The following discussion of our financial condition and results of operation should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the quarter endedJune 30, 2020 (this "Quarterly Report") and in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 (the "Annual Report"). This Quarterly Report contains forward-looking statements. These forward-looking statements include statements other than statements of historical facts contained or incorporated by reference in this Quarterly Report, including statements regarding (i) the plans and objectives of management for future operations, including those relating to the design, development and commercialization of exoskeleton products for humans, (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 theSecurities and Exchange Commission , (iv) our beliefs regarding the potential for commercial opportunities 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, as updated and supplemented in this Quarterly Report under the heading "Part II - Item 1A. Risk Factors," could cause our future results to differ materially from those expressed in the forward-looking information: •our ability to obtain adequate financing to fund operations and to develop or enhance our technology; •scope, scale and duration of the impact of outbreaks of a pandemic disease, such as COVID-19 (coronavirus); •our ability to obtain or maintain regulatory approval to market our medical devices; •our ability to complete clinical trials on a timely basis and that completed clinical trials will be sufficient to support commercialization of our products; •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; •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; •changes to our domestic or international sales and operations; •our ability to obtain or maintain patent protection for our 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 ability to receive regulatory clearance from certain government authorities, such as CFIUS (as defined below), including any conditions, limitations or restrictions placed on such approvals; •outbreaks of a pandemic disease, such as COVID-19 (coronavirus); •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 early termination of leases, difficulty filling vacancies or negotiating improved lease terms; •our ability to retain or attract key employees; •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
32 -------------------------------------------------------------------------------- Table of Contents included in this Quarterly Report 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 Quarterly 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. Overview We design, develop and sell exoskeleton technology to augment human strength, endurance and mobility. Our exoskeleton technology serves multiple markets and can be used both by able-bodied persons as well as by persons with physical disabilities. We have sold or rented devices that (i) enable individuals with neurological conditions affecting gait (stroke and spinal cord injury) to rehabilitate, and in some cases, to walk again, (ii) assist individuals with a broad range of upper extremity impairments, and (iii) allow industrial workers to perform difficult repetitive work for extended periods. We believe that the commercial opportunity for exoskeleton technology adoption is accelerating as a result of recent advancements in material technologies, electronic and electrical engineering, control technologies, and sensor and software development. Taken individually, many of these advancements have become ubiquitous in peoples' everyday lives. We believe that we have learned how to integrate these existing technologies and wrap the result around a human being efficiently, elegantly and safely, supported by an industry leading intellectual property portfolio. We further believe that we can do so across a broad spectrum of applications, from persons with lower limb paralysis to able-bodied users.
EksoHealth
EksoNR, which succeeded our EksoGT. Our EksoNR, is a next generation lower extremity rehabilitation exoskeleton, which is used to allow physicians and therapists to rehabilitate patientswho have suffered a stroke or spinal cord injury. With its unique features designed specifically for hospitals and its proprietary SmartAssist software, EksoNR allows for the early mobilization of patients, enabling increased endurance during rehabilitation sessions through higher step counts and for longer periods. The intent is to allow the patient's central nervous system to take advantage of a person's neuroplasticity to maximize a patient's recovery. EksoUE is a wearable upper body exoskeleton assists patients with a broad range of upper extremity impairments and aims to provide them with a wider active range of motion and increased endurance for rehabilitation sessions of higher intensity. EksoWorks Our EksoVest is an upper body exoskeleton that elevates and supports a worker's arms to assist them with tasks ranging from chest height to overhead. In 2020, we are focusing on increasing sales of the EksoVest and the support arm, EksoZeroG, by pursuing alternative channels, such as rental agreements with construction equipment and heavy tool providers and working with automotive and related manufacturers to roll out our product(s) globally within their assembly operations. In addition, we believe that there is additional mid-to-long-term potential in the industrial markets, and accordingly, we will continue our development efforts to expand our EksoWorks product offerings.
