Myomo, Inc.
Q3 2019 Earnings Call Transcript

Published: 13 Nov 2019

[Operator:]

Good day and welcome to the Myomo Inc. Third Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.I would now like to turn the conference over to Adam Holdsworth from PCG Advisory. Please go ahead.

[Adam Holdsworth:]

Thank you, operator and good afternoon everyone. Welcome to the Myomo’s third quarter 2019 earnings conference call. With me on the call today is Paul Gudonis; Chief Executive Officer and Dave Henry; Chief Financial Officer.Before turning the call over to management, I would like to make the following remarks concerning forward-looking statements. All statements in this conference call other than historical facts are forward-looking statements. The words anticipate, belief, estimate, expect, intend, guidance, confidence, target, project and similar expressions are used typically to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance, and may involve and are subject to certain risks and uncertainties and other factors that may affect Myomo’s business, financial condition and other operating results. These include but are not limited to the risk factors and other qualifications contained in Myomo’s filings with the Securities Exchange Commission to which your attention is directed. Actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Myomo expressly disclaims any intent or obligation to update these forward-looking statements. At 4 p.m. today, we issued a press release with the third quarter results. A copy of the press release can be found at the investor relations section of our website at myomo.com.It is now my pleasure to turn the call over to Paul Gudonis; CEO. Paul, please go ahead.

[Paul Gudonis:]

Thank you, Adam, and welcome to all of you. Thank you for joining us on our third quarter 2019 earnings conference call. I'll begin the call by providing business updates. Then Dave will discuss our third quarter financial results and provide an update on guidance and following the financial update. I'll give some closing remarks and then we'll be available to take your questions.During the third quarter. I'm pleased to report that Myomo’s growth metrics accelerated. This included the greatest number of new additions in any quarter to our reimbursement pipeline, the largest number and value of insurance authorizations. A growing backlog of units converted to revenue as well as the largest percentage of new additions to direct billing, and lastly increasing average selling price or ASP, due to the growing up percentage of direct billing payments.During the past year, we significantly expanded our distribution network by Orthotics and Prosthetics to O&P clinics, and met our goal of being able to provide MyoPro to paralyzed individuals in the top 50 metro areas in the United States, which allows us to now conveniently serve the majority of the U.S. population. We also augmented our O&P distribution with our direct billing program, while Myomo works directly with the patient's health insurance plan to obtain authorization and payment directly to us for the MyoPro brace.Based on the initial success of the direct billing pilot, we're now focused on growing this channel, as it offers us higher revenue and margin per unit. The higher average payments we receive under direct billing, more than cover the incremental costs that we're responsible for, which includes the marketing, clinical and billing costs associated with these patients.This emphasis on our direct billing program is very significant as it now represents 225 units or 43% of the growing MyoPro pipeline, compared to just 32 units a year ago, which is a seven-fold increase over this 12-month period. And in the third quarter 61% of the new patient candidates added to the reimbursement process will be directly billed by Myomo. And we expect that the percentage of direct billing patients in the pipeline should continue to grow overtime, while the direct billing channel generates higher unit revenue and gross margin for the Company, we did underestimates additional revenue cycle time that's associated with directly billing insurance companies.Here's an example of how this shift to direct billing has affected our revenue. And our CFO Dave