Myomo, Inc.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Hello, and welcome to the Myomo, Inc. First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. . After today’s presentation there will be an opportunity to ask questions. . Please note today's event is being recorded. I would now like to turn the call over to Kim Golodetz. Ms. Golodetz, please go ahead.

[Kim Golodetz:]

Thank you, operator and good afternoon, everyone. This is Kim Golodetz with LHA. Welcome to the Myomo First Quarter 2021 Financial Results Conference Call. Earlier today, Myomo issued a news release announcing financial results for the three months ended March 31, 2021. If you would like to be added to the company's e-mail distribution list to receive future announcements, please register on the company's website at myomo.com or call LHA in New York at 212-838-3777 and...

[Operator:]

Yes, Ms. Golodetz accidentally dropped off the line.

[David A. Henry:]

I'll just continue going on from where she left off. Before we begin, I'd like to caution listeners that statements made during this conference call by management, other than historical facts are forward-looking statements. The word anticipate, believe, estimate, expect, intend, guidance, outlook, confidence, target, project and other similar expressions are typically used 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 operating results, including the impact of the ongoing COVID-19 pandemic. These and additional risks, uncertainties and other factors are discussed in the risk factors and other qualifications contained in Myomo's filings with the Securities and Exchange Commission including the Form 10-Q for the quarter ended March 31, 2021, which was filed earlier this afternoon. Actual outcomes and results may differ materially from what's expressed and/or implied by these forward-looking statements. Except as required by law, Myomo undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. It's now my pleasure to turn over the call to Paul Gudonis, CEO of Myomo. Paul, please go ahead.

[Paul R. Gudonis:]

Well thank you Dave and good afternoon everyone and thanks for joining us today. After I provide a business update, Dave will review our first quarter financial results and discuss our financial outlook. And following the financial update, I'll give some closing remarks, and then we'll take your questions. With about half of the U.S. population now having received at least one injection of the COVID-19 vaccine, we're encouraged that our business is well on its way to operating in a more normal pre-pandemic environment, while our clinicians continue to take precautions to protect themselves and their patients. As I've discussed on past calls, during 2020 we adjusted our operations, in particular, regarding our use of telehealth and online marketing. This adoption of digital technologies supported the continued growth of Myomo last year and to date in 2021. We continue to utilize telehealth and online marketing as these modes of reaching patients are not only mainstream now, but they're also cost-effective and very efficient. Last fall, we engaged a new marketing firm with a particular expertise in digital advertising, and we've already seen a very positive impact from their work.

[David A. Henry:]

Thank you, Paul. Turning to our Q1 financial results. Revenue for the first quarter of 2021 was $2.3 million, which was up 132% over the prior year first quarter. A higher average selling price, along with a higher number of MyoPro revenue units, drove this increase and reflects success with our direct billing channel and our marketing efforts. More specifically, we recognized revenue on 65 MyoPro units in Q1 of 2021, an increase of 117% compared with the first quarter of 2020. Our backlog of units consists of insurance authorization received but not yet converted to revenue, and our backlog as of March 31, 2021, was 118 units. Ending backlog reflects 66 authorizations in orders in the first quarter and 14 patients that exited the backlog without becoming revenue. Approximately 92% of the backlog is comprised of direct billing candidates. Gross margin for first quarter was 73%, up from 68% in the first quarter of 2020 and flat sequentially. The year-over-year increase primarily reflects a higher average selling price again, reflecting the shift to our direct billing channel. There were 50 MyoPro delivered to patients in the first quarter for which we recorded cost of goods sold. With 65 revenue units, that means a net 15 revenue units were recorded at 100% margin because cost of goods sold was recorded in a prior period when the units were delivered. This favorably impacted Q1 gross margin as well. Operating expenses for the first quarter of 2021 were $4.6 million. This is up 13% compared with the same quarter a year ago and primarily reflects higher compensation and advertising costs. The operating loss for the first quarter of 2021 narrowed to $2.9 million from $3.4 million a year ago. The net loss attributable to common stockholders for the first quarter of 2021 was $3 million or $0.57 per share, and this compares with a net loss attributable to common stockholders of $4.5 million or $2.51 per share for the same period of 2020. Net loss attributable to common stockholders in the first quarter of 2020 includes a deemed dividend on the repricing of warrants of about $700,000. Adjusted EBITDA for the first quarter of 2021 was a negative $2.7 million, and this compares with a negative $3.3 million for the first quarter of 2020. Cash and cash equivalents as of March 31, 2021, were $17.4 million, which includes $7.3 million received from the exercise of approximately 1 million warrants during the quarter. Roughly 1.7 million warrants remain outstanding. Cash used by operations was $2.1 million in the first quarter and includes a deposit of about $500,000 we paid to one of our contract manufacturing partners to enable the procurement of inventory to support projected 2021 demand for MyoPro devices. Our cash utilization is also benefiting from lower rent as we took advantage of the favorable commercial real estate market to relocate our offices from Boston -- to Boston from Cambridge. This move not only reduces facility rent costs but will also better accommodate our projected growth.

