Myomo, Inc. Q1 FY2020 Earnings Call

Good day and welcome to the Myomo Inc., First Quarter 2020 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 this event is being recorded. I would now like to turn the conference over to Kim Golodetz. Please go ahead.

Thank you, operator, and good afternoon everyone. This is Kim Golodetz with LHA. Earlier today Myomo issued a new release announcing financial results for the first quarter of 2020. If you would like to be added to the Company’s email 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 speak with Carolyn Curran. With me on the call today for Myomo are Paul Gudonis, Chief Executive Officer; and Dave Henry, Chief Financial Officer. Before we begin, I would like to caution listeners that statements made during this conference call by management other than historical facts are forward-looking statements. The words anticipate, belief, 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 other operating results including the impact of the ongoing COVID-19 pandemic on Myomo's business operations. These and additional risks and uncertainties and other factors are discussed in the risk factors and other qualifications contained in Myomo’s filings with the Securities Exchange Commission including the Form 10-K for the quarter ended March 31, 2020, which is expected to be filed earlier this afternoon. Actual outcomes and results may differ materially from what is expressed 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 is now my pleasure to turn the call over to Paul Gudonis, CEO. Paul, please go ahead.

Thank you, Kim. Good afternoon everyone and thank you for joining us today. I hope that you, your families, and colleagues are all well during this pandemic caused by the coronavirus, and the effects that COVID-19 has had on our personal lives and the global economy. It's affected everyone and the full impact on our way of life is still unknown at this time. As I'll describe today, we've taken actions to address Myomo's operations to deal with this changing environment while continuing to address the large need for our powered arm brace for those with upper extremity paralysis. After I provide the business update, Dave will review our first quarter financial results and discuss their financial outlook. And following the financial update, I'll give some closing remarks and then we can take your questions. Our revenues in the first quarter of 2020 were $21 million, up 21% from the same quarter a year ago, and our highest first quarter revenues ever. The quarter's results reflect the strategic actions we took in 2019, which included our direct to patient online marketing and the emphasis on our direct billing channel where we've billed the patient's insurance company directly. Direct billing increased to 62% of revenues in the quarter, up from just 26% of revenues in the same period last year. This has resulted in higher revenue per unit and a higher margin per unit compared to a year ago. We also increased the size of our backlog meaning MyoPro that have been authorized by payers but are either in the process of being delivered to users or are awaiting payments to us. Our backlog stood at 80 at the end of Q1, up from 53 units at the start of the quarter. Last year, we started screening patients via telehealth video conferencing to set them as MyoPro candidates and to move them forward into the pipeline for reimbursement and future fittings. With the travel restrictions and social distancing measures that have been put in place in response to COVID-19 in the past few months, we've been able to continue building the front end of our pipeline by remote screening for MyoPro conducted within the guidelines of the telehealth protocol. It's safer for the candidate since they can be screened at home. Our field staff is safe and much more productive in the number of screens they can conduct per day. And we save the time and costs