Second Quarter 2020 Highlights
•Reported revenue of$2.3 million in the second quarter of 2020 •Sold 1,747,704 shares of our common stock and warrants to purchase up to 873,852 shares of our common stock at a combined price of$4.51 per share for net proceeds of$7.1 million •Received PPP loan proceeds of$1.1 million under the CARES Act •Reduced our workforce by 35% to lower operating expenses and reduce cash burn •Received FDA clearance to market our EksoNR™ robotic exoskeleton for use with acquired brain injury patients •Named "Best Healthcare Robotics Company" in 2020 MedTech Breakthrough Awards Program InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak to be a global pandemic. In response to this pandemic, public health officials and governments across the world have recommended and mandated actions to curb the spread of the virus. The COVID-19 pandemic and the related responses to the pandemic have caused a significant adverse 33
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Table of Contents impact on the global economy, including disruptions to supply chains, sharp increases in unemployment and overall economic uncertainty.
This pandemic has negatively impacted our business, including our employees, suppliers, customers and other business partners. We have seen demand for our exoskeleton products decrease in the current business environment, as many inpatient rehabilitation facilities temporarily shift priorities and and delay capital expenditures. We have seen that the clinical need has not diminished as more data is coming out about the increase prevalence of strokes during this pandemic. As such, we continue to engage with our current and prospective customers through video conferencing, virtual training events and online education demos to offer our support and showcase the value of our Ekso devices. Although market uncertainties related to the pandemic make it difficult for us to project the full impact on our business and customers, we believe that we are well-positioned to serve our customers when business conditions begin to normalize.
We continue to instruct the majority of our employees to work from home, restrict non-critical business travel and have enhanced the use of personal protective equipment in our facilities.
To align our cost structure to the current business environment, we initially furloughed and subsequently laid-off a portion of our workforce.
Management continues to actively monitor the global situation and its effects on our financial position and operations.
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 generally accepted accounting principles inthe United States . 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. 34 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table presents our results of operations (in thousands, except percentages): Three months ended June 30, 2020 2019 Change % Change Revenue$ 2,264 $ 3,262 $ (998) (31) % Cost of Revenue 1,005 1,702 (697) (41) % Gross profit 1,259 1,560 (301) (19) % Operating expenses: Sales and marketing 1,712 3,039 (1,327) (44) % Research and development 452 1,499 (1,047) (70) % General and administrative 1,943 2,120 (177) (8) % Restructuring 244 - 244 n/m(1) Total operating expenses 4,351 6,658 (2,307) (35) % Loss from operations (3,092) (5,098) 2,006 (39) % Other (expense) income, net: Interest expense (38) (107) 69 (64) % (Loss) gain on warrant liabilities (8,574) 2,737 (11,311) (413) % Warrant issuance expense (329) (706) 377 (53) % Other income, net 266 108 158 146 % Total other (expense) income, net (8,675) 2,032 (10,707) (527) % Net loss$ (11,767) $ (3,066) $ (8,701) 284 % (1) Not meaningful Revenue Revenue decreased$1.0 million , or 31%, for the three months endedJune 30, 2020 , compared to the same period of 2019. This decrease was comprised of a$0.8 million decrease in EksoHealth revenue and a$0.2 million decrease in EksoWorks revenue primarily due to a decrease in volume of device sales driven by the impact of the COVID-19 pandemic, as our customers shifted their priorities to prepare for and manage their business during the pandemic.