[Paul R. Gudonis:]

Thanks, Dave. Increased authorizations by health insurance companies are an important component of our growth strategy. Our Chief Medical Officer, Dr. Harry Kovelman, is very focused on obtaining what we believe are appropriate coverage policies for the MyoPro so that more patients have access to our devices. Back in January of 2019, the Centers for Medicare and Medicaid Services, CMS, established two new billing codes for the MyoPro, which resulted in certain Medicare Advantage plans paying for the device on a case-by-case basis. And while results of these new billing codes and Medicare Advantage plans are now providing support for much of our current business, we still have work to do to obtain more appropriate and wider reimbursement. We previously discussed that these Medicare Advantage plans cover about 35% of seniors, while the larger portion of Medicare beneficiaries are covered under Part B, where the MyoPro is coded as durable medical equipment rental. Because the MyoPro is custom fabricated for each patient and is designed for long-term use, we continue to seek a correction in the benefit category and recently applied for such a change with the submission of a code amendment for consideration this year. However, there's no guarantee that CMS will issue a coverage policy or an acceptable payment amount for the MyoPro, in which case we'll continue to address the large population of paralyzed individuals covered by other payers.

[Operator:]

Yes, thank you. .

[Paul R. Gudonis:]

And before we take the first question, I want to mention that we're available for virtual investor meetings during this time of limited travel. So please contact LHA Investor Relations to set up a time. Their contact information is on today's news release. We'll also be participating in some upcoming virtual conferences during the second quarter, including the Oppenheimer MedTech Tools and Diagnostics Summit later this month and Sidoti's Virtual Small Cap Conference in June. Alright operator, we're ready for the first question, if you are.

[Operator:]

Yes, thank you. And first question comes from Scott Henry with ROTH Capital.

[Scott Henry:]

Thank you and good afternoon. Just a couple of questions. First, when I'm just looking at the metrics, it looks like authorizations dipped in Q1 from prior rates. I know it snapped back again in 2Q based on April. But can you talk about what factored into why it went down in Q1 and is that just kind of a onetime event or how should we think about that?

[Paul R. Gudonis:]

Well, it was equivalent to where we were a year ago, Scott. I think part of it is there's a big push for authorizations in Q4. As you know, we had a strong Q3, Q4. We've always seen seasonality in this business. It might be that with the holidays back in December, processing these appeals or authorizations may lag and we don't -- and sometimes, we don't hear from the insurance companies for 30 to 60 days after an appeal, for example. And that's why perhaps, we're seeing more -- we had a strong March and another strong April. So that may be the reason for that.

[Scott Henry:]

Okay, okay, great. And then I guess, similarly, the percent of the cumulative pipeline that kind of just goes away, that was a little higher in Q1 than historically just noise there or would you expect to kind of normalize towards that 15%, which is the midpoint of the 10% to 20%?