associated with travel to perform these screenings. So, in spite of the coronavirus-related shutdowns, we added a record 307 patients into the reimbursement pipeline in the quarter. That's up 58% from its 194 adds in the fourth quarter of 2019, and 93% of the domestic cases added to the pipeline are to be directly billed by us through the health insurance company. More than 700 candidates are now in our pipeline, up from 594 at the beginning of the year. However, we are one of our own preclinical providers who need to see the patient in person to measure and cast their arm for fabrication of the device and then we need to deliver the MyoPro in person for a perfect fit and to adjust the software settings. This has resulted in a growing backlog of units to deliver for payment and revenue recognition, and that number has grown from 80 at the end of Q1 to 100 units as of today. This delay in being able to fabricate and deliver product to the users pushes our revenues down for several months. Since we have to invoice the payers upon delivery, we typically have to wait 90 days or longer for payments. So far, the churn in our backlog, typified by candidates who change their insurance, which requires a new authorization, or candidates who exit for medical reasons, has been limited to just a few cases and has not noticeably increased due to the impact of COVID-19. I have to caution all that it's still early in this pandemic and the socio-economic effects of COVID-19 are only beginning to be realized. The good news is that some phases are opening up, so our MyoPro deliveries have already restarted in certain geographies, and we expect that this trend will continue in May and June allowing deliveries to resume in even more locations. We have instituted a new patient interaction policy as a result of COVID-19 and we've been able to procure a supply of personal protective equipment in order to keep both our employees and our patients safe, as we restart patient visits with public health restrictions being eased. About a month ago, we warned about the negative impact on Q2 revenue due to the impact of COVID-19. Because of this impact, we took a number of steps to reduce our operating expenses and cash utilization. We had to make the difficult decision to eliminate some positions and furlough other employees, so we are able to deliver devices in their regions, freeze headcounts, and reduce other costs such as lift, travel, and outside service fees. With these actions, we've been able to reduce our operating expenses in the current quarter by over $500,000 from the prior quarter and we reduced our spending plan for the rest of the year. And since we're unable to meet with children and families in person to complete a pediatric MyoPro device testing, we pushed the national launch of that product out, which will save us additional cash this year. Meanwhile, the number of MyoPro being authorized by insurance companies is growing, especially among patients covered by Medicare Advantage Plans and other commercial payers who are regularly reimbursing the cost of the MyoPro. For seniors on Part D Medicare, we followed CMS' direction for the MyoPro, as a durable medical equipment or DME rental, and one of our O&P partners has provided additional supporting documentation on the initial claim, as we wait to receive decisions on coverage criteria and payment amounts for these patients. We've also had inquiries recently in our work with the Veterans Administration. MyoPro's reimbursed for VA patients at over 40 VA medical centers, and they purchase MyoPro's for veterans in their care. In fact, we just started the delivery process for several veterans with VA purchase orders in our backlog just in the past week. The VA and the Department of Defense are also funding research on the value of the MyoPro, so we're pleased with our relationship with the VA and the work we do to help our nation's veterans.

