Ekso Bionics: Strong Buy For 150-350% Upside On Three H2:15 Catalysts That Will Step-Change Valuation

Summary

• EKSO is down 40% since publication of a short report.
• Competitive threat in medical/industrial markets is overstated; the industrial market is EKSO’s key value driver, and detailed competitive product diligence indicates the company closest to commercialization with a passive exoskeleton in 3-6 months.
• A 2012 DoD evaluation of a predecessor to LMT's Mantis, using IP licensed from EKSO for government use, shows the company's exoskeleton (called "Works") already meets demanding requirements for industrial applications.
• Three major catalysts are likely in H2:15: first orders for industrial exoskeletons, signing of a channel partner for the industrial marketplace, and FDA approval as Class II device.
• A base case scenario of penetration into medical/industrial markets yields $4.85 stock; upside case yields $7.69; downside case yields $2.60; all scenarios indicate company substantially undervalued, even in downside case.

Recap of Past Events and Stock Setup

For Ekso Bionics (OTCQB:EKSO), the past month paints an unfortunate picture: the Company's largely retail shareholder base has become the subject of a short report (the "Report") containing information and conclusions that I disagree with.

At its current price of $1.04, Ekso is near the bottom of its 52-week trading range as 1) the Report raised a number of points that caused a panic sell, 2) management's response in the FAQ section of its website only addressed certain points of the Report and has been perceived as inadequate by some shareholders who wanted a more forceful response, and 3) the filing of a shelf statement has investors concerned that dilution is imminent.

A comprehensive look at the company, current and competitive technologies, recent events and upcoming catalysts suggest that the stock represents a compelling value even under a downside commercialization scenario because 1) many of the facts and theories in the Report are simply untrue, 2) the Company trades at a discount to ReWalk Robotics (NASDAQ:RWLK), its closest competitor, despite the fact that Ekso has multiple commercialization channels (rehabilitation, industrial, home, wellness, pediatric, military) whereas ReWalk only has the rehabilitation and home channels, 3) the Company has at least three upcoming catalysts that could materially change the valuation, with upside to $4.85/share possible under the Base Case as new markets are opened in H2:15, 4) the company's Works industrial exoskeleton already appears to meet stringent published Navy shipyard specifications for the type of device the Navy seeks and that could be applied across broad Department of Defense applications, 5) a financing is likely not imminent and would only occur after one or more of these events, possibly towards the end of 2015, at a price higher than today (for modeling purposes, a raise at $1.50 is assumed) and which is unlikely to include onerous warrant dilution as the Company has recently cleaned up its warrant structure, and 6) the stock should be up-listed to a national exchange in conjunction with an institutional financing in late 2015 or early 2016.

Industrial Market is the Key Driver; Competition is Overstated

• Given the sheer size of the industrial opportunity, this segment and not the slower-growing, more regulated medical market, is Ekso's highest potential near-term value driver
• Competitive products for the industrial market are largely tethered to a power source or battery-operated and will require electricity or charging stations, which runs counter to the revolution that has occurred in the use of portable power tools
• Ekso's industrial Works exoskeleton, which is passive and uses counterbalances and parallel load paths to transfer weight to the ground, requires no power of any kind, can be manufactured at low cost and will fit well into dynamic industrial work environments
• A 2013 report by the Navy's Naval Surface Warfare Center, using a prototype exoskeleton produced by Lockheed Martin (NYSE:LMT) for the military channel that is very similar to Ekso's Works, demonstrated clear reduction of fatigue and injury risk, and that this type of a passive, unpowered device was the preferred manifestation for a device that the DoD would broadly deploy; this is tremendous validation for Ekso
• Detailed digging into every competitive product reveals either lack of readiness to commercialize in the near term, devices requiring substantial power consumption, devices that are too cumbersome for dynamic work environments, lack of sufficient arm support to facilitate use of heavy tools, and a host of other shortcomings that could make the Ekso Works the category-killer industrial exoskeleton
• An analysis of issued intellectual property on the U.S. PTO's website shows that Ekso has the foundational intellectual property covering a passive (i.e., untethered/non-powered) exoskeleton, which will be a key success factor in winning market share and deterring competition

Industrial - Not Medical - Is the Key Value Driver

Ekso currently participates only in the medical market, which in Europe consists of both rehabilitation centers and community use, and in the U.S. only the rehabilitation centers. Commercialization in this channel has been slow and steady, with Ekso placing 15-20 units in each of the last four quarters. Adoption has been measured due to several factors: 1) the lack of broad reimbursement by public and private payers, requiring one-off reimbursements or private funding, 2) $80-$100,000 capital expenditure required for budget-constraint rehab centers, and 3) relative lack of awareness among patients due to novelty of the technology. By contrast, the industrial market is substantially larger (almost 900,000 construction firms in the U.S. vs. only several thousand rehab centers) and more accessible because capital is readily available for productivity enhancements and injury prevention, the acquisition cost is likely to be only in the $10,000-$20,000 range, exoskeletons will save (rather than cost) money through avoidance of worker's compensation claims and time off work, and there is no onerous government regulation and compliance analogous to the FDA's role in the medical market. All of the demand drivers in the industrial market point to faster adoption. For this reason, investors should focus squarely on near-term industrial commercialization milestones and the pace of adoption as the key value drivers for Ekso this year.

Competitive Threat in Industrial is Overstated Because Competition is Inferior

The Report fails to examine the basis for competition in this market nor does it profile the purported "competitors" and match them against the success factors that will parse winners from losers. Before considering any of the competition described below, investors should watch short demonstration videos from Wired and the San Francisco Business Times in order to understand the essential features and functionality of Ekso's industrial Works exoskeleton.

