Myomo, Inc. Q2 FY2020 Earnings Call

Good afternoon, everyone. And welcome to the Myomo Incorporated Second 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 also note today’s event is being recorded. And at this time, I’d like to turn the conference call over to Kim Golodetz. Please go ahead.

Thank you, Operator, and good afternoon, everyone. This is Kim Golodetz with LHA. Welcome to the Myomo second quarter 2020 financial results conference call. Earlier today Myomo issued a news release announcing financial results for the second 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 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-Q for the quarter ended June 30, 2020, which was 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. After I present a business update, Dave will review our second 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. But first I hope that you, your families and your colleagues are all well during this pandemic. COVID-19 has affected everyone and the full impact on our way of life and our businesses is still unknown. Over the past several months, we’ve taken actions to adjust Myomo’s operations and have dealt well with the initial restrictions on travel and person-to-person activity, and we’ve been safely providing our powered arm braces as states opened up. Our revenues for the second quarter of 2020 were $859,000, which was significantly better than what we had expected at the beginning of the quarter, due to the uncertainties related to COVID-19. This level of revenue was barely down just 2% from our revenues in the year-ago quarter, and year-to-date, our revenues are up nearly 10% over the same period last year. So we’ve been able to grow our business despite the short-term impact of the coronavirus. Direct billing of our products to payers in the second quarter increased by 329% year-over-year and represented 50% of revenues in the quarter. The other half of our revenues came primarily from our U.S. O&P channel partners, the VA, and Europe. And with over 85% of our new MyoPro candidates entering the pipeline as direct billing cases, we have successfully made the transition from a wholesale medical device manufacturer to a B2C direct-to-patient provider, resulting in higher revenue per unit compared to a year ago, as well as more control over the process from generation to delivery. We also increased the size of our backlog, which is defined as MyoPros that have been authorized by payers, but are either in the process of being delivered to users or awaiting payments to us. Our backlog stood at 120 units at the end of Q2, up 50% from the 80 units at the start of the quarter. Last year, we started screening patients via telehealth video conferencing to assess them as a MyoPro candidate and to move them forward into the pipeline for reimbursement and future fittings. Despite the travel restrictions and the social distancing measures that have been put in place, we’ve continued to build 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 can be much more productive in terms of the number of screens they can conduct per day and we save the time and expense associated with travel to perform these screenings. Our success is reflected in the numbers. During the second quarter, we added approximately 200 new MyoPro candidates to the reimbursement pipeline, which continues to stand at about 8,700 units, adjusting for new authorizations received and for the churn due to final denials by insurance, changes in the patient’s condition or change in their insurance or other reasons. Since the start of the year, we’ve added about 500 new candidates to the pipeline through direct-to-patient online marketing and referrals from clinicians. As states began opening up in May and June, we restarted in-person deliveries in MyoPro fittings and now have accelerated that pace of deliveries into July and August, as we are moving forward to monetize the backlog. In July, we delivered more than 40 devices and already have more than 20 scheduled for August. By comparison, we’ve recognized revenue on 54 units so far this year. That means in July and so far in August, we expect that we will deliver more units than we recognize revenue on in the first six months of the year. We expect that these recent deliveries will convert to revenue as payments are received in the coming months. We instituted a new patient interaction policy as a result of COVID-19 and have been able to procure a supply of personal protective equipment in order to keep both our employees and our patients safe as we resumed patient visits as public health restrictions are being eased. As I discussed on our last earnings call, starting in March, we took a number of steps to reduce operating expenses and cash utilization. As a result of these personnel actions and other cost reductions, operating expenses decreased sequentially by approximately $800,000. Now that we’re increasing deliveries, we are bringing back some staff members and expect travel expenses to return to more normal levels in order to provide the MyoPros to patients, so we anticipate our operating expenses will increase in the third quarter in order to generate growth in revenues from our growing backlog. Meanwhile, the number of MyoPros 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 in MyoPro. For seniors on Part D Medicare, we’ve been informed that coverage for MyoPro will be determined on a case-by-case basis upon medical necessity and we’re still waiting for the first device to be approved from claims submitted by one of our O&P channel partners. Although we are meeting with adult candidates in person for MyoPro fittings, we’ve refrained from in-person meetings with children and their families to complete the pediatric MyoPro device testing. So as I mentioned last quarter, we pushed out the national launch of that product to next year. This will save us additional cash this year and enable us to focus our resources on the adult MyoPro population. With that overview of our results and how we’ve adapted to the COVID-19 situation, we’ll move on to the financial review of the 2020 second quarter by our CFO, Dave Henry. Dave?