Gross Profit
Gross profit decreased$0.3 million , or 19%, for the three months endedJune 30, 2020 , compared to the same period of 2019, primarily attributed to decreased volume of device sales. Operating Expenses Sales and marketing expenses decreased$1.3 million , or 44%, for the three months endedJune 30, 2020 , compared to the same period of 2019, primarily due to a decrease in employee compensation expenses as a result of a furlough and a reduction in force in March andMay 2020 respectively, lower general marketing and trade show activities, and the absence of clinical trials expense due the completion of our main clinical trial in the first quarter of 2019. Research and development expenses decreased$1.0 million , or 70%, for the three months endedJune 30, 2020 , compared to the same period of 2019, primarily due to a decrease in employee compensation expenses as a result of a furlough and a reduction in force in March andMay 2020 respectively, and a decrease in patent and licensing costs. General and administrative expenses decreased$0.2 million , or 8%, for the three months endedJune 30, 2020 , compared to the same period of 2019, primarily due to lower consulting expenses. The reduction in operating expenses reflects the continuation of the company-wide initiatives we implemented last year, the restructuring completed inMay 2020 , as well as improving overall operational efficiencies. Our focus remains on optimizing the cost structure of our organization. 35 -------------------------------------------------------------------------------- Table of Contents Total Other (Expense) Income, Net
Interest expense decreased
Loss on warrant liabilities of$8.6 million for the three months endedJune 30, 2020 was associated with the revaluation of warrants issued in 2015, 2019 and 2020, compared to a$2.7 million gain associated with the revaluation of warrants issued in 2015 andMay 2019 for the three months endedJune 30, 2019 . The loss on the revaluation of warrant liabilities during the three months endedJune 30, 2020 is primarily due to increases in the market price of our common stock on The Nasdaq Capital Market from$2.83 onMarch 31, 2020 to$8.40 onJune 30, 2020 , while the comparable quarter's gain upon revaluation of the warrant liabilities were due to decreases in our stock price during the comparable period. Other income, net for the three months endedJune 30, 2020 was$0.3 million , as compared to$0.1 million for the same period of 2019. The primary reason for the increase in income is due to larger unrealized gain on foreign currency revaluations of our inter-company monetary assets and liabilities. Warrant issuance expense of$0.3 million for the three months endedJune 30, 2020 was recorded in connection with our private placement offerings of warrants to purchase common stock concurrently with a registered direct offering of our common stock inJune 2020 . We incurred$1.1 million in direct financing costs, which were allocated on a relative fair value basis between the common stock and warrant issuances, of which$0.3 million was allocated to warrants and expensed immediately. For the three months endedJune 30, 2019 we recorded$0.7 million in warrant issuance expense in connection with our public offering of common stock and warrants to purchase common stock inMay 2019 . The following table presents our results of operations (in thousands, except percentages): Six months ended June 30, 2020 2019 Change % Change Revenue$ 3,731 $ 6,878 $ (3,147) (46) % Cost of Revenue 1,835 3,719 (1,884) (51) % Gross profit 1,896 3,159 (1,263) (40) % Operating expenses: Sales and marketing 4,232 5,848 (1,616) (28) % Research and development 1,163 2,883 (1,720) (60) % General and administrative 4,130 4,438 (308) (7) % Restructuring 244 - 244 n/m (1) Total operating expenses 9,769 13,169 (3,400) (26) % Loss from operations (7,873) (10,010) 2,137 (21) % Other (expense) income, net: Interest expense (90) (228) 138 (61) % (Loss) gain on warrant liabilities (6,055) 1,615 (7,670) (475) % Loss on modification of warrants - (257) 257 (100) % Warrant issuance expense (329) (706) 377 (53) % Other income (expense), net 46 (31) 77 (248) % Total other (expense) income, net (6,428) 393 (6,821) (1,736) % Net loss$ (14,301) $ (9,617) $ (4,684) 49 % (1) Not meaningful Revenue Revenue decreased$3.1 million , or 46%, for the six months endedJune 30, 2020 , compared to the same period of 2019. This decrease was comprised of a$2.4 million decrease in EksoHealth revenue and a$0.7 million decrease in EksoWorks revenue primarily due to a decrease in volume of device sales driven by the impact of the COVID-19 pandemic, as our customers shifted their priorities to prepare for and manage their business during the pandemic.