Henry will cover this in more depth in a few minutes. When we ship a MyoPro to an O&P customer, we typically build the O&P provider and earn the revenue at that point. When we direct bill a payer, we currently recognize revenue upon receipt of payments, and it can take several months to actually receive the payment. As a result, while we have record levels of new leads and backlog of MyoPro units in the pipeline, as well as an authorized backlog that we expect will convert into revenue. Our third quarter revenue missed our expectations and those of analysts because what turned out to be the timing of the direct billing cases. To accelerate and shorten the revenue cycle, we've undertaken a series of actions which I'll describe in a moment.Meanwhile, as I stated earlier, the operating fundamentals of our business are accelerating, and here are some additional details. We continue to generate a growing number of patient leads with the number of MyoPro units in the reimbursement pipeline at a record level of 528 at September 30, which was up from 453 at the end of the second quarter June, 30, which is a 17% sequential increase.We believe that this is a direct result of our expanded direct-to-patient marketing efforts online. We also added 192 MyoPro units into the pipeline with majority of these new units designated as direct billing candidates. This overall number also includes the growing number of patients from our international O&P distributors.Of that 453 units that were in the reimbursement process at the beginning of the quarter, 53 were authorized to be provided to a patient during the quarter and 68 exited or went on-hold due to medical issue, who changed insurance or another personal situation. These 53 authorizations represent approximately 1.8 million of potential revenue upon delivery of the MyoPro device, whether direct to the patient or the O&P customer or to a VA Medical Center, and amount that's almost doubled in just six months since the first quarter authorizations of this year.As I mentioned, we've also recently undertaken a number of actions to accelerate the revenue cycle with the goal of compressing the time between the patient from our online marketing or referring clinician becomes a lead to device delivery and payments. These actions have included opening a call center in Fort Worth, Texas, where the goal is to respond to new enquiries within an hour, which is allows us to verify insurance and arrange for MyoPro’s valuation quickly.For comparison in the past, we'd send the patient candidates to a local O&P clinic to arrange for in person evaluation and that led to cycle times of 30 to 90 days depending on how busy the trained orthotics was at that clinic.We’ve also began to do initial screenings of candidates via telehealth video conference. Our trained staff can now often do the pre-screening within a few days of the patient enquiry, rather than waiting for busy O&P clinic to setup an evaluation or waiting for a scheduled screening date.Our call center customer experience team then follows up with the patient and their physician to collect their medical documents, so that our patient [assessing] team can support the reimbursement process to obtain the necessary insurance authorization. Also to speed up [prior] delivery, we now have more options for fitting a patient with a MyoPro. First, we have more O&P partners around the country, so we can find the available clinician more quickly. And we also have trained and certified our own staff to fit patients with their MyoPro’s in certain geographic areas such as Texas and California.This enables us to eliminate the longer wait time at busy O&P clinics, again, which have been bottlenecks sometimes in some locations in the past, which we can now deal with directly with these patients. We believe that these actions will help us speed up the time from patient enquiry to authorization, delivery and payments, and get more interested candidates into the pipeline more quickly.So, that overview of our accelerating operational metrics, and the strategies were employed to generate higher revenue per units and to speed up the revenue cycle.Move on to the financial review of the third quarter and the year-to-date by our CFO, Dave Henry.