[David A. Henry:]

It was probably high, the historical range is sort of typically 10% to 20%, it might have been in the high end of that range. I don't think there was anything unusual about the drops from the pipeline that occurred in the first quarter.

[Scott Henry:]

Okay. Fair enough. And then on gross margins, obviously they have helped a little bit in this quarter but what would you view as a sustainable gross margin percentage going forward?

[David A. Henry:]

I would say, on a steady-state basis, gross margin in the range of 70% to 75%.

[Scott Henry:]

Okay. 70%, 75%, that's great. And then as well, obviously, you're adding patients much better at higher rates than in the past. I mean should we think about that as kind of the new normal now, this, call it, 350 to 400 range, is that achievable on a consistent basis?

[David A. Henry:]

Well, I mean there's a lot of factors that go into that but we -- for the things that we can control, which is the advertising money that we spend and the way that we run our operations, we are doing what we can to increase the activity levels throughout the organization. And it starts with lead generation that we spend advertising money on and it filters its way down. So if we're to achieve the objectives we're trying to achieve, we need to continue to do what we've been doing.

[Paul R. Gudonis:]

It's a good leading indicator because -- of future revenues because those patients will work through their pipeline to revenue over the next 6 to 12 months.

[Scott Henry:]

Okay, great. Well, thank you very much for taking the questions.

[David A. Henry:]

Alright, thanks Scott.

[Operator:]

Thank you and the next question comes from Kyle Bauser with Colliers Securities.

[Kayla Hostetler:]

Hi, thanks. This is Kayla Hostetler on for Kyle. Thanks for taking the questions. I guess, first, the direct billing pipeline continues to build and drive nice margins. What do you think is like a reasonable goal for the direct billing channel, would it be 100% of new business?

[David A. Henry:]

I don't think it's going to be -- it will never be 100%. We're always going to have an international business, we will always have -- hopefully have VA revenues, and we want to maintain the O&P channel as well. So I think as it gets -- I'm hopeful that we -- that the direct billing channel doesn't get above 80% because that means that the other channels are growing, which is what we want to see happen.

[Kayla Hostetler:]

Right, okay. And then can you talk about how headcount has changed over the past 12 months, what's the latest number, and then as you think of adding new employees, which part of the business do you anticipate adding to the most?

[David A. Henry:]

Yes, overall headcount right now is around, I would say, in the mid-70s, 75 people, I believe. And most of the headcount adds, I would say that the headcount adds have been -- we expect them to be stronger in the first half of the year and then taper off in the second half of the year as we've been doing a lot of work to put the capacity we need to have in place to service the greater number of leads coming in and the evaluations we have to conduct and all the way through our patient pipeline. So we're setting ourselves up now, and I would expect the adds to the headcount to decelerate as we move through the rest of the year.

[Paul R. Gudonis:]

Yes, where we've added folks are in the field clinical staff because there are more people, and almost double the amount of candidates now to evaluate coming into through the advertising. So we have field clinical staff that does these evaluations, and then they'll do the ultimate fittings for these patients in the direct billing channel. We've grown our reimbursement support team under Dr. Kovelman and then we've also added a few quality inspectors and engineers to support the growing volume because we have to make sure every device is inspected before it's delivered to a patient.

[Kayla Hostetler:]

Great, thanks, and then last question. As far as average selling prices of MyoPro, how should we model this going forward, still around 35,000?

[David A. Henry:]

Yes, I would from a modeling standpoint, I would use 35,000 as a number to model off of.

[Kayla Hostetler:]

Great, thanks for taking the questions.

[David A. Henry:]

Alright, thank you.

[Operator:]

Thank you. And the next question comes from Jim Sidoti with Sidoti & Company.

[James Sidoti:]

Hi, good afternoon. Glad to hear you are doing well. Just following up on average selling price, it looks like it was about 35.6000 in the quarter based on 65 units shipped. What was it in the May -- in the March 2020 quarter a year ago?

[David A. Henry:]

It was a little under 34,000.