Thank you, Paul. Now let's discuss our financial results for the second quarter. Revenue for the second quarter of 2020 was $859,000, a slight decrease of 2% compared to the same quarter in 2019. This decline is mainly due to our inability to deliver MyoPros for much of the quarter because of the shutdowns caused by the Coronavirus pandemic. However, our higher average selling price largely balanced out the reduced number of units sold, with a notable increase in our average selling price attributed to our successful direct billing channel. We had 24 revenue units in the second quarter. Specifically, revenue from direct billing made up 50% of our total revenue and rose by 329% compared to the same quarter the previous year. We are pleased with our progress in increasing direct billing revenue. Our backlog of units, which includes insurance authorizations received but not yet recognized as revenue, stood at 120 units as of June 30, 2020, up more than 50% from 80 units on March 31, 2020. Around 20% of the backlog as of March 31, 2020 was converted into revenue in the second quarter, which is lower than previous quarters due to delayed deliveries related to COVID-19. About 70% of the backlog at the end of Q2 consists of direct billing units. Our gross margin for the second quarter was 51%, down from 57% in the same quarter last year, largely due to costs associated with revenues recognized from deliveries at the end of the quarter, which we expect to carry over into future periods, along with increased warranty reserves. Note that cost of revenues now includes certain fixed costs, such as those in our quality organization, which were previously accounted for in R&D. Operating expenses for the second quarter of 2020 totaled $3.3 million, a modest increase of 3% from the second quarter of 2019, but a 20% decrease compared to the first quarter of 2020. The year-over-year increase reflects a full quarter of compensation costs, mainly due to hiring reimbursement personnel last year and higher legal expenses, countered by reductions in payroll and other expenses related to sales, clinical, and marketing functions in response to COVID-19. As some regions begin to reopen, we anticipate that operating expenses will rise in the third quarter as we selectively reinstate professionals to address our growing patient backlog. Our operating loss for the second quarter of 2020 slightly increased to $2.8 million from $2.7 million in the same quarter last year. The net loss for the second quarter of 2020 was $3.3 million or $1.12 per share, compared to a net loss of $2.6 million or $4.50 per share during the same period in 2019. Adjusted EBITDA for the second quarter of 2020 was a negative $2.7 million, compared to a negative $2.5 million for the same period last year. For a reconciliation of GAAP to non-GAAP results, please refer to the table in today's press release. As of June 30, 2020, we had cash and cash equivalents of $10.7 million. We used $3.7 million in cash during the second quarter, which is somewhat higher than in previous quarters due to increased cash outflow for working capital as cash inflows slowed due to the effects of COVID-19, while we continued to pay down liabilities. During the quarter, we used our ATM facility, generating net proceeds of about $700,000 by issuing around 180,000 shares of common stock at an average sales price of $3.87 per share. We expect cash utilization in the third quarter to be at the lower end of our typical quarterly range of $2.4 million to $3 million, excluding any ATM proceeds. Assuming there are no renewed public health and travel restrictions due to the COVID-19 pandemic, we believe we have enough cash to meet our operational needs for at least the next 12 months. However, if restrictions are reinstated, we may need additional funds to support our operations in the latter half of 2021. In the second quarter, we modified our term loan with Chicago Venture Partners, converting it into a convertible note that gives us the option to repay in cash or stock. This amendment included a restructuring fee of $105,000, added to the outstanding balance. During the second quarter, redemptions of $800,000 by CVP were settled by issuing approximately 224,000 shares of common stock at an average price of $3.58 per share. As of June 30, 2020, the outstanding balance of the note, including the restructuring fee, was roughly $1 million. The net loss for the second quarter of 2020 contains a charge of about $348,000 for the loss on debt extinguishment due to these redemptions. Now, looking at our year-to-date financial results, revenue for the six months ending June 30, 2020 was $1.9 million, a 9% increase over the same period last year, despite COVID-19's impact. Year-to-date operating and net losses were $6.3 million and $7.1 million, respectively. The net loss for both the second quarter and the first half of 2020 includes charges of $500,000 related to the partial extinguishment of the company’s convertible note. Adjusted year-to-date EBITDA was a negative $6 million, compared to a negative $4.8 million for the same period last year. Looking ahead, despite the challenges posed by COVID-19 earlier this year, we remain optimistic about significant growth opportunities in the latter half of the year. With economies reopening, we believe Myomo’s operations will return to a more normal rhythm for the rest of the year. We have been building a substantial authorization backlog, which we intend to convert into revenue in future periods, primarily from direct billing patients. The extent to which we can boost revenue growth in the third quarter will depend on our ability to deliver MyoPros to patients and the timely reimbursements from insurers, which are beyond our control. Due to the uncertainty surrounding the timing of insurance payments, providing revenue forecasts is challenging. However, we do expect to achieve a record number of deliveries in the third quarter, presenting an opportunity for record revenues depending on when payments from insurers are received. In the long run, the MyoPro opportunity continues to be significant. We are confident that we are establishing all necessary elements to accelerate revenue growth and margin improvement as the economy fully reopens.

