Myomo, Inc.
Q4 2018 Earnings Call Transcript

Published: 8 Mar 2019

[Operator:]

Good day, and welcome to the Myomo, Inc. Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Vivian Cervantes of Investor Relations. Please go ahead, ma'am.

[Vivian Cervantes:]

Thank you, operator. Before turning the call over to management, I would like to make the following remarks concerning forward-looking statement. 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 other 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 uncertainty 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 filing with the SEC 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's expressly disclaims any intent or obligation to update these forward-looking statements. After the market closed today, we issued a press release with our fourth quarter and full year earnings results. A copy of this press release can be found in the Investor Relations section of our website. At this time, it is now my pleasure to turn the call over to Mr. Paul Gudonis, Chairman and Chief Executive Officer of Myomo. Paul, please go ahead.

[Paul Gudonis:]

Thank you, Vivian, and welcome to all of you. Thank you for joining us in on our fourth quarter and year ended December 31, 2018 earnings conference call. I'm joined today by David Henry, who became our Chief Financial Officer in February 18, after the retirement of Ralph Goldwasser. David will provide a discussion of our financial results and be available for your questions after our prepared remarks. During 2018 we significantly increased our investment in scaling up our sales and marketing activities. We built out a national sales team with eight regional managers across the country, we recruited and trained orthotics and prosthetics practices to fit patients with our MyoPro braces in the top metro markets in the U.S. And we conducted over 200 screaming days to evaluate patients for our devices. We also launch the direct to patient online marketing efforts to reach the many individuals who may need our powered braces for their paralyzed arms. Our record results in the fourth quarter demonstrate that these investments are achieving strong revenue growth and a growing pipeline of units in the insurance reimbursement process. We ended the year with 306 MyoPro units awaiting authorization from private insurance companies including adding 139 new units into the pipeline in the fourth quarter. To put our pipeline of units in the insurance reimbursement process into perspective, we sold a total of 92 units for all of calendar year 2018. We also expanded our distribution footprint in the fourth quarter by adding O&P channel partners in multiple metro markets including San Francisco, San Antonio, Las Vegas, Austin, Texas and Saint Louis with the goal of having an O&P clinical presence in the top 50 MSA's this year. During the fourth quarter, we also initiated our direct billing program whereby Myomo is the provider of record and we invoiced the insurance companies directly on behalf of the patients. We partner with local O&P clinicians who evaluate candidates at the screening days, they fit the custom fabricated brace when we received the insurance authorization and then they provide local support as necessary. This program contributed to the increase in our average selling price to approximately $26,000 per unit in the fourth quarter of 2018, a roughly 70% increase compared to the fourth quarter of the prior year 2017. This increase was the major reason for the improvement in gross margin, as we roll out this program to other new metro areas, we expect that an increasing percentage of our revenues will be generated from this direct going program. We continue to see growing revenue from orders placed by our O&P centers of excellence in markets across the country as well. Turning to reimbursement. In November of 2018 the centers for Medicare and Medicaid services or CMS issued two new codes for the MyoPro product line, L8701 and L8702. These codes went into effect on January 1st, so that we've been billing private insurance plans with these specific product codes instead of using a miscellaneous code not otherwise specified L3999. We're still waiting to hear from CMS about their coverage policies and allowable fees for patients who are Medicare beneficiaries. We expected a decision from them by the end of January of this year, but I have not heard back yet. While, we're cautiously optimistic about the ultimate determination, I need to emphasize that there's no guarantee that CMS will follow through on these new codes with the suitable policy and allow the amount. In the meantime, we'll continue to submit for reimbursement for those patients covered by commercial insurance plans, worker's compensation, and the VA health care system for veterans who need a MyoPro with these newly granted product codes. Our developments on the pediatric sized device has moved to the next stage as we test new prototype designs on children with cerebral palsy, spinal muscular atrophy and this new polio like disease known as AFM, acute flaccid myelitis. We plan to introduce this MyoPro version into the market later this year. Our international expansion initiative includes working with O&P providers in Denmark, Germany and the UK to host patient screening days in these countries and while our revenue from international sales is insignificant at this stage, we're planting the seeds for future revenue growth. With that overview of how our expanded sales and marketing efforts are growing the business, we'll move on to the financial review of the quarter and the year. Before I introduce David Henry, who joined us last month as Myomo's new CFO. I want to acknowledge and thank Ralph Goldwasser, who served as Myomo's CFO first as a consultant and then as a full time executive over the past eight years. During that time he help the company raise private rounds of capital, enable us to go public onto the New York Stock Exchange American, raise additional capital to fund our growth and establish the internal financial infrastructure for Myomo as a public company. So at the youthful age of 71, I agree that he could retire, if he help me find a terrific successor as a CFO, which he did and whom he will support under a consulting agreement for the next two years. And now to discuss the financial results for the quarter and the year and the recent financing we conducted to raise additional growth capital for the company. I like to introduce David Henry to you. As you may have seen in our press release last month, David has extensive experience in high-tech manufacturing companies, public capital markets, and financial responsibility for global operations. Dave, we're pleased to have you join Myomo and present our financial results.