Today's heavy construction industry has largely moved away from power tools that require a tethered electrical cord (i.e., power tools have gone "cordless"). Therefore, to fit into the current work flow, an industrial exoskeleton also ideally needs to be untethered. Moreover, the construction industry will require a relatively low-cost device that can be adopted quickly and without much training (like the training needed in a highly supervised medical rehab center), and Ekso Bionics has engineered exactly the kind of passive, unpowered exoskeleton that will fit well in this type of environment. Many of the other industrial exoskeletons that the author cites from "industry juggernauts" such as Panasonic (OTCPK:PCRFY), Honda (NYSE:HMC), Daewoo and Sarcos (formerly Raytheon) require some form of power, whether battery or tethered, to actuate motors, and this profile will severely limit their applicability in modern construction environments as well as increase the cost to the point where the value proposition may be untenable. The ability to produce and commercialize (and defend from an intellectual property point of view) an untethered, passive, easy-to-use exoskeleton will be the key success factor in broad adoption by heavy industry.

Here is a comparison chart of able-bodied exoskeletons that will be referenced in detailed product profiles below. They are divided into passive vs. powered.

(click to enlarge)

The clear conclusion from a detailed review of each of these competitors is that, while there is a flurry of interesting activity going on, none of these companies besides Ekso Bionics is currently commercially ready to compete in the industrial market with the type of passive, untethered, low cost suit that the construction companies will require. Each is discussed below.

Lockheed Martin: Insofar as it is a licensor of Ekso's technology for government/military use and has the unpowered FORTIS in development, Lockheed is the most advanced and well-capitalized of the Company's competitors. However, for the last 3 years, Lockheed has made no visible progress in commercializing an able-bodied exoskeleton in the government/military channel, or in the commercial channel, where it has co-exclusive rights with Ekso. The most logical explanation is simply that it is not Lockheed's business model to be selling relatively low-priced equipment into a diverse end-market comprised of disparate commercial customers. As stated in its 10-K, 99% of its revenues derive from U.S. or foreign government and military customers, and only 1% from U.S. commercial and other customers. While the initial military-targeted Human Universal Load Carrier ("HULC") units produced by Lockheed commanded a $250,000 price tag, commercial customers are going to require a much lower cost of acquisition, perhaps in the $10,000-$20,000 range, in order to support broad adoption (one research analyst uses $12,000 for Ekso). This low price point is unlikely to be attractive to Lockheed because it departs from its traditional high-value business of selling extremely sophisticated equipment such as missiles and aerospace equipment to a concentrated group of customers. One more constraint might be at work: a careful reading of theCross License Agreement between Ekso and Lockheed Martin reveals, in clauses 2.3 (A) and (B), that Ekso Bionics ("EB") "shall have the right to sublicense the rights granted in Section 2.1 through multiple tiers in its sole discretion…," but that Lockheed Martin ("LM") "shall have no right to grant any sublicenses under the licenses granted by EB in this Agreement without the prior written consent of EB." The implication is that if Lockheed decided it did not want to be in the business of producing industrial-use exoskeletons, it would be blocked from sub-licensing Ekso's technology to any other party, thereby precluding it from participating in this market. While impossible to know for sure, this could explain Lockheed Martin's decision not to make progress in its commercialization efforts.

Cyberdyne: While the Report makes vague reference to a product from Cyberdyne, its industrial product appears to be the "HAL for Labor Support," a lumbar support device that is similar in appearance to the Honda walking assist device. While the Cyberdyne reduces load on the lumbar spine when lifting heavy objects, the obvious lack of any arm support would induce the very type of arm fatigue from overhead task work that the Ekso Works balance arm mitigates by making a tool weightless.

Honda: While the Report correctly notes that Honda is conducting research for a Walking Assist device for patients with weakened legs due to illness or injury, in looking at Honda's website, this technology is unlikely to be a competitor to Ekso in any current field since 1) it is not used for paralyzed patients as it requires substantial walking ability from the user, 2) development has been slow, the device having been in research since 1999and only in one clinical trial that has taken over two years, which is unlikely to be sufficient for submission to FDA for approval, and 3) regarding the purported "worker assist device" that the Report cites as potential competition for Ekso's industrial suit, there is no mention on Honda's website, the lastpress article was from 2008, and from the available images in that article, the device seems to help workers sit and stand with less power, rather than allowing heavy tools to be lifted with minimal effort. Honda has probably shelved this worker assist product.

Daewoo: This company has produced an industrial exoskeleton, last profiledin August 2014, and press stories indicate it is a captive technology that Daewoo is developing internally to assist its own workers in shipbuilding. None of the available articles, all from August 4-6, 2014, indicates that Daewoo is intent on commercializing this exoskeleton outside of the company.

Panasonic: The history of Panasonic's development of its Power Loader and Power Loader Light industrial exoskeletons has been long and confusing. Panasonic first showed this device in 2010; the product went through further development until 2013, when it became a slightly modified version. The original Power Loader is enormous, bulky, and requires an overhead harness(seen in first video); it could never be used for the type of flexible and confined work that construction requires. Panasonic's Power Loader Light, also seen in the video, does not have functioning arms, which in the video are shown mounted separately and contain a set of bulky motors at the joints. While Panasonic claims to be targeting a 2015 introduction of its Power Loader in a Wall Street Journal Japan story, the version pictured from a year ago shows an entirely different version (the PLL-01E) that uses hand-controlled levers to lift a load. This device does not seem suitable for lifting a power tool such as a grinder or drill overhead. The PLL-04, or "Ninja" (pictured at the top) is only capable of lifting 15kg, which is less than the weight of many power tools, such as the 35-pound grinder that Ekso CTO Russ Angold has demonstrated. As the Ninja is shown in use on a treadmill, it is not clear how any arms would attach and how overhead lifting would occur. Finally, Panasonic subsidiary Activelink's President Hiromichi Fujimoto almost seems to acknowledge that these products aren't ready for prime time when he says "For commercialization, we need to make something that's more compact and lighter while further reducing the risk of falling over." Unlike the Ekso Works that provides a parallel load path to the ground, the Power Loader may not adequately keep the load's center of gravity over the user's base of support, such that the user falls over.