Gross Profit
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Gross profit decreased$1.3 million , or 40%, for the six months endedJune 30, 2020 , compared to the same period of 2019, primarily attributed to decreased volume of device sales. Operating Expenses Sales and marketing expenses decreased$1.6 million , or 28%, for the six months endedJune 30, 2020 , compared to the same period of 2019, primarily due to a decrease in employee compensation expenses as a result of a furlough and a reduction in force in March andMay 2020 respectively, lower general marketing and trade show activities, and the absence of clinical trials expense due to the completion of our main clinical trial in the first quarter of 2019. Research and development expenses decreased$1.7 million , or 60%, for the six months endedJune 30, 2020 , compared to the same period of 2019, primarily due to a decrease in employee compensation expenses as a result of a furlough and a reduction in force in March andMay 2020 , respectively, and a decrease in patent and licensing costs. General and administrative expenses decreased$0.3 million , or 7%, for the six months endedJune 30, 2020 , compared to the same period of 2019, primarily due to a decrease in consulting expense and lower employee compensation from reduced headcount. The reduction in operating expenses reflects the continuation of the company-wide initiatives we implemented last year, the restructuring completed inMay 2020 , as well as improving overall operational efficiencies. Our focus remains on optimizing the cost structure of our organization.
Total Other (Expense) Income, Net
Interest expense decreased
Loss on warrant liabilities of$6.1 million for the six months endedJune 30, 2020 was associated with the revaluation of warrants issued in 2015, 2019 and 2020, compared to a$1.6 million gain associated with the revaluation of warrants issued in 2015 andMay 2019 for the six months endedJune 30, 2019 . The loss on the revaluation of warrant liabilities during the six months endedJune 30, 2020 is primarily due to increases in the market price of our common stock on The Nasdaq Capital Market from$5.86 onDecember 31, 2019 to$8.40 onJune 30, 2020 , while the comparable period's gains upon revaluation of the warrant liabilities are primarily due to decreases in our stock price during the comparable period. Warrant issuance expense of$0.3 million for the six months endedJune 30, 2020 was recorded in connection with our private placement offerings of warrants to purchase common stock concurrently with a registered direct offering of our common stock inJune 2020 . We incurred$1.1 million in direct financing costs, which were allocated on a relative fair value basis between the common stock and warrant issuances, of which$0.3 million was allocated to warrants and expensed immediately. For the six months endedJune 30, 2019 we recorded$0.7 million in warrant issuance expense in connection with our public offering of common stock and warrants to purchase common stock inMay 2019 .
Financial Condition, Liquidity and Capital Resources
Since our inception, we have devoted substantially all of our efforts toward the development of exoskeletons for the medical and industrial markets, toward the commercialization of medical exoskeletons to rehabilitation centers and toward raising capital. We have financed our operations primarily through the issuance and sale of equity securities for cash consideration and through bank debt.
Liquidity and Capital Resources
As ofJune 30, 2020 , we had an accumulated deficit of$197.6 million . Largely as a result of significant research and development activities related to the development of our advanced technology and commercialization of such technology into our medical device business, we have incurred significant operating losses and negative cash flows from operations since inception. In the six months endedJune 30, 2020 , we used$5.7 million of cash in our operations and had cash on hand of$13.3 million as ofJune 30, 2020 . 37 -------------------------------------------------------------------------------- Table of Contents In 2020, management has taken several actions to alleviate the substantial doubt about the our ability to continue as a going concern that existed as of the date of issuance of theDecember 31, 2019 consolidated financial statements, including, but not limited to, the following: •streamlined our operations and reduced our workforce by approximately 35% to lower operating expenses and reduce cash burn; •conducted a registered direct offering of 1,747,704 shares of our common stock for net proceeds of$7.1 million ; •invested in the development and reliability of our products; •restructured our commercial organization and strategy which is showing accelerated adoption; •received FDA clearance for ABI to market our product to a larger patient population increasing the value proposition to our customers.