Thank you, Paul, and good afternoon everyone. The revenue for the first quarter of 2020 was $21 million, which is up 21% compared with the prior year quarter. We achieved this growth through a higher average selling price, reflecting a record amount of direct growing revenue. More specifically, revenue from direct billing for the first quarter was a record 62% of total revenue and this is up from 26% of total revenue in the prior year quarter. The increase in direct billing revenue reflects efforts to emphasize this channel compared to the same period a year ago, and we're very happy with this continued progress. Note that these direct billing sales also have a positive impact on our gross margin, which has expanded nicely. Our backlog of units, which represents insurance authorizations received but not yet converted into revenue, was 80 units as of March 31, 2020. This is up 51% compared with 53 units in backlog as of December 31, 2019. Approximately 30% of the December 31, 2019, unit backlog was converted into revenue in the first quarter, and roughly 47% of our first quarter revenue units came from orders received during the quarter. The majority of these were from our O&P, VA, and international sales channels. Gross Margin for the first quarter of 2020 was 68.4% compared with 65.4% for the first quarter of 2019, a gain of 300 basis points. The increase primarily refers to higher average selling price, again attributable to the higher prices in the direct selling channel. Starting in 2020, certain costs that were recorded primarily in R&D during 2019 are now being recorded in cost of revenues. This change accounts for almost all the sequential decrease in gross margin. Prior year gross margin reflects this reclassification. Operating expenses for the first quarter of 2020 were $4.1 million, an increase of 27% over the first quarter of 2019. The increase primarily reflects higher compensation costs associated with the addition of sales, customer service, and reimbursement personnel, as well as higher marketing expenses and professional service expenses. Note that we expect operating expenses while the COVID-19 pandemic is ongoing will be lowered due to the actions we've undertaken in recent weeks. The operating loss for the first quarter of 2020 increased to $3.4 million from $2.7 million in the first quarter of 2019. Net loss for the first quarter of 2020 was $3.8 million, compared with a net loss of $2.6 million for the same period of 2019. Net loss in the first quarter of 2020 includes a charge of about $200,000 related to the early extinguishment of a company's term loan. Net loss attributable to common stockholders was $4.5 million in the first quarter of 2020 or $2.54 per share, compared with $3.4 million or $6.82 per share in the prior year's first quarter. We recorded a deemed dividend in the first quarter of 2020 of approximately $671,000 to reflect the re-pricing of warrants originally issued in December 2017 concurrent with our February 2020 public offering. We revised our financial statements for the first quarter of 2019 to reflect that deemed dividend for approximately $798,000 on the re-pricing of those same warrants, as a result of our public offering in February 2019. Note that per share amounts reflect the Company's 1-for-30 reverse stock split effected on January 30 of this year. Adjusted EBITDA for the first quarter of 2020 was a negative $3.3 million compared with a negative $2.5 million for the first quarter of 2019. Please refer to the table and the press release we issued earlier today for a reconciliation of GAAP to non-GAAP accounting. Cash and cash equivalents as of March 31, 2020 were $13.7 million, compared with $4.5 million as of December 31, 2019. Excluding the net proceeds from a public offering in February 2020 of $13.5 million and the prepayments of 50% of the outstanding balance of our term loans concurrent with the closing of the offering, our cash burn was $2.4 million for the first quarter. Today, we also announced that we amended our term loan with Chicago Venture Partners, turning it into a convertible note, which allows us to repay the note in cash or stock at our option. This amendment includes a restructuring fee of $105,000, which was added to the outstanding balance. As of the amendment date, the outstanding balance of the term loan, including the restructuring fee, is approximately $1,851,000 before reported date discounts. Please refer to our 8-K filed today for more fully described terms of the amendment. Turning now to our near-term expectations, the impact of COVID-19 has altered our outlook. As one would expect, public health mandates and travel restrictions are temporarily constraining our revenue, and we expect second quarter revenue to be substantially below first quarter revenue. That said, certain geographies are starting to open up to economic activity, and we are hopeful that operations will return to a more normal pace by the end of the second quarter. In the meantime, we have been building an impressive authorization backlog that is expected to put us in a position to convert some of the backlog into revenue during the third quarter. The extent to which we can accelerate revenue growth in the third quarter will depend on how quickly we can return to something closer to normal operations in the coming weeks. Turning to our cash position, our cash burn is expected to increase substantially in the second quarter, as we expect net usage of cash for working capital as cash inflows are being muted by the impact of COVID-19 on the business while we expect to pay down liabilities. Despite the higher expected cash burn in the second quarter, we believe we have sufficient cash on hand to meet our operating requirements for at least the next 12 months. However, if we can't resume something closer to normal operations in the coming weeks, we may require additional capital to fund our operations beyond the second quarter of 2021. Longer term, the MyoPro opportunity remains significant. We believe we are putting in place all the necessary components to accelerate revenue growth when the country gets back to work.