[David Henry:]

Thank you, Paul. And thank you team Myomo for your warm and gracious welcome. This with great pleasure and excitement that I stepped into this role and be part of the team that is both committed and driven to improve the daily lives of people suffering from the effects of strokes of traumatic arm injury and making orthotic device to standard of care for upper extremity paralysis. There was a large, relatively untapped global market for the MyoPro. I see a tremendous opportunity here at Myomo, and I'm excited to join in this effort. Now let me turn to our financial review. Revenue in the fourth quarter 2018 was $890,000, an increase of 63% versus the comparable period of 2017. Revenue for the year ended December 31, 2018 was $2,440,000, an increase of 57%, versus the comparable period of 2017. Our results for both the three months and year ended December 31, 2018, reflected at higher average selling price due primarily to favorable product and sales channel mix. The product mix reflects increased sales of our top of the line Motion G unit. The sales channel mix reflects to reduce sales through Ottobock and increasing direct billing sales. The number of units shipped in 2018 was similar to 2017. Gross margin was 75% and 63% for the quarters ended December 31, 2018 and 2017, respectively. Gross margin was 70% and 68% for the years ended December 31, 2018 and 2017, respectively. As I noted previously, the increase in gross margins are due to the higher average selling price. Operating expenses were $3,398,000, an increase of $1,239,000, or 57%, during the quarter ended December 31, 2018, versus the comparable period of 2017. Operating expenses during the year ended December 31, 2018 were $12,244,000, an increase of $4,643,000, or 61%, as compared to the year ended December 31, 2017. The increases in our operating expenses primarily reflect higher labor and related costs associated with the addition of personnel, the expansion of our sales, marketing and product development efforts as we implement our growth strategy as well as increased administrative costs, primarily to support increasing reimbursement efforts. The company's net loss for the quarter ended December 31, 2018 amounted to $2,692,000, or $0.22 per share, compared with a net loss of $1,900,000, or $0.25 per share for the corresponding period of 2017. Net loss for the year ended December 31, 2018 was $10,317,000, or $0.84 per share compared with a loss of $12,097,000, or $2.93 per share for the year ago period. Net loss for the 12 months ended December 31, 2017 includes a $5,172,000 charge for debt discount on convertible notes. Adjusted EBITDA for the quarter ended December 31, 2018 was a loss of $2,542,000, compared with a loss of $1,770,000 for the corresponding period in 2017. Adjusted EBITDA for the year ended December 31, 2018 was a loss of $9,644,000, compared with a loss of $6,257,000 for the year ended December 31, 2017. As a reminder, adjusted EBITDA is a non-GAAP measure. A reconciliation of adjusted EBITDA to net loss on a GAAP basis is included in the press release, we issued this afternoon. Cash on hand at December 31, 2018 was $6,541,000, compared to $12,959,000 at December 31, 2017. The pro forma cash balance as of December 31, 2018 was roughly $12.1 million including the net proceeds of $5.6 million from our common stock operating of 1.5 million shares completed in February, 2019. I'd like to take this opportunity to provide some color around our expectations for full year 2019. As Paul previously indicated, we ended the year with 306 units in our insurance reimbursement pipeline. This is up from 222 units at the end of the third quarter and compares as well with the sale of 92 units for all of 2018. Due to our increasing reimbursement pipeline, we expect revenue to grow significantly in 2019. We also expect operating expenses to increase in 2019 but that increase is expected to be less that our anticipated increase in gross profit dollars resulting from the higher revenues, I just mentioned. As a result of the financing completed in February, we expect that our existing cash balances sufficient fund our operations and capital expenditure requirements in 2019. Beyond 2019, we expect to need to raise additional capital in order to reach breakeven. Now I'll turn the call back over to Paul.