Raytheon/Sarcos: Although the Sarcos robotics unit of Raytheon was recently spun out into a separate entity, Sarcos' new website does not appear to show any competitive industrial applications in development, save for theBigArm, a gasoline-powered, driveable vehicle more akin to a small forklift with moveable robotic arms. It will not compete with the wearable, passive, individual suits that Ekso is commercializing, but rather will replace forklifts and other small machinery that can benefit from more dexterous arms. The company's XOS-2, introduced in 2010, looks similar to other individual exoskeletons, but as can be gleaned from this video, 1) the device consumes too much power to be operated without a long tether cord to a power source, seemingly confirmed by the stated goal to reduce power consumption substantially, and 2) according to Dr. Fraser Smith, the two main focuses of development are both military-related, a combat version and a logistics version. However, Dr. Fraser stated (in 2010) that the earliest availability for a non-tethered version would be at least 8-10 years away. Therefore, a device competitive to Ekso's Works is far off on the horizon.

MIT's Supernumerary Robotic Limbs (SRLs): This device uses sensors on the user's body to cause two body-mounted limbs to mimic the user's movements. Obvious problems include the fact that 1) the device only mimics the user in a clumsy way (in the second video, the arms are seen to flail somewhat, and an additional person's hand is seen assists the user, obviating the whole point of assistive limbs), 2) because the user wears the exoskeleton strapped to the back, there is no means to transfer heavy loads off of the user's body, and so the user may still experience substantial fatigue and injury from lifting heavy devices, and 3) the device requires a power source. According to the MIT lab's own presentation, "Although the SRL has the potential to provide the wearer with greater strength, higher accuracy, flexibility, and dexterity, its control performance is hindered by unpredictable disturbances due to involuntary motions of the wearer, which include postural sway and physiological tremor." This device does not appear ready for current commercialization, nor does not appear to be sufficiently ruggedized for industrial use.

Boeing: The Report's author erroneously cites Boeing (NYSE:BA) as a competitor, whereas it actually is not, but rather is cited in the article as testing the MIT lab's SRLs. In the picture, note the large actuators, several wires coming off the back of the device that aren't shown to lead anywhere, but presumably attach to some sort of external power source.

Ekso Bionics currently appears to be the farthest along the commercialization path to the type of low-cost, flexible, passive industrial exoskeleton that is likely to garner orders and usage.

Ekso Owns The Controlling Patent for a Passive Device

While investors needn't spend substantial time on intellectual property, it is worth asking the question: why are only Lockheed's and Ekso's industrial suits passive, and all others are active? Is it because only Lockheed and Ekso believe this is the path to success, or because only they have the intellectual property that allows such a device, whereas all other major competitors are blocked and therefore can only commercialize active devices?

A search of the US Patent and Trademark Office's website for current issued patent landscape using the search term "exoskeleton" yields 50 results, of which 17 are relevant to this discussion (33 are "red herrings" that relate to other technologies such as shoes and microfluidics). Here are the patent numbers, title and assignment:

(click to enlarge)

The key patent is 7,947,004, "Lower extremity exoskeleton." The most important is Claim 1: "A lower extremity exoskeleton, configurable to be coupled to a person… wherein the entire energy required for said flexion and extension between the shank link and the respective thigh link of a leg support over a cyclic knee motion is provided by said person." This is likely the key enabling patent that allows Ekso to commercialize a passive suit and that precludes any other party from doing so. While Ekso has indicated plans to produce motor-actuated devices, it has chosen a passive device as its first entry in order to break into the market thereby avoiding the need for power, user training, and maintenance and repair of sophisticated actuators. This will not only drastically reduce the amount of training required for adoption, it should lower the cost of production and customer acquisition, and therefore increase the salability into the construction industry. Ekso therefore has a sizeable advantage in competing against larger players, all of whom are seeking to produce powered devices.

Conducive Uptake Dynamics in Industrial Markets

Ekso management has been optimistic about the feedback it is getting from potential customers and channel partners, as stated on its Q1 conference call. Investors should therefore be incorporating an increasing probability of commercialization success into their thinking and valuation. With that in mind, and on the backdrop of favorable competitive dynamics, a few statistics are worth reviewing to dimension the industrial opportunity:

• According to the Bureau of Labor Statistics (BLS), there are 6.4 million construction workers in the U.S. as of May 2015, of which there are ~516,000 carpenters, ~698,000 construction workers, ~425,000 electricians and ~215,000 equipment operators
• There are 880,000 U.S. based construction companies
• In 2013, there were 3 million nonfatal work injuries in the US, of which 917,000 resulted in days missed from work, and 171,000 back injuries
• The annual cost of U.S. work-related injuries is $250 billion
• The average cost of low-back associated workers compensation claim is $8,500

Investors who want to understand the value proposition of what an unpowered exoskeleton can achieve in the industrial setting can look to the report published in 2013 by the Naval Surface Warfare Center (NSWC) and the National Center for Manufacturing Sciences. This report discusses the early development of a predecessor to Lockheed Martin's MANTIS called the "iHAS" that was used in conjunction with a tool arm very similar to the one attached to Ekso's Works. Before reading further, investors should be reminded that the use of Ekso's IP in the government/military channel is exclusively licensed to Lockheed, and therefore is non-competitive with Ekso's activities in the commercial and industrial channels. While the report specifically stated that this device was not commercially viable given its use of expensive components, the device looks and operates very similarly to Ekso's Works, and therefore is a good proxy for what the Ekso Works can achieve. Testing of the device in a naval shipyard revealed that:

• The suit can be put on in 2 minutes and removed in 10 seconds
• The team required to complete a paint-removal job using a 36-pound tool was reduced from 3 people to 2 people due to reduced fatigue among the workers
• The 2 workers required "far fewer breaks" than when using the tool without the exoskeleton
• A grip strength test and a "BORG" survey of fatigue levels showed that workers experienced a reduction in their fatigue levels and reported feeling more energetic the morning after using the iHAS than the morning after working manually all day
• Using a scale called the Rapid Upper Limb Assessment (RULA), workers reduced their risk of injury without the device from the highest Action Level of 4 ("the person is working in the worst posture with an immediate risk of injury from their work posture") to a much safer level of 2 with the device
• Report's conclusion: the exoskeleton "has significant ergonomic benefits, in addition to the productivity and quality improvements. A user in the suit is less likely to get injured because they will experience less muscle strain and fatigue."

The NSWC then discussed the preliminary requirements for an exoskeleton that, if met, could be used to apply the exoskeleton across all Department of Defense industrial activities. Some of these requirements are detailed below. The ideal exoskeleton:

1. Must transfer most or all of the weight of various industrial tools directly to the ground, and remove the tool load from a worker
2. Accommodates individuals that range from 5'0" in height to 6'6"
3. May be a single system interfacing directly to a tool, or it may be an exoskeletal lower extremity interfaced to a commercial tool holding arm
4. The exoskeleton, arm and all required accessories must weigh less than 60 pounds, not including the tool weight
5. Must be capable of supporting a load of 50 pounds
6. Shall have a target cost of $20K, or $10K for only the lower extremity
7. May be powered; however, a purely mechanical, human driven system is preferred

Investors should read and then re-read the last, bolded line of the government's requirements for an exoskeleton that it says would be suitable for deployment across all Department of Defense industrial applications. While Ekso has licensed commercialization rights in the military arena to Lockheed, the obvious conclusion, given the cross-licensed intellectual property, is thatthe Ekso Works meets most of these demanding government specifications already, and therefore, it is not unreasonable to assume that the Works will also meet the demanding specifications of large construction companies that engage in similar activities as the ones detailed in the report. This extrapolation bodes well for Ekso's near-term uptake into the industrial setting.

Based on this preliminary assessment of a comparable exoskeleton to the Ekso Works, the calculus for a channel partner to sign on Ekso for distribution of their industrial exoskeleton seems obvious: there are no other commercially viable industrial exoskeletons available; any of the products coming to market in a reasonable time frame are all powered, whereas only the Ekso is "purely mechanical;" the cost of the device, while not specifically disclosed yet by Ekso, seems to achieve the cost targets set by the NSWC in its 2013 report; and the low cost of the device, relative to the extremely high cost of back injury and workers compensation claims, makes purchase seem like a corporate "no-brainer" for heavy construction businesses.

Over the longer term, if industrial exoskeletons are shown to consistently prevent injury, which seems plausible based on preliminary results of ergonomics and injury risk reduction shown by the NSWC, it is not difficult to imagine that OSHA regulations will make protective exoskeletons a workplace standard in the same way that hard hat helmets, protective eyewear and protective boots have become across the construction industry.

As an aside, observers will note that in both the video interview that CTO Russ Angold gave to the San Francisco Business Times and in the Wired interview in which Articles Editor Adam Rogers tries on the Works suit, it has a circular holster that holds a Milwaukee Electric Tools grinder, not coincidentally the former employer of Tom Mastaler, whom the Company has charged with generating channel partnerships and industrial customer orders. As the Company has disclosed that several customers are in trials with the Works suit and that it is seeking channel partners, it wouldn't be unreasonable to think that the circular holster was one of many designed so that Milwaukee Electric Tools could evaluate the Works.

Competition and Uptake in the Medical Market are Misunderstood

Just as with the industrial market, central to the Report's thesis is that competition in the medical market will surpass Ekso's "inferior" technology and ultimately cause sales declines. Detailed due diligence on competitors such as ReWalk, Parker Hannifin (NYSE:PH) and U.S. Bionics show that each of these products also has benefits as well as flaws. However, as discussed in detail below, the competitive threat from these devices has been overstated; analogies from other medical device markets (stents, orthopedics, radiology equipment, ventricular assist devices) suggest that introduction of competitive technologies expands, rather than contracts, medical marketplaces because of price inelasticity, increased promotional activity, payer tolerance for price increases and market segmentation with various features. The exoskeleton market will be no different - future competition is unlikely to contract Ekso's business, and continued product innovation from Ekso and others will increase, rather than decrease the market.

ReWalk Robotics' Argo II

ReWalk is the only viable competitor on the market that, like Ekso, is making strides in its desire to develop and penetrate the rehabilitation and in-home markets. However, ReWalk's technology is not perfect, either and as detailed in its FDA Decision Summary,

• the ReWalk device is not approved to climb stairs and should not be used over rough surfaces;
• In one clinical study supporting approval, there were six incidents of skin tears in five subjects and three incidents of bruising in two subjects;
• In another study, three out of seven subjects studied (43%) had mild skin abrasions, and two (29%) had moderate skin abrasions, for an overall rate of 71%.

Furthermore, as detailed in FDA's MAUDE Adverse Event database, the ReWalk Argo II has been associated with two reported events including a compound fracture and a device malfunction. Although the MAUDE database is entirely voluntary, such that neither physicians nor patients are required to report adverse events, no similar reports could be found regarding any of Ekso's products.