Thank you, Dave. Well, as you've heard us describe today, we've quickly adjusted our business in light of the changed personal health and economic environments. We continue to add to our patient pipeline, and we're doing so in a much more cost-effective approach using telehealth, and we expect to see an even larger percentage of our business going through the direct billing channel, which leads to higher revenue and gross margin per unit. While we had a short-term delay in our deliveries and revenues, we've been able to restart deliveries and believe we are able to generate revenue growth. With a lower spending plan, we have been able to increase our operating leverage necessary for us to achieve cash flow breakeven in the future. This concludes the formal part of our presentation, operator, and we're ready to open the call for questions.

Thank you. We will now start the question-and-answer session.

Thank you and good afternoon. A couple questions I didn’t hear. Did you mention how many units were sold in Q1?

We sold 30 revenue units in Q1.

Okay, excellent. Thank you very much. And when I look at the backlog of 80, that's a pretty good number, which typically would carry into 2Q and 3Q, the issue that you can't make the units for the person because typically, I would expect the backlog to wear off into revenues in the next quarter. But is there kind of a bottleneck of not being able to interact with a patient? Is that what the issue is?

That's correct. We have authorization, but we need to fit the patient, and we haven't been able to complete deliveries due to public health restrictions.

Yes, while those slow down at the end of March and in April, as I reported here Scott, now we've now started to do some castings, which is the first step for the fabrication and delivery. And our field clinical team has scheduled a number of these fittings out over the next two to three weeks.

Okay. Is there a limitation on your ability to convert the large backlog into revenue as we approach Q3?

Well, with our field team, it has enough capacity to go out and fit on many devices during the course of the month. And the central fabrication site has significant capacity for what we have in the backlog today. So, we feel like we're ready to go as soon as these regions open up and from watching the news, they are now slowly.

Okay. I want to focus on the reimbursement pipeline. That 307 number is significant. This is a two-part question. First, what is required to become a pipeline addition? What criteria need to be met? Clearly, insurance is necessary to enter the backlog, but what does it take to be added to the pipeline? Has this process changed over time? Additionally, how do you view that 300 number once we move past COVID-19? Can you sustain that elevated level?

Thanks Scott. So, our definition of what enters the pipeline hasn't changed. We have leads from patients and their families through social media, Facebook, Google activity plus to get referrals from doctors and therapists and rehab hospitals and our clinics. So, when we have a customer experience team that does this over the phone, they interview the patient candidates. We ask for their insurance and we verify that they would likely receive reimbursement from some of the plans that are regularly reimbursing for the MyoPro, and then we get their permission to collect their medical documents. So, we have to get a doctor's written order, we get their medical histories. For example, if they had a stroke seven years ago, they are chronically paralyzed and they want to go back to work and use their arm again, that's medical necessity. Then, our reimbursement team prepares the package to submit to the insurance company and that either goes through an O&P provider or 90-plus percent of these new pipeline patients are through our direct billing channel. So, when we submit those directly to the payers, they are considered part of the pipeline. I'm very pleased with how large it has expanded here to over 300 in a quarter. We're doing 100 of these evaluations and the big change, you may recall a year ago, we used to set up screening days around the country. We get patient leads and then referring to, for example, we could do a screen day in Chicago or New York or LA, which might be put out a month or two later. So, we've compressed that timeline and we're doing it by telehealth. Our field clinical team is able to have someone if they contact us today, our customer screen team will verify their insurance and we can set up an evaluation tomorrow. It takes maybe an hour, hour and a half video conference evaluation, so we have really compressed that time and also it saves significant amounts of travel dollars. That's why moving from these in-person evaluations and doing all by telehealth has enabled us to increase that pipeline significantly even from quarter-to-quarter.

This is actually Greg Bogdanski on for Kyle. Thanks for taking questions, you guys. First off, it looks like states reopening quickly here. Last I saw there about 39 states that have reopened for elective procedures. So, if you can share your backlog, what percent of these could actually move forward right now with the in-person visits, as required as part of the fabrication process?

We're in the process of contacting these 100 patients, that's how large the backlog is now. And I know we scheduled a couple dozen already coming up here in May, and now more will come up in June as more areas open up around the country. So, we're just following those public health guidelines. But our team is anxious, as well as the patients; they've been waiting for a while, they've got their insurance authorization. And I hope that we can get to the majority of these by the end of the quarter.

That's good. Okay, that's really helpful. Thanks. And then, just for clarification, I think you mentioned that the cash burn is roughly $2.5 million in the quarter. With the reduction already spoken about, how should we think about operating expenses over the next couple of quarters?

I would say that we had $4.1 million of operating expenses in the first quarter, and Paul had mentioned in his remarks about a $500,000 reduction. So, I would look for that kind of reduction in the second quarter from the first quarter. Depending on how well things are going and how quickly states are opening up, that maybe how quickly we resumed normal operations that will depend on how long that level of stem will last. We will look to extend those savings out as long as possible. So, we try to stay on this lower operating expense rate for as long as we can.

Okay, great, thank you. And then lastly, I know it's early, but the COVID impact, of course, hit international markets first and then the U.S. Do you anticipate the demand to be staggered? In other words, are you seeing things come back internationally already with the expectation that the U.S. will follow thereafter?

