.8 million, compared to $19.6 million at December 31, 2015. For the nine months ended September 30, 2016, the Company used $20.6 million of cash in operations, compared to $13.1 million for the nine months ended September 30, 2015. The increase in cash used was driven by general increases in operating expenses such as selling, marketing and research and development, as the Company continues to build its team and capabilities and commercialize its medical and industrial device businesses. The increase also includes a one-time increase in inventory, as well as some investment in certain inventory which is expected to reverse over the next few quarters.

 

Based upon the Company’s current cash resources, which include cash received from the exercise of warrants since September 30, 2016, the recent rate of using cash for operations and investment, and assuming modest increases in current revenue offset by incremental increases in expenses related to increased sales and marketing and research and development, and a potential increase in rental activity from its medical device business, the Company believes it has sufficient resources to meet its financial obligations into the second quarter of 2017. The Company will require significant additional financing. The Company intends to pursue opportunities to obtain additional financing in the future through public or private equity and/or debt financings, corporate collaborations, or warrant solicitations.  

 

The Company’s actual capital requirements may vary significantly and will depend on many factors. For example, the Company plans to continue to increase its investments (i) in its clinical, sales and marketing initiatives to accelerate adoption of the Ekso robotic exoskeleton in the rehabilitation market, (ii) in its research, development and commercialization activities with respect to an Ekso robotic exoskeleton for home use, and/or (iii) in the development and commercialization of able-bodied exoskeletons for industrial use. Consequently, the Company will require significant additional financing in the future, which the Company intends to raise through corporate collaborations, public or private equity offerings, debt financings, or warrant solicitations. Sales of additional equity securities by us could result in the dilution of the interests of existing stockholders. There can be no assurance that financing will be available when required in sufficient amounts, on acceptable terms or at all. In the event that the necessary additional financing is not obtained, the Company may be required to reduce its discretionary overhead costs substantially, including research and development, general and administrative, and sales and marketing expenses or otherwise curtail operations.

 

Cash and Cash Equivalents

 

The following table summarizes the sources and uses of cash for the periods stated (in thousands). The Company held no cash equivalents for any of the periods presented.

 

   Nine months ended 
   September 30, 
   2016   2015 
Net cash used in operating activities  $(20,555)  $(13,082)
Net cash used in investing activities   (728)   (962)
Net cash provided by financing activities   14,537    92 
Effect of exchange rate changes on cash   (6)   - 
Net decrease in cash   (6,752)   (13,952)
Cash at the beginning of the period   19,552    25,190 
Cash at the end of the period  $12,800   $11,238 

 

Net Cash Used in Operating Activities

 

Net cash used in operations for the nine months ended September 30, 2016 was driven by our $17.9 million operating loss, offset by $3.9 million in non-cash charges primarily related to depreciation and amortization and stock-based compensation expense, and a $3.0 million non-cash gain from the revaluation of warrants issued in December 2015. In addition, our change in accounting estimate related to our revenue recognition policy that occurred during the first quarter of the year resulted in a non-cash gain of $6.5 million of previously deferred revenue, offset by non-cash charges of $4.2 million of previously deferred cost of revenues, $0.9 million of accrued maintenance and $0.2 million of accrued warranty costs.

 

 30

 Table of Contents

 

Net cash used in operations for the nine months ended September 30, 2015 was driven by our $14.9 million operating loss, offset by $1.9 million in non-cash charges related to depreciation and amortization and stock-based compensation expense.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities of $0.7 million and $1.0 million for the nine months ended September 30, 2016 and 2015, respectively, was primarily to acquire property and equipment, including expansion of our company-owned fleet of Ekso units used for demonstrations and loaned to current customers.

 

Net Cash Provided by Financing Activities

 

The net cash provided by financing activities for the nine months ended September 30, 2016 of $14.5 million consisted of $14.7 million proceeds from the issuance of common stock, offset by $0.2 million of expenses related to the December 2015 issuance of convertible preferred stock.