The report states that "…in the ReWalk FDA disclosures we can see that a consistent speed for 10m+ of 0.40 meters per second (a function of necessary time to cross a street) as apparently critical. Unfortunately, the EKSO suit is just too weak and clumsy to ever achieve this speed hurdle by the comfortable margin it seems is necessary for FDA approval, effectively making FDA clearance for the home market an impossibility for EKSO's suit." However, as detailed in the FDA Decision Summary, the FDA states no requirement whatsoever for 10 meter walk in a certain period of time as a basis or condition for approval (a so-called "primary endpoint"). According to the document, In Study 1, 22 subjects completed the 10 meter walk test in 10-100+ seconds, a wide range, and in Study 3, 7 subjects completed the 10 meter walk test in 20-62 seconds. The report gives no average time for 10 meter walk, nor does it state the percentage of patients that either were, or were not, able to complete the 10 meter walk in a prescribed period of time. The author has no basis whatsoever to arrive at the conclusion either that the Ekso suit is "too weak and clumsy" to achieve certain speeds, nor that an FDA clearance for the home market is "impossible."

Parker Hannifin's Indego

The Report correctly identifies Indego, an exoskeleton designed by industrial giant Parker Hannifin, as a potential future source of competition for Ekso in the home-use market. Looking at the Indego website, the device appears to be a well-designed, well-researched exoskeleton with a sleek design. However, the Report overstates the degree to which Indego is likely to be a competitor to Ekso because:

• A Wall Street Journal article and video shows Parker Hannifin intends to price the Indego between $69,500 and $100,000 - right on par with Ekso and ReWalk; Parker Hannifin does not appear to want to use price as the basis for taking market share. Much has been written about the reason that competition in health care does not lead to lower prices for suppliers to the industry, including here, here and here, and investors should re-think the Report's conclusion that price competition will be Ekso's demise.
• The report highlights that competition will arrive in 2015. While a previouspress release from Parker Hannifin suggested an Indego "release" in 2014, a new article and video posted on the Indego website from Fox5Vegas suggests that Parker Hannifin will submit the Indego to FDA at the end of July 2015 and launch it commercially next year; therefore, Indego is unlikely to be a competitor to Ekso any time soon, and in fact based on the same one-year timeline as it took ReWalk to get approved and that Ekso is guiding to, competition from Indego is at least a year away. It is unclear why Parker Hannifin has been delayed for two years in coming to market beyond its original expectations, but it is likely that the FDA reclassification of exoskeletons from Class I to Class II devices required additional testing.
• The Report highlights that the Indego allows users to sit in a wheelchair with the device on; however, in the very same presentation that the Report uses to source information about competitive products such as the Indego, including that the Indego can be worn while sitting in wheelchair, the presentation's author states that the Indego "fits some wheelchairs (larger than one normally prescribed)" (emphasis added). Are paraplegics really going to have two wheelchairs, one for regular use and one for use with their exoskeleton?
• Ekso has consistently said that current exoskeletons are not sufficiently agile for use in the community, and therefore it is developing the "Indie;" arendition of Ekso's upcoming offering for the in-home market, which it plans to introduce later this year or early next, looks strikingly similar to the Indego. According to the timeline, Ekso plans to introduce the Indie in late 2015 / early 2016.

Parker Hannifin "says sales of Indego and spinoff devices could reach $500 million by 2020, and industrywide sales could hit $2 billion that same year." Therefore, a large, credible, well-financed and disciplined organization sees their own sales going from $0 to $500 million in just five years, and this same organization recognizes that other industry competitors will make up the other $1.5 billion. The Report, while touting the potential advantages of the Indego by quoting press releases from a single rehabilitation center (Shepherd) that prefers the Indego and ignoring others more favorable to Ekso, fails to acknowledge Parker's own admission that they will be one part of a competitive, growing industry in which other players will make up 75% of the market.

U.S. Bionics

The Report cites the fact that Professor Homayoon Kazerooni, one of the scientific founders of Ekso's predecessor Berkeley Bionics, has started a new company called U.S. Bionics, as a harbinger of Ekso's impending failure. Once again the competitive threat has been overstated, as U.S. Bionics is a company in the very early stages of formation with no published clinical research, very little intellectual property, and no prospects of FDA approval for many years. Of note:

• U.S. Bionics has a rudimentary website that, unlike the research websites of Indego (a more real competitor) and Ekso, contains no clinical research publications or presentations
• On clinicaltrials.gov, a central repository for ongoing medical device and drug trials in the United States and elsewhere, there are no trials of the U.S. Bionics device, unlike for Ekso or Indego. It will take two years to run trials and another year to gain FDA approval
• The last press reports about the company were in 2014, and one YouTube video is available
• A patent search for Professor Kazerooni's issued intellectual property in the area of exoskeletons reveals that of the 21 patents that bear his name, only two are the exclusive use of U.S. Bionics, dating most recently to issuance in December 2014; conversely, the other nineteen have been exclusively or co-licensed to Ekso Bionics (including Berkeley Bionics, Ekso's predecessor)

In conclusion, while the Report's author claims to have talked to multiple people in the industry and found "countless presentations," the comparison chart is erroneous in many respects and fails to note many of the advantages that the Ekso platform has over its competitors. Below is a revised chart, with corrected comparisons noted by gray shading, as well as additional comparisons that the previous author failed to include (noted below the blue shaded line). Investors should compare this chart with the original one in order to appreciate how many factual errors it contained, and how many omissions were left out in order to avoid presenting a balanced view:

(click to enlarge)

Ekso's Presence in Rehab Has Grown Substantially

The Report then attempts to analyze what has happened to Ekso's eleven "Charter Centers" that it announced on initial commercialization in 2012 in the hope of scaring investors into believing that Ekso has lost important centers. The report fails to analyze the fact that Ekso has not only maintained ten of its eleven original charter centers (the only loss being Shepherd, which is the ninth-ranked rehab center in the U.S., not the leading center as the author states), it has since added an additional 71 centers (82 total). Fundamentally, the author misunderstands the rollout of new medical technologies into leading academic medical centers, which has never been a "winner takes all" dynamic - rather, leading centers inevitably try and adopt multiple technologies in order to fully explore the benefits of every available device and then tailor use to appropriate patients based on the best features and benefits available in each device to particular patients.