[Dave Henry:]

Thank you, Paul, and good afternoon, everyone. Turning to our financial review, revenue in the third quarter of 2019 was approximately $607,000, which was similar to the results in the third quarter of 2018. Total revenue for the nine months ended September 30, 2019, was approximately $2.317 million, an increase a 49% versus the comparable period of 2018. Our revenues for the three and nine months ended September 30, 2019, were driven by a higher average selling price, which offset a lower number of revenue units. We’ve recognized revenue on 22 units in the third quarter versus 24 units during the third quarter of 2018.I'd like to provide some color on how the change in the channel mix in our reimbursement pipeline has impacted near-term revenue. In the third quarter of 2018, 15% of the patients in our reimbursement pipeline are in the direct billing channel compared to 43% at the end of the third quarter of 2019. So, the mix of patients in the pipeline has shifted towards direct selling over the last four quarters. This is the done consciously since ASP and gross margin are both higher on direct billing revenues.We record revenue when we meet all of the defined criteria under GAAP. For the non-direct billing sales channels such as O&P providers or VA, we do not deal directly with insurance companies and are generally able to meet all of those criteria and record revenue upon shipment.In the direct billing channel, we deal directly with insurance companies and do so on a case-by-case out of network basis, where we have no contract with the insurer. In many instances, we don't know how much will be paid by the -- by an insurance company, which is a prerequisite for revenue recognition until we are paid. Given that sometimes can take insurance companies anywhere from 90 to 120 days to pay or longer. This [big] change has resulted in a near-term revenue GAAP, which is expected to normalize in the coming quarters as our direct billing revenues increase.As Paul mentioned, we have 61 units in backlog at the end of the third quarter up from 50 units at the end of the second quarter. Our backlog is a number of patients for whom we’ve received insurance authorization, but had not recorded revenue. A record 53 insurance authorizations in POS are received in the third quarter. As I mentioned earlier, 22 units were converted to revenue and 20 units exited backlog during the quarter without turning into revenue. This was a higher number than we've experienced in prior quarters, which was due in part to insurance changes and changes in the conditions of patients. We do not expect this percentage of non-revenue backlog in future quarters.Gross Margin was 68% in each of the quarters ended September 30, 2019, and 2018 respectively. Third quarter gross margin was affected by approximately $102,000 of costs, recorded for units delivered to patients under the direct billing channel with no corresponding revenue. This was partially offset by revenue of approximately $164,000 which is recorded at 100% margin as a corresponding cost of revenue was recorded in a prior period. Normalized for these factors gross margin was 79% in third quarter in line with the first two quarters of 2019.Other factors positively impacting gross margin included realizing cost reduction benefits on the MyoPro and our higher average selling price compared to the same period a year ago. Year-to-date gross margin is 73% compared to 68% for the comparable period a year ago.Operating expenses were approximately $3.237 million for the three months ended September 30, 2019, an increase of 4% versus the comparable period of 2018. Operating expenses were approximately $9.910 million for the nine months ended September 30, 2019, an increase of 12% compared to the same period a year ago. The increase is primarily reflect higher compensation costs associated with the addition of personnel, marketing and product development efforts and increase spending to secure reimbursement.The Company's net loss for the quarter ended September 30, 2019 amounted to approximately $2.788 million or $0.16 per share, compared with a net loss of $2.650 or $0.21 per share for the corresponding period of 2018. Net loss for the nine months ended September 30, 2019, was approximately $7,952,000 or $0.48 per share, compared with a net loss of approximately $7,625,000 or $0.62 cents per share for the corresponding period of 2018.Adjusted EBITDA for the quarter ended September 30, 2019 was a loss of $2,652,000 compared with a loss of $2,538,000 for the corresponding period of 2018. Please see our press release issued this afternoon for a reconciliation of net loss to adjust EBITDA.Cash on hand at September 30, 2019 was approximately $4,328,000 compared to approximately $6,669,000 at June 30, 2019. Cash burn continued to decline and slow to $2.3 million in the third quarter, compared to $2.6 million in the second quarter of the year, and $3 million in the third -- in the first quarter of 2019.On October 18, 2019, we closed on a $3 million term-loan with Chicago Venture Partners. Interest on the term-loan is at a rate of 10% and there's a 10% original issue discount, which means we will repay $3.3 million in principle for the lender. The term-loan is repayable in cash and redemptions under the term-loan begins six months after closing. The proceeds from the term-loan represent a non-dilutive source of capital, which will be used to make further progress on our growth milestones, including receiving clarity from CMS on coverage and allowable. The introduction of the pediatric version of the MyoPro, which is expected in the first quarter of 2020, and the further expansion of our reimbursement pipeline. Pro forma for the net proceeds from the term-loan, we ended the third quarter with $7.1 million in cash.Turning to our forward looking guidance, we're at the halfway point of the fourth quarter, and we had good visibility into revenue based and announced already recorded, and those patients in the pipeline for which revenue is under our control, in other words, not dependent on payment from insurance. As a result, we believe fourth quarter revenues will resume their growth trajectory, resulting in significant revenue growth for 2019 compared to 2018.With respect to cash, the proceeds from the term-loan have extended our cash runway into the second quarter of 2020, after which we expect to need to raise additional capital in order to repay the term-loan and reach our objective of cash flow breakeven.Now I'll turn the call back over to Paul.