[James Sidoti:]

Okay. All right. And seems like accounts receivable dropped substantially in the quarter. I know orders were down a little from the last quarter. But does that indicate at all your ability to get paid from the third-party payers, is that becoming easier now that you're direct billing?

[David A. Henry:]

Well, actually with direct billing, we don't -- except for those certain insurers that we're taking revenue on delivery, we actually wait till payment to recognize revenues. So the receivables that we have are from the O&P and the VA providers and international channels and then that portion of our direct billing revenue that we're able to take on delivery. And the reason we're able to take the direct billing revenue now on delivery is that we've established sufficient collection history. So I think that -- just circling back to the decrease in receivables, I think that's just a function of the decrease sequentially of the revenue, which is expected by the way, just because of the way traditionally the business has been operating.

[James Sidoti:]

Okay, and then last one for me. You raised about $7 million in the quarter from the sale of warrants, is that something that you can predict going forward or is that going to be more based on the share price and what is a good share count for 2021?

[David A. Henry:]

Yes, we didn't sell any warrants just to be clear, they were exercised. So...

[James Sidoti:]

Right.

[David A. Henry:]

And so it's hard to say what might -- what stock price might trigger more exercises. So it's hard for me to speculate on that. And in terms of our share count, our share count as of May 1st was 5.6 million shares. We're not anticipating -- we say that we have sufficient cash to go well into 2022, so we're not expecting any financing activities that we initiate. So it's -- any increases in shares will primarily come from if there do happen to be additional warrant exercises.

[James Sidoti:]

Okay, alright. Thank you.

[Operator:]

Thank you. And the next question comes from Edward Woo with Ascendiant Capital.

[Edward Woo:]

Yeah, congratulations on the quarter. My question is, you mentioned that it takes about 6 to 12 months from when a patient is identified, get into the pipeline and eventually recognized as revenue. Have you seen that speed up at all?

[David A. Henry:]

I think we're starting, I think, to see that. And I think we'll see that more as we continue through 2021 and as the rate and the numbers of patients cycling through all the way to revenue begin to increase. I think we'll see that more as we go forward. But until that time, I mean, it is dependent on the number of authorizations that we get from that insurance company, and that can fluctuate on a month-to-month basis. So it's -- I think the better way to look at it will be probably quarters at a time and not months at a time.

[Edward Woo:]

Great. And then do you guys notice any issues with your supply chain, either significantly higher costs or shortages on certain parts coming from Asia?

[David A. Henry:]

We are seeing some cost increases, like, for example, laptops and things like that.

[Paul R. Gudonis:]

Steel bars used in the MyoPro, we're seeing that.

[David A. Henry:]

Yes, so we are seeing some cost increases. But we are working on cost decreases as we do some of our engineering projects. But in terms from a supply standpoint, while there are some -- obviously, that we've heard about and been aware of the shortages of certain electronic components but right now, we're able to procure what we need. So in terms of straight supply, we're doing okay right now.

[Edward Woo:]

Great, well thank you, and wish you guys good luck. Thank you.

[David A. Henry:]

Alright, thank you.

[Paul R. Gudonis:]

Thank you Edward.

[Operator:]

Thank you. And the next question comes from Paul Nouri with Noble Equity.

[Paul Nouri:]

Could you describe in some detail about how much the advertising environment has improved for you guys and if it is mostly from the presidential election or if there was also an effect from people getting out and shopping more in-person as opposed to online? And maybe the cadence of the improvement over the past five months or however long it's been?

[Paul R. Gudonis:]

Well, as you may be aware, the way these platforms like Facebook work is you're in a constant auction for eyeballs. And in the fall, we were competing with a certain budget that we have set with a lot of other advertisers specifically political advertising. So that calmed down after November, and then we increased our spending. While we don't break out the advertising dollars in total, it's just under $100 a lead and if that turns out to be a good payer, a medically qualified candidate, that could lead to a $35,000 sale. So we see a pretty good return on that. As I mentioned, we did change agencies to get a specialist in digital online marketing back in the fall, and I think that's had a positive impact as well because, as you may aware, these are very sophisticated algorithms to target patients, lookalikes compared to people who've already clicked on ads. So I think between the increased spending and also, I think consumer behavior, I'm optimistic, it has changed more positively. People are more confident about their health situation or about their job or their spouse's job who might have the health insurance to cover their MyoPro. So I think maybe that has led to more click throughs on our ads in the last couple of months.