[Paul Gudonis:]

Thank you, Dave. While as you heard us describe today, we're seeing signs of attraction as we implement our growth strategy. This includes solid gains in our revenue performance and in the key metrics which we believe will lead to future revenue. So to recap, for the full year 2018, our total revenues grew 57% to $2.4 million. Excluding our one-time sales back in 2017, the Ottobock revenue growth was approximately 115% year-over-year. We started 2019 with 306 units of waiting reimbursement, a significant growth in the pipeline. We compared to the 92 revenue units sold in 2018, we have a growing distribution footprint of O&P providers in the U.S., and in additional markets in Europe. And our recent financing is provided $5.6 million in additional capital continue to grow the business, and of course, obtaining suitable Medicare coverage. We expand our ability to address the needs of more paralyzed individuals as we continue toward our goal of becoming the worldwide standard of care for upper extremity paralysis. This concludes the formal part of our presentation. So operator, we're now opening up the call for questions.

[Operator:]

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

[Jim Sidoti:]

Good afternoon. Can you hear me?

[Paul Gudonis:]

Yes, we can Jim.

[Jim Sidoti:]

Great, great. Sounds like you've made a lot of progress. You gave us a lot of the numbers. They just sort of go over a couple again. How many O&P centers are you in right now?

[Paul Gudonis:]

So we have O&P centers in most of the top 50 markets across the country. What's important to look at Jim, is that since we shifted our strategy where with our direct to patient marketing programs, we're the ones that are generating the demand, bringing the patients in for the screening days into these O&P locations across the country. So I look at – we have a partner, in Atlanta, for example, that has four locations. I consider Atlanta has been one of the metro markets; it will bring patients to whatever is the most convenient location in that particular area. These O&P providers will also source patients from their patient flow from their rehab centers that they will have referrals with from physicians in their areas. So we don't really look at this as sort of the number of locations to me, more importantly, it's the number of metro service areas, MSAs that really drive our distribution footprints.

[Jim Sidoti:]

Okay. So how many MSAs you are in?

[Paul Gudonis:]

So we're in 40 MSAs. That are the major MSAs right now – 40 of the top 50 MSAs plus a number of smaller MSAs.

[Jim Sidoti:]

Okay. And do you have any sense, when you will hear back from CMS regarding the reimbursement codes and I'm quantifying that, could that happen right away or is that something that could take several more months?

[Paul Gudonis:]

It could happen at any time. It could take several months. We thought we would hear in January. As you know, the government had a shutdown period that might have affected things. So we're just going to continue working with the VA, with private insurance companies, with worker's comp plans in the meantime.

[Jim Sidoti:]

And so you have over 300 units in the pipeline now. When those – when the quantification, I guess when we imbursement code is announced, do you expect that process to become much quicker to get those reimbursement approvals?

[Paul Gudonis:]

Well, if Medicare does right thing in terms of covering this for their beneficiaries, it is a much faster process with Medicare patients because there's no pre-authorization required. As long as a patient meets the clinical guidelines that CMS establishes and then the O&P provider documents that they meet those clinical requirements, they can go and fit the patient, purchase the device from us and billed Medicare immediately. I think it would also have a positive effect on the private insurance companies. Although, those policies and their approach job may take some time for them to really adjust to Medicare decision.

[Jim Sidoti:]

Okay. And then two more, out of the revenue growth in 2018, I think was the transition of the sales channel. I think you said that units we're about flat with 2017, but because of the higher price you saw the revenue increase, where do you expect to units to be in 2019 relative to 2018.