[Paul Gudonis:]

Thank you, Dave. As you've heard us described today, the operating metrics of our business are accelerating, number of patient leads, the reimbursement pipeline, new authorizations, and the approved backlog are all expanding in respect revenue will follow as the pending payments are received. We've also began implementing strategies to shorten the revenue cycle from the moment of patients or family member or clinician makes that initial contact with us through to the insurance approval and delivery of the MyoPro.So, before opening the call to questions, I want to review the four catalysts for growth that we've emphasized over the past year. We continue to execute on these initiatives as follows. Number 1, we increased our U.S. distribution and direct-to-patient marketing. The digital marketing we've been doing on social media and search engines has been very successful and is generating a large number of leads and candidates into the reimbursement pipeline, with a record 61 authorized units in the backlog to be delivered and paid. And currently 43% of the pipeline represents direct billing cases, a 7x increase in such candidates compared to last year’s third quarter, and we will also continue to support O&P clinics in their marketing and pipeline building efforts as well.Number 2, new product development our pediatric device for younger patients is in the final prototype stages, and we're meeting with children's hospitals to start organizing screening days for their patients.Number 3, Medicare reimbursement, earlier this year, we began to obtain reversing for Medicare advantage policyholders they are managed by United Healthcare and other major payers. And we now will have over 75 Medicare advantage candidates in the pipeline. Additionally, we're preparing the first MyoPro claims for submission for payments for regular part B Medicare beneficiaries, while we continue to have dialogue with CMS staff about our coverage guidelines and finalizing the payment amounts under our new codes, which were issued at the beginning of this year.And finally, number 4, international markets our O&P distribution partners in overseas markets they are started ordering product as they get successful case-by-case reimbursements. We now have a million dollars in potential orders in this pipeline, subject to local player authorization. In the third quarter, we also announced our international technology licensing program and are engaged in discussions with potential partners in several Asian countries. We're very excited about the opportunities for growth as we continue to broaden distribution in international markets and introduce our new pediatric MyoPro to reach a broader population.And so, this concludes the formal part of our presentation. Operator, we're now opening up the call to questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jim Sidoti with Sidoti and Company. Please go ahead.

[Jim Sidoti:]

Hi, good afternoon. I just want to be clear on this transition now to more units being sold to this direct billing method. Are you saying that because of this, you're going to get better pricing higher gross margins, but it's going to take longer to actually to book that revenue on the income statement?

[Dave Henry:]

Yeah, that's right. So, the margins and ASP are higher under direct billing because we're not giving some of that fee that we would be getting under the direct billing channel through the O&P provider. But, the trade-off for that is -- that for that economic benefit is that, we need to wait to record revenue until we're paid because as I mentioned, if you don't know what you're going to be paid, you can't take revenue, it's just one of those things under GAAP. And that's what the rules state.So, for that reason and because it could take anywhere from 90 to 120 days for an insurance company to pay, that's resulted in what I call the revenue GAAP in the third quarter, and as our pipeline, in our backlog of direct billing cases, increases, which it is doing. Then the revenue will then follow that and we are expecting to resume growth in revenues in the fourth quarter.If I could add a bit more to that, too, we have a manufacturer's that’s retail price in [MSRP] that ranges from $46,000 to $86,000 depending on the model of the MyoPro. So, we submit that directly to the insurance company for payments, and the amount that they will pay will vary depending on the patient's plan in network, out network and so on. But in general, that is significantly higher amount, than when we sell a device wholesale through our O&P partner channel.

[Jim Sidoti:]

Okay, and so just to be clear, you're at 43% now, I assume you're hoping you know, be somewhere [north of] 50% or 60%, in the fourth quarter and then to 2020. So, the revenue growth you will report will not be as [indiscernible] if you didn't make this transition or it high, is if you didn't make this transaction?