We've recently shipped out several devices to Germany. As you might have seen in the media, Germany seems to have taken really good steps and has reopened more than some of the other European countries. So, we've shipped some revenue devices to Germany. The partners there, O&P partners are continuing to hold screening days and add candidates in the pipeline. We announced a couple of months ago, that statutory health insurance is covering the MyoPro for German citizens who meet the tests of medical necessity. So, that's a good thing too. I think we'll see Germany being our best international market this year.

Can you give us some sense on just when things really got disrupted for you? We able to get through February and part of March before things really took a change. Have you started to see disruptions earlier in the quarter?

It was really mid-March. I've been on a business trip, meeting with our clinical providers. We have offices in the Chicago area, flew back at the end of that week. The following week, the governor here in Massachusetts declared a shelter-at-home. Fortunately, most of our work can be done at home, so engineers brought their laptops and other fixtures home to continue their design work. Most of our clinical team in the field works from home anyway. Our department of patient advocacy can work from home. So, a lot of that work has continued. What Dave mentioned is that what was constrained was our ability to actually go visit with patients in person because we do need to do that to measure their arms, take a cast, and then return to get it fit. So, it's really been since mid-March. Now we're pleased to see the areas open up in certain states around the country.

But we should assume that pretty much everything came to a grinding halt with regards to that in April, right? I mean, there's very little customer contact in April?

Yes, that means we can't file claims for payments with the payers. There were some, but not a lot, a couple of international ones. But now that we're able to go out there, fit, and deliver devices, we will submit those claims for payments. There's a cycle that takes about 90 days, usually may take a little longer to actually convert that into cash revenue for us, so more likely to be received in Q3.

In the second quarter, we mainly rely on potential claims that have already been filed, which we hope to receive payment for through direct billing. This is why we anticipate a decrease in revenues for the second quarter, as there is limited opportunity to increase those revenues without assistance from public health. Even with that assistance, there is a lengthy process, particularly with direct billing, that must be completed before we can recognize revenues after sending a patient.

Now, you said you shift about 30 units in the quarter. So, your average price was around $33,000 or $34,000. How does that compare to the average price in the first quarter of 2019?

It was much higher. We had direct billing at 62% of revenue in this year's first quarter compared to 26% last year. As a result, the average selling price was much lower in the first quarter, probably somewhere in the range of $25,000 to $26,000.

And then, the people that have been, I assume, you had some people who have been furloughed. Are those any salespeople or clinical specialist people that you're going to need to get in touch with patients once things are opened? And how quickly can you get them back?

Yes, it's right because with our inability to actually go and visit with those patients to fit them, we had to take the step of furloughing about half of our clinical field team. We just brought one back this week. As we get more areas opened up, we will over the next month or two probably bring some of those people back.

Okay, all right. And then last thing for me. I know you've had ongoing conversations regarding the reimbursement with CMS and trying to get that quantified with any update on that in the last three months?

Well, it just continues back and forth between the O&P provider who submitted claims against the CMS rental code that we got L8701 and L8702. There's dialogue back and forth between provider relations of the DME medical contractors and the O&P provider, and no published decision yet on any coverage and payment policies. So, that continues; in the meantime, we're focusing on the Medicare Advantage plans that are now paying for this device for 35% of seniors who are on Medicare Advantage, as well as the commercial payers and VA Workers Comp plans that are regularly paying for MyoPro.

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

Well, thank you, operator. In closing, now that the shelter-in-place restrictions are being eased in some locations, we are going to catch up on delayed revenues. We are doing so with reduced operating expenses while increasing the number of cases and the reimbursement pipeline, obtaining a larger number of insurance authorizations, increasing the percentage of direct billing, and overall delivering a greater volume of product orders. So, we're addressing a large unmet need with a very valuable unique product line that we'll continue down the path towards our next milestone of cash flow breakeven. Again, thank you all very much for your time this afternoon, and be well.

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