[David Henry:]

I think, units – this is Dave Henry. I think units with the – I use the word significant revenue increase. So I would expect that the units that we sell will be significantly higher as well in 2019. And in terms of the ASP, I mean, there are – I think, there were really a couple of factors to consider with the growth in the ASP year-over-year. First is through the – on the product side, there's more units sold for the Motion G MyoPro, which is our top of the line version covers not only the arm, but the hand, the wrist and the grasping as well. And then also, the mix in sales channels as we move away from – for auto from Ottobock and some of the other O&Ps that we had to provide a fairly large fee towards to complete the transaction. We're doing that ourselves and that's providing an ASP increase.

[Jim Sidoti:]

Okay. And the last one for me, I think, you mentioned it, but I didn't get it. What was the cash balance following the secondary offering in February?

[David Henry:]

Yes, so pro forma, it's about $12.1 million, pro forma as a spend.

[Jim Sidoti:]

Thank you.

[Operator:]

And our next question comes from Scott Henry with ROTH Capital. Please go ahead with your question.

[Scott Henry:]

Thank you, and good afternoon. A couple of questions. First, just to confirm what I think I have is correct in my models, whether 32 units sold in Q4. That's what my math works out, I just wanted to confirm that.

[Paul Gudonis:]

That's correct. Yes.

[Scott Henry:]

And was there any grant revenue in the quarter?

[Paul Gudonis:]

De minimis.

[Scott Henry:]

Okay. And then the other question is just trying to understand, how we should think about this growth in 2019. I guess the first question is, should we expect seasonality or do you think the growth is – when something's growing at a high rate, it tends to blow through seasonality. But I'm just trying to get, should we look for sequential increases throughout the year? Or do you think it'll be a big fourth quarter or just trying to get any color on that?

[Paul Gudonis:]

Yes, Scott. Well, in our operating history over the last several years, we have seen seasonality. We see revenues grow from Q1 through Q4. Q4, historically, is the largest quarter in the O&P industry. In the first quarter, we have some seasonality in this business because insurance plans often restarts. There's also a new deductibles kick in for many patients, so some may differ to later in the year, when they may have already met their deductible. So that their out of pocket costs for MyoPro would be minimal, maybe even to zero. So you see some of that happening. So we expect, over the course of four quarters to see increasing revenue during a calendar year. But Q1 also tends to be a bit softer because you've got weather issues, where patients can't get to the screen days or even if they're authorized, it may not be able to come into the O&P shop to get measured and cast it for the device. So that's typically what we've seen in this industry sector.

[Scott Henry:]

Okay. That's helpful. And can you talk about any experience you've had with the reimbursement pipeline? And I know you've been asked about it already. Are you tracking how long a patient stays on the pipeline? What percent is your hit rate? And can you give us any color of how to think about that pipeline and how it gets converted into revenue?

[Paul Gudonis:]

Well, first of all, in terms of building the pipeline, through the direct to patient advertising, the screening days with our O&P partners, we're adding about 10 to 12 new qualified candidates into the pipeline every week. To put that in perspective, when we sold less than 100 in the last two years, we've increased the front end of the business and then on the reimbursement success rate, we're seeing it stayed kind of where it's been. We've said it's been 80% or greater. So we're pleased with that, that payers are paying for the device for their members. And in terms of timing. It's still varies by the plan, the patients coverage, whether or not we have to appeal it. Some of these get reimbursed within three months, others between three and six months, others go lot beyond six months. And over time we'll get a better data as we get a larger number of these that we're tracking on a regular basis.

[Scott Henry:]

Okay. And I don't recall, did you tell us what the reimbursement pipeline was at the end of Q3?

[Paul Gudonis:]

Yes. It's stood at 222.

[Scott Henry:]

Okay. So…

[Paul Gudonis:]

So I've always dealt with a mass there. So of those 222 a number of those turned into authorizations in Q4, in which case those come out of the pipeline, some got disqualified or the patient went down hole for example, they might have another medical issue that they have to deal with. And then we added 139 new ones. So that the overall net number now is 306.