[Paul Nouri:]

Okay. And you mentioned that you continue to sell product into O&P. How is that part of the business doing for you guys?

[Paul R. Gudonis:]

Well, that part of the business continues to generate sales force. It's a smaller percentage just because our direct billing activity is driven by our own direct marketing, it has accelerated and taken over three quarters of the revenue stream here. But we still have a number of patients in that pipeline that are O&P providers in the United States. And then outside the U.S., we work exclusively through orthotics and prosthetics providers. We have a whole network of those O&P providers in Germany, some in the UK, Australia as well. So again, as Dave mentioned, the O&P business both U.S. internationally, plus VA, where we sell to directly is about quarter of our business.

[Paul Nouri:]

And are you waiting to see how your experience in Germany goes in terms of how well you can get into that market before you spread into other European markets or are you kind of doing it in tandem?

[Paul R. Gudonis:]

Well, we're well positioned in Germany. We're getting more of these statutory health insurance payers to pay for this. And again, it's a deep pool of patients in Germany. It's the biggest country in the EU. It's got the best reimbursement for high-tech devices. And so our goal there, we just hire another person there to help us penetrate that market. Opening up new countries requires an investment. We're talking to O&P providers in a couple of other countries. But right now, Germany will be our key market, UK is opening up again, we've got a screening day going on there as well.

[Paul Nouri:]

Okay. And the previous caller had mentioned the length of time between the inquiry and when you can actually book it as revenue. But what's the typical length of time between like -- between inquiry and when the patient is confident that they can actually get the device, is it pretty similar?

[Paul R. Gudonis:]

So if you look at that 6 to 12 month cycle time we quote, let's say you contacted us today. Our call center in Fort Worth, Texas would be back in touch with you very quickly. We'd arrange for a telehealth initial evaluation, which could be done in a few days. Then we need you to go to your doctor's office to get all your chart notes about your previous treatments such as occupational therapy. You need a prescription, a letter of medical necessity, now that could take a few weeks. Then we get that submitted to the insurance company for you and that approval by the insurance company, it could happen within 30 to 45 days on the first pass. Some insurers will kick it out as not approved or denied, and therefore, we have to craft an appeal. That could take out 30 days to do that and it may be approved at that point. If it's denied a second time, we may have to go through an administrative law judge hearing, which we then prepare the case for that. Our team will then conduct that appeal. Once we get that approval, then we have to arrange to visit with you in-person, take a cast of your arm, other measurements, and then we get the device fabricated, and we set up a follow-up appointment to actually deliver the device, configure all the software settings. So again, you just look at the time elapsed there, it's about 6 to 12 months and sometimes longer.

[David A. Henry:]

Yes, and just if you were to split it out, the -- and break the pipeline up between what's -- when we receive an authorization to when it becomes revenue, that's somewhere in the neighborhood of, say, three to four months. It can be shorter sometimes, but, call it, 3 to 4 months. And then the rest of that 6 to 12 months is in the part from the time the lead is generated to the time we get the authorization.

[Paul Nouri:]

And do you find that you lose a lot of patients between inquiry and when you get the authorization or not really?

[David A. Henry:]

Yes, we find that the NS was one of the earlier questions dealt with that point. There's in general about a 10% to 20% dropout rate in the pipeline each quarter. That comes from people that we -- they'll drop out for various reasons, insurance reasons, health reasons, can't get a hold of them, what have you. It can be all kinds of reasons. And we find that that's the rate at which -- and it's been fairly consistent at which people will drop out.

[Paul Nouri:]

Okay. And the last question, what is the average out-of-pocket for people?