Thanks, Dave. As you heard us describe today, over the past five months, we quickly adjusted our business in response to the changes in personal health and economic environments. We added to our patient pipeline, and we continue to do so more cost-effectively with our telehealth approach. 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 delay in deliveries during the quarter, we’re moving aggressively to catch up with a large number of shipments from our growing backlog. Starting in July, we also increased our digital marketing activity, and we’re seeing a higher number of patient inquiries as the front end of our pipeline continues to grow. This growth in the number of candidates considering a MyoPro is a leading indicator of future revenues as we continue on the path toward cash flow breakeven. This concludes the formal part of our presentation. So, Operator, we’re ready to open the call to questions.

We have a significant number of shipments from our expanding backlog. Beginning in July, we ramped up our digital marketing efforts, leading to an increase in patient inquiries as our pipeline expands. The rise in candidates interested in a MyoPro serves as a positive sign for future revenues as we aim for cash flow breakeven. This wraps up the formal portion of our presentation. Operator, we are now ready to take questions.

Before we take the first question, I want to mention that we are available for virtual industrial meetings and calls during this time and more limited travel. So please reach out to our Investor Relations firm to set up a time. Their contact information is on today’s news release. Hey, Operator, we’re ready for the first question.

Hi. Thank you for taking the questions and for all the details provided. You mentioned the growing pipeline and noted that the backlog has increased by 50%, with July and August accounting for more than the entire first half of the year. Just for clarification, I didn’t quite understand. Were you referring to sales or backlog? I was curious if you indicated that Q3 sales could potentially exceed the total for the first half.

Well, we booked revenue on 54 units in the first half of the year, in the first six months. And then our shipments in July and August, together, totaled over 60 units and those will convert into revenue as we receive payments from the insurance payers.

So what I mentioned in my remarks, Kyle was that, given that we have a record number of deliveries, but we don’t control the timing of insurance payments, I said there was an opportunity for record revenues in the third quarter. The previous record revenue for the company was $1.5 million back in Q4 of last year. So that’s the opportunity we have. We’re doing what we can to try to grow the revenues as quickly as possible. But we don’t control the timing of insurance payments, which under direct billing is really the criteria that we’re beholden to in order to be able to record revenue.

Okay. Okay. That’s helpful. I mean either way it’s pretty exciting to already have shipped 60 units and that’s just the first two months of the quarter, you still have September, so really nice to see that update there. Shifting to direct billing, so this has been a really nice way to be able to kind of control the process and keep really nice way to be able to kind of control the process and keeping patients in the pipeline and generating better returns. I’m just kind of curious if a patient drops out from the time that they are going through this process. What are some of the key reasons for that and how is this dropout rate changed over maybe the past year or so?

So a patient might drop out of the pipeline for a number of reasons. For example, they may have another medical issue, another stroke, for example, and they need to postpone their continuation of the process. Some people change insurance. Some move. I think we saw a higher churn than usual in the second quarter due to COVID, where people might have become more hesitant about proceeding in the process. Some people or their spouses might have gone on unemployment, which might have reduced their ability to move forward here. So, fortunately, we were able to continue our online digital marketing, people were, obviously, sheltering in place, going to Facebook, going on Google, still searching for solutions. So we’re able to replace that churn pipeline with new patients coming into the process.

Got it. Got it. And regarding the Medicare opportunity, I know we’re waiting for this to eventually be material, but do you think that the device compliance rate and maybe even value proposition is higher in the younger patient population anyways or no, I mean, I know this is an opportunity that’s coming, but just kind of wondering if maybe the higher value proposition opportunities is already activated?