This dynamic has been seen multiple times over the course of the last three decades of medical innovation, with examples ranging from stents (Abbott (NYSE:ABT), Boston Scientific (NYSE:BSX), J&J (NYSE:JNJ), Medtronic (NYSE:MDT)), joint replacements (Biomet (Pending:BMET), J&J, Zimmer (NYSE:ZMH), Smith & Nephew (NYSE:SNN), Stryker (NYSE:SYK), etc.), radiology equipment (GE (NYSE:GE), Hologic (NASDAQ:HOLX), Panasonic, Siemens (OTCPK:SIEGY)), and, most recently, in ventricular assist devices (Thoratec (NASDAQ:THOR), HeartWare (NASDAQ:HTWR)). It is very rare in medical markets that "winner takes most" or "winner takes all" in the way that consumer markets behave (think iPhone vs. Blackberry), because academic centers, whose lifeblood of funding for research depends on publications in medical journals, need access to all available technologies in order to conduct medical studies that result in publications and decide which features will benefit their patients. History proves repeatedly that innovation in medical devices spurs the use of multiple competitors at each center, and rarely, if ever, will one center convert its entire use of a device or piece of equipment to a single manufacturer. This idea is confirmed by a simple overlap analysis of the Ekso and ReWalk centers, which show that, of the top 14 rehab centers in the U.S. (U.S. News & World Report ranks only 14), Ekso is in 6, ReWalk is in 7, and Parker Hannifin is in 5.

Rather than painting a picture of elimination of one technology by another (as the author suggested should have happened with ReWalk's purportedly faster and superior exoskeleton), we see that highly ranked centers adopt multiple technologies. This point is further emphasized by the fact that the top two centers have done precisely that in using and evaluating all three. Therefore, over time, investors should expect that most centers will adopt more than one exoskeleton, and in many cases the leading centers will adopt all of them. In this process, Ekso should thrive as a vibrant market participant.

The Report used selective disclosure to build a case that Ekso is a laggard and destined for failure. In particular, a quote is taken from the Shepherd Institute, which the author states "is widely regarded as the single best rehab center in America," (Shepherd is actually ranked #9) to indicate their preference for the Indego device over the other marketed devices from Ekso and ReWalk (although these aren't mentioned by name). Just as critical to read would be an article from the Rehabilitation Institute of Chicago (RIC), which is in fact the #1 rehab center in the U.S., and has been so for 24 years. Here is an excerpt:

"At RIC, researchers are partnering with one leading entrepreneurial company, Ekso Bionics, and playing a pivotal role-identifying design enhancements that will make this novel technology safe and effective for use in the daily lives of individuals with paralysis.

Of the several devices introduced just this year, we think the Ekso™ product has the most potential," said lead researcher Arun Jayaraman, PT, PhD, director of the Rehabilitation Technologies & Outcomes Lab at RIC s Center for Bionic Medicine. "Our clinical trials look at the many human factors important in the design of a device, and we have deep expertise in testing how safe, reliable, and effective new devices are for patients with lost or reduced function."

Indeed, a recent Ekso press release quotes two German doctors who published an article entitled "Comparison of Therapy with the Exoskeletons ReWalk, Ekso and HAL" and presented their findings:

"The presentation detailed the advantages of Ekso over other robotic exoskeletons in the clinical environment, citing the ease of changing from patient to patient in Ekso, the absence of skin injuries from using the Ekso Bionics™ device, and the operation of its Variable Assist™ software. "Ekso was the best choice for us at this time for rehabilitation therapy," said Dr. Nitschke.

Finally, as disclosed more recently in Ekso's 2014 10-K: "The two top rehabilitation centers in the United States (according to US News and World Report rankings), the Rehabilitation Institute of Chicago and Kessler Foundation, have initiated Ekso human exoskeleton studies in this area [of gait training in stroke patients]. In preliminary findings at Kessler researchers are seeing improved functional independence measure, or FIM scores, after using the Ekso GT robotic exoskeleton in gait training."

In conclusion, Ekso Bionics is going to be a vibrant and important competitor in the rehabilitation market with what may well be a safer device than the ReWalk Argo II; and upcoming competition from Indego resulting in price competition and market share declines are unlikely given the consistent history of market expansion and price stability on introduction of competitive medical technologies.

One final point of clarification: investors that are impatient for an FDA approval of Ekso's 510(k) application as a Class II device will need to wait until the latter part of 2015. As can be discerned from the ReWalk decision summary, it took exactly one year from application on June 22, 2013 toapproval of the device on June 26, 2014, and Ekso has similarly guided to a one year process, i.e., the 510(k) was submitted in December 2014 and should therefore be approved no later than December 2015.

Report Contained Numerous Factual Errors and Misleading Innuendo

Apart from the overstated competitive threats, the Report contained a large number of errors, biased statements and misleading innuendo. It is imperative that investors appreciate a point-by-point refutation of each one so that they can return to valuing the Company on its fundamental business and prospects.

The most concerning fact that investors learned in the Report was the involvement of Adam Gottbetter, a now-discredited financier for a number of small reverse-merger companies. While the Company does bear responsibility for undertaking a financing with someone that was being profiled in public articles for his involvement in soured financings, the Company has appropriately acknowledged its involvement with him in the FAQ section of its website. However, the Company has refrained from going further, perhaps to the frustration of some shareholders.

Report's Assertion	FAQ Response
"EKSO insiderAdam Gottbetter jailed for fraud."	"Mr. Gottbetter… is not currently affiliated with the Company in any way. Mr. Gottbetter has never been an employee, officer or director of the Company and has not held any other insider position at the Company."