[David A. Henry:]

These are -- because we're on a case-by-case basis, we don't have contracts with insurers unless they've reached their out-of-pocket maximum. And that's the sort of the key thing, whether they have an out-of-pocket maximum or not. And besides that, it's probably going to then be 80-20 but it depends on the state of that patient's out-of-pocket maximum.

[Paul Nouri:]

Okay, thanks a lot.

[Operator:]

Thank you. . And the next question comes from Warren Hirst with AIGH Investment Partners.

[Warren Hirst:]

Hi, how are you?

[David A. Henry:]

Hi.

[Warren Hirst:]

Hi, you had alluded to some additional futuristic products. I mean, besides the pediatric product, any more specific you can be in terms of what else you think you could do or what's in the pipeline, etcetera?

[Paul R. Gudonis:]

Well, we're looking at how do we continue to enhance the existing MyoPro device. And then we're always starting to think about, okay, what's the next-generation product. But we're going to focus on the upper extremity because there are lots of different alternatives for the lower extremity from AFOs, ankle-foot orthoses; to wheelchairs; to canes; exoskeletons. And so we're looking at what should be that product mix going forward, are there other new types of sensing technologies that we ought to incorporate into our devices. So all you can say is we have planning sessions on those. And the typical development cycle between conception, prototyping, patient testing, validation, supply chain, it's typically 18 to 24 months before a new product can be introduced into the marketplace for FDA regulations.

[Warren Hirst:]

In terms of the additional sensing technologies, you mentioned what had been televised, where is your IP, in there or is the critical IP really coming from the outside where the brainwaves are being monitored, where does that dovetail with your electrical stimulation IP and understanding?

[Paul R. Gudonis:]

Well yes, our IP is centered around using the body's electromyogram, EMG signals to power an orthotic device. And the most recent patents which go out to 2039, cover multiple joints, which we think is important. So it's not just a hand component, but you've got to have the elbow for it to be able to reach and grasp items. So that plus our IP around the control algorithms because yes, this is very sophisticated software to be able to decipher, filter, sample the body's EMG signals to have a true high-fidelity motion, which the patient wants to have.

[Warren Hirst:]

And so in terms of the one that's controlled by brainwaves, for example, what outside IP or technology would you need in that case that is proprietary that you don't have today or have you licensed it in today if you don't have it today, if I may ask that one last question?

[Paul R. Gudonis:]

Yes, so there are some of these experimental projects where like at Thomas Jefferson and you've got that are using brain implant electrodes. Well, that's going to be their intellectual property. What we have is an API, an application program interface, where we can take those signals, whether it comes from that type of electrode or our own sensory electrodes, to power the device. So we kind of look at it is we've got a platform that in the future, multiple sensor technologies could drive that for the patients.

[Warren Hirst:]

Okay. Is there an important -- so if I can follow-up on that, is it important for you to own the other sensor technology against other sensory technology or that's not so critical or you are open to that, what's the general thoughts and plans?

[Paul R. Gudonis:]

Well, each of those are going to require substantial investments and a long time to commercialize those. So our view is we are partnering with these other entities to make our API open to them, so we can take the signals they generate and drive our device. And again, focus on our control algorithms don't change. It's just a different input mechanism.

[Warren Hirst:]

Got it, okay, thanks very much. Congratulations.

[David A. Henry:]

Alright, thank you for the questions.

[Operator:]

Thank you. And as it does concludes the question-and-answer session I would like to return the floor to management for any closing comments.

[Paul R. Gudonis:]

Very well, thanks. Well, in closing, we're optimistic that the economy here and in other countries is going to continue to open up and that the pandemic will abate over the course of the year. And assuming that's the case, we can expect continued patient pipeline growth and record strong annual revenue growth for the fifth year in a row. We're addressing a large unmet need with a life-changing solution while continuing along the path toward our next milestone of breakeven cash flow from operations. So again, thanks for your time and for your interest in Myomo. Have a good evening.

[Operator:]

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