Myomo, Inc. Q2 FY2021 Earnings Call

Hello, everyone, and welcome to the MedAvail 2021 Second Quarter Earnings Conference Call. My name is Bethany, and I'll be coordinating this call for you today. I will now hand the call over to your host, Caroline Paul, from Investor Relations, to begin. Caroline, over to you.

Thank you, and thank you all for participating in today's call. Joining me are Ed Kilroy, Chief Executive Officer; and Brian Schlerf, Interim Chief Financial Officer and Corporate Controller. Earlier today, MedAvail Holdings released financial results for the second quarter ended June 30, 2021. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance, or similar statements are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, the impact of COVID-19 on our business and prospects for recovery, expense management, expectations for hiring, growth in our organization and reimbursement, market opportunity and expansion, and guidance for revenue, gross margin and operating expenses in 2021 are based upon our current estimates and various assumptions. Also, management may make additional forward-looking statements in response to your questions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements and do not guarantee future performance. Accordingly, you should not place undue reliance on these statements and should not rely on them in making an investment decision without considering the risks associated with such statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2021. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 11, 2021. MedAvail Holdings disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I will turn the call over to Ed.

Thank you, Caroline. Good afternoon, everyone, and thank you for joining us. We're encouraged to report another positive quarter with sequential revenue growth from the first quarter of 2021. As a reminder, our business model has two business segments: the operation of our technology-enabled high-touch retail pharmacy using our proprietary technology and processes, known as our Retail Pharmacy Services segment; and the sale or provision of these technologies to large customers to support their own pharmacy operations, known as our Pharmacy Technology segment. Our Retail Pharmacy Services segment generated $4.5 million in revenue for the second quarter of 2021, representing a 162% year-over-year increase and a 31% increase from the first quarter of 2021. Our pharmacy technology revenues decreased 10% year-over-year in the second quarter of 2021 to $500,000. As we mentioned during our first quarter earnings call, many of our clients delayed deployments due to their focus on COVID vaccinations and attempting to resume more normal operations, which resulted in all of our first half deployments occurring in June. As such, our double-digit sequential revenue growth for the second quarter was achieved through continued organic growth of the clinics we had installed by year-end 2020. We are pleased to report that we did install 12 new clinics in June. Ten of the 12 were expansions with clients such as Oak Street Health, OptumCare, and CareMore. We remain cautiously optimistic that clinic visit volumes will return to pre-COVID levels in the back half of 2021. As with most of our new client installations, there are two steps: our physical installation and an on-site inspection by the Board of Pharmacy for the state, which allows us to begin to dispense and generate revenue. In 2020, our experience had been that the time between physical installation and first dispense was approximately a 4-week window, which we built into our plans. Due to the delays and other external pressures on the Boards of Pharmacy, they have now pushed the expectation to 8 to 12 weeks for the foreseeable future. These changes impact our ability to generate revenue from new clinics. Based on discussions with the Boards of Pharmacy, we expect these timelines to continue for at least the balance of 2021. Therefore, new clinics we deploy in the fourth quarter of 2021 are not likely to generate any appreciable revenue in this calendar year, which impacts our full year revenue outlook. As we have discussed on previous calls, our value proposition is fueled by our embedded on-site pharmacy model, in which we are viewed as a true partner to the clinics and care providers. The partnership with the clinics and care providers is focused on improving medication adherence and customer satisfaction. Our target clients all have common business models: high percentage of Medicare Advantage patients; run an at-risk model with payers so that the clinics are fully incentivized for high-quality outcomes versus the old fee-for-service model; and management systems built around high quality of care and customer service. As we have evaluated our current total installed base, it is encouraging that our growth is with clients who are aligned with these attributes. As we have enhanced our target clinic analytical capabilities, we have identified several clinics that do not meet our expectations going forward as they have begun to transition from the height of the COVID-19 period. We have decided to exit these sites prior to year-end 2021 and redeploy our valuable resources into clinics that more closely fit our target model. Therefore, between now and year-end 2021, we expect to exit approximately 10 clinics that we do not feel fit our long-term model. We view this as the removal of a small anomaly in our clinic deployment ramp, albeit one that was taking up a disproportionate amount of our resources, which we can now redeploy to greater effect in our core Medicare Advantage sites. The decision to withdraw from these approximately 10 clinics does not improve expectation of deploying a minimum of 45 new clinics with SpotRx in 2021. With these withdrawals, we have reset our base of clinics, and we feel that all of the clinics in our pipeline are aligned with our key criteria. Demand for our solution remains strong in the states where we are currently operating, including Arizona, California, Michigan and Florida. Regarding our 2021 outlook, we are encouraged to see most of our clinic partners moving back to more normal operations. As a result, in July, we saw monthly sequential retail pharmacy services net revenue growth of 7% compared to June. However, while the business continues to grow robustly, we are cautious that clinics will return to pre-COVID volume levels in the second half of 2021. We have encountered unanticipated headwinds with the timing of Boards of Pharmacy regulatory approvals, which I described in our decision to withdraw from approximately 10 clinics between now and year-end 2021. As a result, we are adjusting our full year net revenue guidance to be at least $21 million in full year net revenue compared to our previous guidance of $27 million to $31 million. Excluding the one-time revenue recognition adjustment in 2020 associated with an old large customer agreement, we expect to grow over 100% this year and expect to maintain that growth rate in 2022, assuming the world returns to its pre-COVID levels in due course. Turning to gross margins, we experienced a reduction in gross margins from the same period of the prior year. The decrease in year-over-year margins is primarily due to a lower contribution from our Pharmacy Technology segment. The margin in our year-over-year Retail Pharmacy Services segment was relatively flat. We continue to focus on improving our gross margins through the balance of 2021, driven by the initiatives we have previously discussed such as continued reduction in the cost of delivery and improved procurement terms. Over the long term, our model is highly scalable and repeatable as we expand to additional markets in new regions and within existing regions. You'll recall that our cost structure works to our advantage as we do not have to carry the overhead cost of the large retail store footprint that traditional pharmacy operations have. We remain excited to be entering the important Florida region in the second half of 2021 and believe this further demonstrates the highly scalable and repeatable nature of our business model and the potential for future growth in target markets across the U.S. In addition, as we have discussed previously, Texas remains a key market for our strategic clients in MedAvail. We are pleased to announce that at the August 3 Texas Board of Pharmacy Meeting, permanent rules were passed that allow MedAvail to widely deploy our proprietary MedCenter technology throughout the state. In addition to the meaningful progress we have made on geographic expansion through our recent business development efforts, we are also pleased to announce new partnership opportunities in both our retail pharmacy services and Pharmacy Technology Solutions segments. We were recently honored to have been selected by Zipdrug, a wholly owned subsidiary of Anthem, to participate in their program, which connects Medicare Advantage patients with pharmacies that drive the best possible adherence for the lowest cost. Zipdrug solutions connect many consumers with chronic conditions to these high-performing independent pharmacies that have a proven track record of providing impactful clinic care with higher patient adherence rates. In the Tucson area, where thousands of lives are covered by the PBM IngenioRx, SpotRx will be serving as Zipdrug's only preferred pharmacy. IngenioRx members in the Tucson area utilizing retail pharmacies considered to be low performing or out of network will be able to be connected by Zipdrug with SpotRx to transfer their medications should they wish to. SpotRx is also working with Zipdrug in Southern California as one of several preferred pharmacies. Our partnership with Zipdrug represents a significant milestone, underscoring our ability to meet important quality and performance thresholds to be selected as a partner pharmacy. Zipdrug's pharmacy network is currently available in a number of states, including California, Arizona, and Florida. We are looking forward to expanding our partnership with Zipdrug in the coming months. Turning to our Pharmacy Technology Solutions segment, we are delighted to announce that we have begun the integration of Epic's pharmacy system software with Medavail software. The Epic EHR integration will allow Epic customers to take advantage of the seamless integration with our MedCenter technology and deploy our proprietary technology in an expedited manner. The integration further enhances our pharmacy technology value proposition. Providence, one of the largest healthcare systems in the nation, has an initial agreement for five MedAvail MedCenters targeted to be deployed in late 2021 based upon the completion of the Epic EHR integration through its new technology agreement with MedAvail. In closing, we delivered another quarter of strong retail pharmacy services growth, and we remain focused on executing against the opportunities ahead. I would like to reiterate that excluding the one-time revenue recognition associated with a large customer agreement in 2020, we expect to deliver revenue growth in excess of 100% in 2021, and expect to maintain this top line growth rate in 2022, given the demand we see for our offerings and our ongoing expansions into new geographies.