As readers will know, the SEC's definition of an "insider" is "a company's officers and directors, and any beneficial owners of more than ten percent of a class of the company's equity securities registered under Section 12 of the Securities Exchange Act of 1934." Of course, the Report produces no evidence that Gottbetter was ever an "insider" according to the SEC definition, rather it used the mere business association to create a sense of relationship that never existed.

Report's Assertion	FAQ Response
"a SEC FOIA response received shows EKSO is facing, or faced, a law enforcement investigation. I am shocked to find no EKSO disclosure, which leaves investors in the dark about the extent of any potential issues or what is going on."	"To date, the Company has not been contacted by the Securities and Exchange Commission or the Department of Justice regarding Mr. Gottbetter. The Company is not aware of any Securities and Exchange Commission or Department of Justice investigation regarding the Company or transactions in its securities."

The Freedom of Information Act ("FOIA") response shows nothing other than the fact that the SEC is invoking an exemption from responding a FOIA request while a law enforcement matter was proceeding. However, the Report incorrectly assumes that the SEC is investigating Ekso directly, when the more likely reason the SEC invoked that exemption was its investigation of Gottbetter's involvement in the Ekso financing as part of their case to bringfraud charges against him.

Disclosure rules generally require a company under investigation by legal authorities to disclose such investigations soon after the company becomes aware of it. The lack of such disclosure by Ekso regarding any SEC investigation in any of its SEC filings should have alerted the Report's author, who is obviously unaware of disclosure requirements, to the fact that no such investigation ever was ongoing. It should have been no surprise when the Company refuted this insinuation.

A number of the Report's assertions are placed in tables below, with the facts available from public disclosures (that the author did not bother to find or intentionally omitted) presented side-by-side:

Report's Assertion	Ekso 2014 10-K
"I find interesting, EKSO's management consistently fails to disclose the amount or extent of any partnership it gets."	"In December 2013, the Company was awarded a twelve-month, $1 million fixed-price contract by U.S. Special Operations Command (USSOCOM) to develop design, build, test and deliver a next generation military exoskeleton prototype... As a result of the success of the project and our integral role in the TALOS development, in January 2015, we were awarded a separate ten-month, $2.1 million contract with the potential to be awarded more.
"Further research to Boston Dynamics resulted in the response "we have nothing to do with that company" with an abrupt end to the conversation. A second email from Boston Dynamics confirmed any relationship that ever existed ended months ago."	"In September 2014, the Company completed an evaluation for the Defense Advanced Research Projects Agency (DARPA) as part of the Warrior Web program as a subcontractor to Boston Dynamics.The Company completed the program for Boston Dynamics after its purchase by Google (NASDAQ:GOOG) (NASDAQ:GOOGL). The Company designed and built a mobile hydraulic power unit, electrical system, and control system to use with Boston Dynamics' warrior web spars.
"EKSO touts also repeatedly promote past work with Lockheed Martin but a call to LMT confirmed FORTIS is "not an EKSO product"and "Fortis was independently developed by Lockheed Martin with support from Robrady Design"… What is really going on here? Until Lockheed Martin comes out with a public press release clarifying this, I don't think any of us know what reality is. Not that it even matters though as EKSO's SEC filings state after 2017 LMT will have exclusive rights to the military market anyway."	"In 2009, we signed our first agreement with Lockheed Martin Corporation establishing the companies' collaborative partnership to ruggedize and commercialize a human exoskeleton for military and other able-bodied applications. In July 2013, we entered into a new agreement with Lockheed to further enable exoskeleton development in non-medical applications." "In 2013, Lockheed leased its first FORTIS units - based on our technology - to the U.S. Navy. In 2014, Lockheed sold its first units to the U.S. Navy. These commercial transactions triggered the first royalty payments received by us." "One of the Company's development partners for able-bodied applications isLockheed, for whom the Company continues to provide research and development services. The Company's collaboration with Lockheed focuses on anthropomorphic exoskeleton technology used to augment the strength and endurance of people.
"The only financial details I can find on EKSO partnerships are that EKSO has generated just ~$1m in total licensing revenue since inception, which is immaterial for a ~$200m valued company."	"Since 2008, Lockheed has purchased approximately $6 million in non-recurring engineering services from the Company and paid $1 million in licensing fees for the further development of the HULC and other exoskeletons. More recently, Lockheed and the Company initiated development of a non-powered exoskeleton called FORTISTM."

Investors wanting to dive into the finer details of Ekso's agreements with Lockheed Martin can do so in the Government Field Cross License Agreement,Medical License Agreement, and Cross-License Agreement.

Very unfortunately for the author's credibility, a statement is next made next that any rational investor should find misleading at best and offensive at worst: "Lastly, spinal cord injuries are already being cured with stem cells and that technology will relentlessly improve in coming years. Owning EKSO is, in some ways, a bet against stem cells and biotech innovation, which is not a bet any smart investor should make." As most everyone knows, reports of cure of spinal cord injury are rare, and as many comprehensive, peer-reviewedmeta-analyses show, broad improvements have been slow to evolve, and as the author states in the abstract, "despite our deeper understanding of the molecular changes occurring after initial insult to the spinal cord, the cure for paralysis remains elusive."

