For Ekso, Military Could Prove To Be A Secondary Market With Deep Pockets

| About: Ekso Bionics (EKSO)


Ekso Bionics operates in an industry that is growing steadily but may find a huge boost in growth in the military market with its "human augmentation" bionic suits.

Ekso Bionics has already entered the military market by way of U.S. military funding and a partnership with Lockheed Martin.

Ekso Bionics has helped design the Human Universal Load Carrier (HULC) alongside Lockheed Martin and has produced many exciting prototypes.

Ekso Bionics has been the first company to be offered grant funding from the United States Special Operations Command to work on the TALOS Project.

The Tactical Assault Light Operator Suit is US.SOCOM's supposed take on an "Iron Man" suit and will be meant to be on the forefront of U.S. military innovation.

Ekso Bionics (OTCQB:EKSO) is pioneering a revolutionary technology by specializing in the development of bionic suits that allow people with cases of lower body paralysis to walk. As of this moment, Ekso Bionics' target market is generally the rehab market. Though they posted a net loss for nine months ended September 30, 2013, they were able to increase medical segment revenues by 276%, which provides most of their business. The promising next-gen robotics technology grants EKSO investors the opportunity to expand into a secondary market; the military market.

Established Channels with US Military

Ekso is operating in an underfollowed industry that is growing at a steady pace as the majority of consumers are not fully aware of the existence of bionic exoskeletons. Currently, Ekso Bionics is in collaboration with Lockheed Martin (NYSE:LMT), the exclusive contractor of the US military, in an attempt to provide exoskeletons for military purposes. Many EKSO investors are overlooking this opportunity. The military market could be the secondary market that not only raises awareness of EKSO's bionic skeleton, but also advances the function of the technology.

HULC: The Original Bionic Suit

Since 2009, in a licensed collaboration with Lockheed Martin, Ekso participated in the creation of the Human Universal Load Carrier (HULC) to satisfy a $10 million grant provided by Defense Advanced Research Projects Agency (DARPA), an offshoot of the US Defense Department. The HULC is an exoskeleton built of lightweight titanium that weighs 53lbs and is designed to help US military soldiers carry heavy 200lb loads over long distances and rough terrain. The HULC is potentially the first of its kind and the collaboration of the two companies has resulted in exciting prototypes.

The agreement is structured so that Lockheed Martin has majority control over the project, but that does not mean Ekso will not benefit greatly from their collaboration. Since 2008, Lockheed has purchased approximately $6 million in non-recurring services from Ekso for the development of the HULC. Eventually, Ekso will make 4% to 6% royalty from Lockheed Martin, who will also cover costs of development through 2017.

An Ekso suit for rehab purposes costs $110,000 (excluding $40,000 software upgrade and $10,000/ year maintenance cost). If Lockheed Martin is able to develop a fully functional HULC for military use, we can assume a very conservative price of $150,000 - as no cost figures have been disclosed. Through this, Ekso would be looking at royalties of $6,000-$9,000/suit (4% - 6% royalty rate). Being the exclusive provider of the intellectual property of the HULC will allow Ekso to increase their bottom line, awareness and ultimately, consumer demand for their able-bodied products.

Spurring Additional Channels

Though the HULC is in early stages of development and royalties will not be realized in the short-term, Ekso still receives grant funding. This funding is critical in developing the bionic technology further as it is essentially cost-free to the company. In fact, grant funding accounts for a majority of Ekso engineering services revenue. In total, Ekso Bionics has 5 grants underway that sums up to $3.225 million. Grantors include the US National Science Foundation, DARPA and US Department of Defense. In addition, having a co-licensing deal with Lockheed Martin allows Ekso to pursue R&D for industrial use and enter the race to create exoskeletons for the able bodied, which is yet another emerging market that presents upside to investors.

We're the first company in the world to get a contract from the TALOS program. (Source)

Ekso was awarded a twelve-month, $1 million contract by United States Special Operations Command (US.SOCOM) in December 2013 to design, test and deliver a next generation military exoskeleton prototype. This award is different from other grant funding because this is the first award granted under the TALOS Project which is supposedly the creation of an "Iron Man" suit.

President Obama hinted in a news conference towards TALOS when he joked that "we're building Iron Man." TALOS is still a work in progress as EKSO and Lockheed Martin are concentrating on the HULC. The project is in its infancy therefore not much information has been disclosed. Having gained such an exciting opportunity to flex their innovative muscles, Ekso has shown to have a sizable lead on competitors trying to capitalize on the robotics market. It may come to a surprise as to how developed the robotics market actually is. Google, for example, gained access to "an army of robots" when it acquired Boston Dynamics. Also, Vanderbilt University has their own exoskeleton targeted to help paraplegics walk. The above examples point towards the bionics technology becoming a modern day reality we will be able to benefit from instead of a fictional fantasy seen in Hollywood films.

Stock Volatility Stock will be Common

EKSO's run-up to nearly $8 (to a market cap of over $500M) was due to the exposure the company received from a prior Seeking Alpha article and bullish investor sentiment. Hype can provoke a nasty decline, which is what is happening with EKSO now. The aftermath of hype is not pretty. Ask 3D printing investors who bought in at the peak during the end of 2013.

Realistically, when EKSO was trading at levels above a $500 million market cap, it was overvalued. EKSO has nearly 68 million shares outstanding and another potential 36 million convertible through options/warrants. Using these figures, the company would have had a fully diluted cap of over $800 million when it reached $8 range. Would you invest in an $800 million company that recently went public and has not fully established its operations? In retrospect, we're all rational investors.

Ekso is a development stage company that will be driven by its technological advancements and market awareness. The stock will be volatile so traders will undoubtedly play the swings. Longer term investors however, must remain unaffected by price movement. At the end of the day, the bionic technology will determine whether EKSO succeeds as a company. EKSO is expanding its team by adding executives with extensive knowledge of the medical industry. The newly issued company is building itself slowly to add value in the long run. Investors should keep an eye on the progress Ekso announces with rehab centers and any military updates. These two segments will establish Ekso's valuation.


The advancements Ekso contributes towards military projects will surely help the company gain awareness. Ekso Bionics CFO Max Scheder-Bieschin stated that Ekso is "not a medical device company," but a company that revolves around "human augmentation," suggesting Ekso is prepared to venture into all markets that could benefit from bionic exoskeletons. For now, the prospects of successful contracts with Lockheed Martin and the US government provide Ekso investors an opportunity to benefit from targeting a market with deep pockets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.