 

The net cash provided by financing activities for the nine months ended September 30, 2015 of $0.1 million was primarily from the exercise of common stock warrants and options.

 

Contractual Obligations and Commitments

 

The following table summarizes our outstanding contractual obligations as of September 30, 2016, and the effect those obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

 

   Payments Due By Period: 
       Less than           After 
   Total   One Year   1-3 Years   4-5 Years   5 Years 
Facility operating  lease  $2,668   $116   $1,438   $933   $181 
Capital lease   147    11    114    22    - 
Leasehold improvement loan   32    12    20    -    - 
Equipois supply agreement   157    157    -    -    - 
Total  $3,004   $296   $1,572   $955   $181 

 

The amount noted above as Equipois supply agreement reflects the minimum purchase amount under the agreement, with a maximum purchase amount that may be due of $0.5 million. The agreement is set to expire on December 31, 2016, unless mutually extended by the parties.

 

In addition to the table above, which reflects only fixed payment obligations, we have two license agreements to maintain exclusive rights to certain patents. Under these license agreements, we are required to pay 1% of net sales of products sold to entities other than the U.S. government. In the event of a sublicense, we will owe 21% of license fees and must pass through 1% of the sub-licensee’s net sales of products sold to entities other than the U.S. government. The license agreements also stipulate minimum annual royalties of $50,000 per year.

 

In connection with our acquisition of Equipois in December 2015, we assumed the rights and obligations of Equipois under a license agreement with Garrett Brown, the developer of certain intellectual property related to mechanical balance and support arm technologies, which grants the Company an exclusive license with respect to the technology and patent rights for certain fields of use. Pursuant to the terms of the license agreement, the Company will be required to pay Mr. Brown a single-digit royalty on net receipts, subject to a $50,000 annual minimum royalty requirement.

 

 31

 Table of Contents

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

We are exposed to market risks in the ordinary course of our business, including inflation risks.

 

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

 

In addition, we conduct business in foreign countries and have subsidiaries based in the United Kingdom and Germany. Accordingly, we are exposed to exchange rate risk. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures.

 

Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed by us under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

It should be noted that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment and makes assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.  Management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

 32

 Table of Contents

 

PART II. OTHER INFORMATION

 

Item 5. Other Information

 

On November 5, 2016, the Company entered into an amendment to its lease agreement with FPOC, LLC with respect to its Richmond headquarters (the “Amendment”). Pursuant to the Amendment, the term of the existing lease will be extended for a period of five years, commencing June 1, 2017 and expiring May 31, 2022. A copy of the Amendment is attached hereto as Exhibit 10.38 and is incorporated herein by reference. The foregoing description of the terms of the Amendment is qualified in its entirety by reference to such exhibit.

 

Item 6. Exhibits

 

Exhibit Number   Description
     
10.38*   Amendment to Lease Agreement dated November 5, 2016.
     
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
     
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
     
32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101*   The following financial statements from the Ekso Bionics Holdings, Inc. Quarterly Report on Form 10Q for the quarter ended September 30, 2016, formatted in Extensible Business Reporting Language (“XBRL”):

 

·unaudited condensed consolidated balance sheets;
·unaudited condensed consolidated statements of operations and comprehensive loss;
·unaudited condensed consolidated statement of cash flows;
·notes to unaudited condensed consolidated financial statements;

 

*Filed herewith

 

 33

 Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, Ekso Bionics Holdings, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  EKSO BIONICS HOLDINGS, INC.
   
Date: November 9, 2016 By: /s/ Thomas Looby
    Thomas Looby
    President and Chief Executive Officer
     
Date: November 9, 2016 By: /s/ Maximilian Scheder-Bieschin
    Maximilian Scheder-Bieschin
    Chief Financial Officer
     
    (Duly Authorized Officer and Principal Financial and Accounting Officer)

 

 34