Availability of Capital Not a Concern; Company Will Wait for Catalyst

Contrary to the Report, the Company should be able to finance its business with both equity investors as well as working capital providers. Ekso has research coverage from three investment banks, which signals their desire (but is obviously no guarantee of their ability) to complete a financing. Secondly, the Report implies that the Company will burn cash while it attempts to build inventory should the end-market (i.e., rehabilitation centers) move rent exoskeletons instead of buying them. However, any number of banks or alternate providers of capital, such as Oxford Finance, Silicon Valley Bank,Hercules Technology Growth Capital, and Horizon Technology Finance could structure a revolving line of credit for Ekso. All of these entities have dedicated life sciences practices (seen here, here, here and here). Investors familiar with this market will also appreciate, as can be seen from all of these venture debt providers, that many of their clients include not only early-stage medical technology companies, but also early-stage biotechnology companies (seenhere and as described in this Forbes article), many of whom don't have products approved by the FDA. The idea that Ekso will need $250+ million to finance its own inventory in a rental-only model is simply absurd.

Investors are spooked by the shelf registration statement that Ekso recently filed. Given three upcoming catalysts and the potential for a valuation change on commercialization into industrial, Ekso will likely wait until after one of the catalysts to finance at a higher price. Also, as the Company has recently just cleaned up its warrant structure through a solicitation in order to facilitate a subsequent up-listing to a national stock exchange, it would be unlikely that warrants would be attached to any future capital raise. For modeling purposes below, it is assumed that the Company raises $25 mm in stock at a price of $1.50 (16.7 mm shares), and an additional $20 mm in venture debt at an interest rate of 7%.

Ekso is Hiring, Not "Imploding"

The Report's analysis of employee turnover does not show the company "imploding," rather, it shows that 1) the company had to lay off many employees in 2013 when financing wasn't available, 2) there were a significant numbers of interns employed by the company for a short period of time who distorted the calculation of average tenure, 3) by the Report's own analysis, only one employee has departed the Company in all of 2015, which would put turnover at well below that of any average of a high-tech company, and finally, 4) contrary to the Report, the Careers section of the Company's website shows that it is indeed hiring, including two jobs posted in each of May and June alone.

Financial Model and Valuation

To arrive at a valuation for Ekso that is not based on an overly aggressive revenue forecast against which is applied an arbitrary multiple of future revenues, a discounted cash flow analysis is presented based onconservative timelines, conservative operating margins and conservative financing assumptions. Unlike current sell-side models, this analysis takes into account the dilution that will accompany the need to raise additional capital, and it also accounts for the financing cost of securing venture debt for working capital purposes.

Three revenue scenarios are presented: a Downside Case in which the Works and Indie are introduced but gain only modest traction, a Base Case, and an Upside Case in which these products perform well but not unrealistically so. Each scenario assumes that the Works is introduced later this year through a channel partner, and also that the Company enters the home-use market in 2016 with its Indie suit. All three scenarios are conservative on their assumptions regarding penetration into these markets. For example, even in the Upside Case, 2026 industrial suit placement of 31,835 would represent penetration of only 0.35% of the 9 million construction workers in the U.S., and 2026 in-home units of 7,005 would represent penetration of only 0.87 % of the 807,000 combined annual paralysis and stroke victims.

(click to enlarge)

Common assumptions to all three cases include:

• On all industrial sales, Ekso gives up typical 50% economics to a channel / distribution partner
• Industrial suit is priced conservatively, and below sell-side analysts, at $12,000; in-home unit priced below rehabilitation suit at $65,000
• First industrial sales in 2016 (company guidance H2:15); first in-home sales in 2017 upon introduction of Indie suit (company timeline shows late 2015 / early 2016)
• 4 year replacement cycle on all sales; represents middle of managements 3-5 year useful life estimate
• No credit given for Engineering Services, pediatric exoskeletons, or any other wellness platforms; these are left as upside
• Price deflation of 2% per year on all suits, not inflation, in order to appropriately account for competition
• COGS of 50%
• Sales force grows from 9 people currently (10-K) to 40 people in five years as commercial efforts ramp up in direct sales
• Marketing and G&A expense increase 10% per year to account for company growth
• Capex of $2mm / year growing at 10% annually as production volumes increase, with a one-time $20 mm investment in 2018 to automate and upgrade manufacturing lines; depreciation equal to capital expenditures
• Ekso raises $25 mm additional equity at a stock price of $1.50 (16.7 mm shares) in early 2016
• Ekso raises $20 mm in venture debt at a 7% interest rate, resulting in $1.4 mm interest expense per year
• 35% tax rate applied beginning in 2020 after $19.5 mm of year-end 2014 net operating losses (10-K) plus 2015/2016 NOLs of $33 mm are used ($52.5 mm total)
• A discount rate of 15%, a terminal EBITDA multiple of 7x (well below the average for high-growth medical technology companies), and no retention of excess cash in the business

The valuation per share derived in each case is as follows:

Growth Scenario	Valuation	Upside to Ekso
Downside	$2.60	150%
Base	$4.85	366%
Upside	$7.69	640%

Here are the Income Statements for the Downside Case, Base Case and Upside Case:

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Conclusion

Ekso is substantially undervalued because its end markets, particularly in industrial and home use, are so large that any hint of success in these markets will force investors - both long and short - to contemplate revenue scenarios with very meaningful upside. Fortunately, if bullish management commentary and a recent spate of press interviews are any guide, including a story in theFinancial Times in which CEO Nathan Harding states "there is a definite demand signal from construction customers," this moment will arrive soon. On the day that the company announces its first industrial order or channel partner, which based on management comments seems likely to occur in the next three to six months, investors will have to incorporate some degree of penetration into the industrial market into their valuation. Ekso's industrial Works exoskeleton can change the valuation and profile of this company, and investors should buy Ekso ahead of this meaningful event. As demonstrated through a conservative, rigorous valuation using reasonable penetration assumptions into near-term markets, Ekso Bionics appears undervalued under any outcome, with upside from 150%-366% under two reasonable commercial scenarios.

Health Care Contrarian

Source: http://seekingalpha.com/article/3294415-ekso-bionics-strong-buy-for-150minus-350-percent-upside-on-three-h2-15-catalysts-that-will-step-change-valuation