While we got the HCPCS codes issued back in January of 2019 that enabled Medicare Advantage plans to start paying for the device. And Medicare Advantage covers about 35% of seniors. We believe the value proposition for them is to live more safely at home and reduce the potential healthcare costs, for example, stroke survivors tend to fall more often. Because with their hemiparesis, they often have issues with an arm and a leg, so if they were carrying something, they might trip, fall and that results in head trauma, perhaps, some type of other injury. They’ve had to go readmitted to the hospital. So there are those types of savings or maybe also savings and reduction in pain medications, other reductions, for example, in Botox usage for spasticity. So these are the types of reported savings we’ve heard from patients. For the younger patients, because they are still able to work or of working age, they may be able to go back into the workforce.

Okay. Okay. Yeah. That makes sense. Well, great updates here and thanks for taking the questions.

Thanks, Kyle.

Thank you and good afternoon. A lot of encouraging trends in the quarter. I did have a couple questions, when I think about kind of the revenue model and what to do with all the leading indicators. The first one is, pipeline adds strong this quarter at 200, even stronger first quarter at 300, yeah, which one of those numbers do you think is more reflective of what we should expect going forward or is it somewhere between 200 and 300 a quarter?

Scott, we experienced significant growth in our pipeline during the first quarter. However, as the COVID pandemic began to impact operations in the second quarter, we scaled back our field staff and reduced our advertising spending to concentrate our efforts where we had regional clinical staff. This led to fewer leads coming in. In July, we reintroduced our advertising efforts, and we've noticed a robust increase in leads in the early part of the third quarter. Therefore, I believe the first quarter results are likely to be a better indication of what we can expect moving forward.

Okay. Great. Thanks for that color. And then the roughly 60 devices you expect to sell in July and August. I guess, first question is, how many of those do you think are from activity in Q1 or is it more from Q2? And second, historically, how much of those devices would get paid for in I guess Q3?

Yeah. So let me unpack that and hopefully I can answer all your questions. Our backlog typically, unless if there’s issues with a particular claim, and we do have some claims that have issues, is generally three months to six months in order for it to get paid. So I don’t know, I don’t have an answer for you as to how much of the deliveries that we’re making so far here in the third quarter came from backlog that was in existence in the first quarter versus the second quarter. But I can tell you that it’s generally three months to six months before backlog actually turns into revenue somewhere in that timeframe in that.

Okay. If I could just follow up, how was in the month of June, since you have given us July and August just to get a sense thus far?

June deliveries, I don’t have that number off the top of my head. I don’t know if you do, Paul. It was…

18 in June.

All right.

So things really paused in March, April, May. They started opening up and so we had this growing backlog and also new authorizations during the quarter. In fact, a record number of new authorizations in Q2, and so then we started delivering those in June, and now those are getting delivered in July and August. You may recall we started the calendar year with 53 units in backlog. We delivered some of those, we got new authorizations. We ended Q1 at 80 units in the backlog and then between new authorizations and deliveries we got to 120 units as of June 30th.

Another way to think about the backlog is the conversion rate, which I define as the number of units that turned into revenue compared to the beginning backlog. This quarter, the rate was low at around 20% because we couldn’t deliver anything for much of the quarter. That’s the lower end of the spectrum. The highest conversion rate we’ve seen since we started reporting backlog is around 50%.

Okay. Thank you. That’s helpful. And final question on the income statement, I was kind of surprised to see gross margins going down, given the change in channel. Is that just perhaps lower volume this quarter and should we expect that to rebound going forward?

We did some cost reclassifications, so now we have fixed costs, primarily related to our quality organization, that are included in the cost of goods sold because they mainly involve sustaining activities. During periods of low revenue, we will experience a lower gross margin due to these fixed costs in the cost of goods sold, which can be referred to as fixed overhead. However, as revenue increases, the gross margin will also improve because the contribution margin will rise while those fixed costs remain unchanged. Additionally, in the second quarter, we had a significant number of deliveries at the end of the quarter as we began to resume operations. It's important to note that under our revenue recognition policy, we do not recognize revenue until all conditions are met, which often aligns with payment. However, we must still account for the cost of revenues when we ship and when the inventory is recognized on the balance sheet.

Okay. Thanks.

There was a phenomenon that was worsened in the second quarter due to our direct billing practices. Patients are being billed directly, which means we will recognize that revenue in later periods.