[Paul Gudonis:]

It would have take -- well, one thing it would have taken more units to grow the revenue as much because the selling price, the average selling price in the O&P channel is lower for one thing. But yes, because we have decided from, it makes business sense to make this -- to accelerate the transition towards direct selling and for that reason, we feel that has impacted our revenues here in the near-term, but we do expect those revenues to return growth as I said.

[Jim Sidoti:]

So, when we model, we should maybe look for a little bit lower revenue growth reported over the next few quarters. But, as we get out to the later years, we should think that the gross margins will be higher than we had originally expected?

[Paul Gudonis:]

I think that's a fair assumption. But then as we get out to the later period what we, the wildcard on gross margin will be obviously what happens with CMS and if there is -- as a decision on reimbursement by Medicare, we don't know what that amount could be or what the impact on gross margin would be.

[Jim Sidoti:]

And it’s my next question. Have you had any communication with CMS over the past three months?

[Paul Gudonis:]

Yes, we've continued to have discussions with them. And as I mentioned in my remarks, we're now working with one of the Medicare certified orthotics and prosthetics practices to file the first claims. The approach is to file claims in one of the regions what the DME [indiscernible] these are the medical contractors of different regions around the country. They're responsible for deciding on specific claims and the amount of payments. And so, per advice to encouragement from CMS staff at headquarters. We're taking that approach, we will be filing the first claims this quarter.

[Jim Sidoti:]

Okay, do you still think it's possible you'll get a -- an assigned amount at the end of this year or do you think it's now 2020 and then?

[Paul Gudonis:]

It depends how fast they process these claims and whether they take what are once region pays for the device and make that into a national allowable amount. So, I really can't speculate on how quickly they'll act on that, Jim.

[Jim Sidoti:]

Okay, and then last one from me. How many O&P centers in the U.S.is the MyoPro available right now?

[Paul Gudonis:]

Oh, it's between all the different offices where we have our centers of excellence. We have other O&P partners and so on. We're probably close to 100 locations around the country.

[Jim Sidoti:]

Okay, all right. Thank you.

[Operator:]

[Operator Instructions]. Our next question comes from Ed Woo with Ascendiant Capital. Please go ahead.

[Ed Woo:]

Yeah, thank you for taking my question. My question is more on the competitive landscape. Have you noticed any changes or new entrants into the market?

[Paul Gudonis:]

No, we haven't. We have -- to our knowledge, the only commercially available device like this that is FDA registered, it's CE Mark in Europe. And it's the one that our patients and clinicians are turning to it. So, we've not seen any direct competitor enter the market.

[Ed Woo:]

Great. And now you mentioned this, about this shift towards, more and more direct billing. Are you [indiscernible] this in your international markets as well?

[Paul Gudonis:]

No, in the international markets, we're working exclusively through O&P providers, because unlike the U.S. market, these providers are in network specifically. And they understand the reimbursement regulations and approach in their home countries. So, we are supporting them with clinical and reimbursement, background clinical data and so on, but we're [indiscernible] the reimbursement to them.

[Ed Woo:]

Great. And then looking forward into next year a little bit in terms of your sales presentations or marketing outreach to your patients, while would that be pretty similar next year or more or less than this year?

[Paul Gudonis:]

What we have now, because we've seen the direct marketing to patients, social media, well it’s Facebook, Google, and so on is real

[Paul Gudonis:]

Thank you.

[Dave Henry:]

Thank you.

[Operator:]

This concludes our question and answer session. I would like to turn the conference back over to Paul Gudonis for any closing remarks.

[Paul Gudonis:]

Well, thank you, operator. So, in closing, we’ve remained very confident in our outlook for growth as we continue to improve the metrics of our reimbursement pipeline, in insurance authorizations, as well as growing backlog of units that will convert into revenue overtime. Our focus on increasing the direct billing is expected to drive average selling prices higher in terms of the revenue we are able to recognize per unit and allow us to begin to benefit from operating leverage as we continue down the path to achieving profitability. Thank you all for your time today and have a good evening. Bye

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.