[Scott Henry:]

Okay. That I've just typed those numbers and that seems to follow the numbers you gave me that. That's good. And I guess, just the final question, and it's somewhat subjective. But obviously the challenge for us is to try to determine what the leading indicator here is for an inflection point and when we'll start to see the ramp accelerate. What would you recommend? Would you say the reimbursement pipeline is your leading indicator and that's the best gauge for acceleration? Or are there any other metrics that you would highlight?

[Paul Gudonis:]

Well, that is the best one we have. That's why we decided to make it very visible to our investors and analysts. Because again, unless I get them into the pipeline, now these are candidates who are interested in the device. They have past our evaluation of their medical condition, their a good candidates for the device physically. And their insurance is one that, we believe and are very confident, will pay for the device, including private payers, worker's comp and VA. So that to me is the best leading indicator.

[Scott Henry:]

Okay, great. Thank you for taking the questions.

[Operator:]

And our next question comes from Paul Bienstock with National Securities. Please go head.

[Paul Bienstock:]

Sure. Thanks. Good quarter, gentlemen. The question I have is how many screening days are you planning for the first quarter 2019?

[Paul Gudonis:]

We're running at about 90 to 100 screening days per quarter right now, Paul.

[Paul Bienstock:]

Okay.

[Paul Gudonis:]

In fact, you can go to our website, we typically will list on the website screening days that are coming up over the next 60 days. And then one, we work with an O&P partner and set up the screening day in a particular city that we want should be online marketing activity with Facebook, with Google AdWords, et cetera, within 100 mile radius. And that attracts the patients to come in for an evaluation. But I will say, if we've got a screen day set up, maybe 60, 90 days out, if that patient is ready to go, we don't want to wait that long, we'll just bringing them right in to get evaluated as soon as the O&P provider who's got a slot their calendar.

[Paul Bienstock:]

Okay. Beautiful, beautiful. The second question I have is you're currently at 40 MSA. How quickly do you think you would get to the top 50? I know that's been a goal of yours for a while.

[Paul Gudonis:]

Well, our team is at the Academy of O&P Annual Meeting that's in Orlando, late this week, meeting other O&P providers. I would say, probably over the next three to six months we should be able to fill out the map.

[Paul Bienstock:]

Okay. Beautiful. I don't have any more questions. Thanks.

[Paul Gudonis:]

All right. Thank you, Paul.

[David Henry:]

Thank you.

[Operator:]

And our next question comes from Roger Duan with RF Lafferty & Co., Inc. Please go ahead with your question.

[Roger Duan:]

Thank you. Good evening, Paul. So a couple of questions on the margin side. I see you because you're scaling of your direct billing program, your gross margin is at 75%. Can we take it as kind of sort of the new base case scenario for MyoPro going forward?

[David Henry:]

I would be cautious with that. This is Dave Henry, just because there's a number of factors at play. Every insurance company is difference in terms of the reimbursements that they will allow. And you have different products, you have the G versus the W, et cetera. So I think 75% is a really good quarter and we obviously will try to continue to match that in the quarters ahead. But longer-term, I think you probably should be thinking about maybe 65%-ish gross margin is something – if you're putting a longer-term target on us, that's probably one that you should probably model.

[Roger Duan:]

All right. So, with the introduction of your pediatric version, how is that going to affect your margin mix?

[Paul Gudonis:]

Well, we haven't priced it yet. I think we will – we expect to sell it and earn the same type of margins that we do on the adult size MyoPro unit. That's our best estimate right now.

[Roger Duan:]

All right. Thank you, Paul. That's all for me. Thanks.

[Paul Gudonis:]

All right. Thank you, Roger.

[Operator:]

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Paul Gudonis for any closing remarks.

[Paul Gudonis:]

Well, thank you, operator. And I like to thank all of you for joining us on today's call. In summary, we're following through on the growth programs we've outlined and they're demonstrating year-over-year increases in revenue and a large increase in our potential revenue pipeline with a record number of patients in the queue waiting to be authorized for MyoPro, which could translate into growing revenue in the months ahead. So thank you again for your time this afternoon and have a good evening.

[Operator:]

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