Hi. Good morning. Seems like you’ve done a pretty good job adapting to a pretty crazy environment. A couple questions, you said 24 units shipped in the quarter, so average selling price works out to around $35,000. Is that correct?

That’s right. So…

Jim, although, we recognized revenue units, not necessarily shipments, again… Right. Sorry.

We would ship more units, but those won’t convert into revenue until the payments are received, for example, in this quarter.

Okay. Yeah. That kind of leads into my next question, because you said you shipped 18 units in June and I assume you didn’t get paid for any of those units and you shipped 60 units in July and August. So I mean, if you didn’t ship another unit for the rest of the year or if you just collected on the 78 units that you have out right now, you would expect to book about $2.25 million and $3.25 million, but $2.8 million in revenue. I mean does that sound reasonable?

If you’re considering the right approach, and assuming there are no issues with the claims related to those deliveries, it would depend on those units times the average selling price. I don’t have my calculator with me, but I’ll take your word for it.

Yeah.

And we still have another 60 other units in the backlog to be scheduled for delivery as well.

And I don’t think you ship units unless you’re pretty confident you’re going to get paid, right? Because it’s clearly a shipment, you’ve already got reimbursement approved, isn’t that correct?

We need to complete the delivery before we can submit a claim. However, we do have authorization from the insurance company, which provides us with a single case agreement. With that preauthorization, we are confident about receiving reimbursement, so we move forward with the delivery.

Is there a significant number of units that are shipped for which you do not receive reimbursement, or is that number fairly low?

We've implemented various programs previously, and overall, the number of units we are not reimbursed for is quite low. We are not discarding many units we have delivered. However, occasionally, we will deliver to patients even without insurance authorization when we believe it is crucial to meet their needs and tackle the reimbursement issue later.

Yeah. No. I just say, it’s pretty impressive, because if you didn’t ship another unit this year, you just collected on what you shipped, you would grow revenue 30% in a year that no one could have predicted, a pandemic that shut the world down for three months to four months. So, I think, that’s a pretty impressive statistic.

Thanks, Jim. This success is really attributed to our staff who come in, inspect the units, get them fabricated, and then deliver them to the patients. They need to conduct an in-person fitting and set all the software configurations for the device. It's been a great outcome from this collaboration.

And then last thing from me, I know you have some business in Germany. Can you just kind of give us an update on how conditions are there relative to conditions in the U.S., are patient visits up yet, are they ahead of us, are they lagging the way we are right now?

Thanks for the question. In fact, as you may know, from some of the media reports, Germany has managed this pandemic quite well. They opened up before the U.S. did. So we are shipping units to Germany. They’re getting reimbursed because the statutory health insurance there has declared the MyoPros covered for German citizens with medical necessity. In fact, on Facebook, there’s a recent TV show that ran in Germany with a brachial plexus surgeon and one of his patients wearing a MyoPro and talking to a German audience about how this has really restored motion for this individual who had been injured and lost the ability to use that arm and hand.

So I just followed up on the 18 units that were reimbursed in the quarter. How many of those came from overseas?

International revenue currently accounts for just under 10% of our overall revenue.

Okay. So it’s still a business that has a lot of room to grow?

Yes. Yeah. There’s still a growing pipeline there especially in Germany.

Ladies and gentlemen at this time I am showing no additional questions. I’d like to turn the floor back over to Paul Gudonis for closing remarks.

Oh! Thank you, Operator. Well, I want to mention that we continue to present the Myomo investment proposition at virtual conferences. We’re scheduled to present at the LD Micro 500 Virtual Event at 8:11 a.m. Eastern Time on September 2nd, and in addition, we plan to present during the week of September 14th at the H.C. Wainwright Annual Global Investment Conference. We’ll also be presenting at the Sidoti Conference in November. So, in closing, we are closely monitoring the COVID-19 situation. As restrictions have been eased in some locations, our ability to service, our backlogs is accelerating. In parallel, we’re also increasing the number of cases in the reimbursement pipeline, obtaining a larger number of insurance authorizations, increasing the percentage of direct bill patients, and overall, delivering a greater volume of product orders. We’re adjusting to meet a very large unmet need with valuable, unique product lines, while continuing along the path toward our next milestone of cash flow breakeven. Once again, thank you for your time and for your interest in Myomo.

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for joining. You may now disconnect your lines.