We have also received proceeds of
As described in Note 10. Notes Payable, net in the notes to our condensed consolidated financial statements, borrowings under our secured term loan agreement have a requirement of minimum cash on hand equivalent to the current outstanding principal balance. As ofJune 30, 2020 ,$1.8 million of cash must remain as restricted. After considering cash restrictions, effective unrestricted cash as ofJune 30, 2020 is estimated to be$11.5 million . With this unrestricted cash balance and the impact of management's actions described above, we believe that we currently have sufficient cash to fund our operations beyond the look forward period of one year from the issuance of these condensed consolidated financial statements. Our actual capital requirements may vary significantly and will depend on many factors. We plan to continue our investments in our (i) sales initiatives to accelerate adoption of the Ekso robotic exoskeleton in the rehabilitation market, (ii) research, development and commercialization activities with respect to exoskeletons for rehabilitation, and (iii) development and commercialization of able-bodied exoskeletons for industrial use. Consequently, we may require significant additional financing in the future, which we intend to raise through corporate collaborations, public or private equity offerings, debt financings, or warrant solicitations. Sales of additional equity securities by us could result in the dilution of the interests of existing stockholders. There can be no assurance that financing will be available when required in sufficient amounts, on acceptable terms or at all. In the event that the necessary additional financing is not obtained, we may be required to further reduce our discretionary overhead costs substantially, including research and development, general and administrative, and sales and marketing expenses or otherwise curtail operations.
Cash and Cash Equivalents
The following table summarizes the sources and uses of cash (in thousands). We held no cash equivalents for any of the periods presented.
Six months endedJune 30, 2020
2019
Net cash used in operating activities$ (5,745) $
(9,708)
Net cash used in investing activities -
(60)
Net cash provided by financing activities 8,160
15,368
Effect of exchange rate changes on cash (27)
7
Net increase in cash 2,388
5,607
Cash at the beginning of the period 10,872 7,655 Cash at the end of the period$ 13,260 $ 13,262
Net cash used in operations decreased$4.0 million , or 41%, for the six months endedJune 30, 2020 , compared to the same period of 2019 primarily due to the reduction in operating expenses by improving overall operational efficiencies, including but not limited to, the reduction of employee headcount. In addition, increased collection efforts resulted in higher accounts receivable collections.
Net Cash Provided by Financing Activities
38 -------------------------------------------------------------------------------- Table of Contents Net cash provided by financing activities of$8.2 million for the six months endedJune 30, 2020 was from the sale of our common stock for net proceeds of$7.1 million in connection with the equity financing inJune 2020 , proceeds of$1.1 million from our PPP loan, and proceeds of$0.8 million from the exercise ofMay 2019 Warrants, partially offset by to aggregate principal payments of$0.8 million against our term loan. Net cash provided by financing activities of$15.4 million for the six months endedJune 30, 2019 was from the sale of common stock for net proceeds of$9.0 million in connection with the equity financing inMay 2019 , net proceeds of$2.3 million under our "at the market offering" program, net proceeds of$5.0 million from equity investors associated with the JV Agreement, and proceeds of$0.2 million from the exercise of stock options, partially offset by aggregate principal payments of$1.2 million against our term loan.
Contractual Obligations and Commitments
The following table summarizes our outstanding contractual obligations as of
Payments Due By Period: Less than After Total One Year 1-3 Years 3-5 Years 5 Years Notes payable, principal and interest$ 3,142 $ 2,497 $ 645 $ - $ - Facility operating leases 777 269 508 - - Purchase obligations 539 539 - - - Financing lease 3 3 - - - Total$ 4,461 $ 3,308 $ 1,153 $ - $ - 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 theU.S. government. In the event of a sublicense, we owe 21% of license fees and must pass through 1% of the sub-licensee's net sales of products sold to entities other than theU.S. government. The license agreements also stipulate minimum annual royalties of$50,000 per year. In connection with our acquisition of Equipois inDecember 2015 , we assumed the rights and obligations of Equipois under a license agreement with the developer of certain intellectual property related to mechanical balance and support arm technologies, which grants us an exclusive license with respect to the technology and patent rights for certain fields of use. Pursuant to the terms of the license agreement, we pay the developer a single-digit royalty on net receipts, subject to a$50,000 annual minimum royalty requirement. We purchase components from a variety of suppliers and use contract manufacturers to provide manufacturing services for our products. Purchase obligations are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. We had purchase obligations primarily for purchases of inventory and manufacturing related service contracts totaling$0.5 million as ofJune 30, 2020 , which is expected to be paid within a year. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.
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