Thank you, Ed. Turning to our Q2 results. Net revenue for the three months ended June 30, 2021, was $5 million, a 118% increase from $2.3 million in the same period of the prior year. These results were driven by a 162% increase in retail pharmacy services sales, which was partially offset by a 10% decline in our pharmacy technology sales. As we have indicated in the past, pharmacy technology sales can be variable from quarter to quarter due in large part to customer purchasing patterns. As Ed mentioned, during the second quarter, we deployed 12 MedCenters in the Retail Pharmacy Services segment compared to 7 in the second quarter of 2020. Gross margin for the second quarter of 2021 was 3% as compared to 19% in the corresponding prior year period. The decrease in our gross margin year-over-year is primarily due to less contribution from our Pharmacy Technology segment, noting the sale of 7 MedCenters in Q2 2020 versus 3 in Q2 2021. Total operating expenses for the quarter of 2021 were $10.6 million, a 59% increase from $6.7 million in the second quarter of 2020. This expected increase in operating expenses was driven primarily by investments in personnel, facilities and other expenses necessary for the continued build-out of our operating footprint, including the launch of operations in Florida. Additionally, we continue to make accelerated investments to automate additional workflows important to our customer service capabilities, including our investment in compliance packaging. Adjusted EBITDA, which we calculate by adding back interest expense, depreciation and amortization, stock-based compensation, and exclude nonrecurring expenses and other income to net loss, was a loss of $9.7 million in the second quarter of 2021 compared to a loss of $4.6 million in the second quarter of 2020, reflecting the various initiatives and investments in growth you have heard us talk about. We ended the second quarter of 2021 with $48.7 million of cash and cash equivalents. We now have approximately 32.6 million shares of common stock outstanding, and we expect to have a weighted average share count for the third quarter of approximately 32.9 million shares. Turning to our outlook for 2021, we are now expecting at least $21 million in net revenue compared to our previous guidance of $27 million to $31 million. As Ed mentioned, while we encountered some unanticipated headwinds from the timing of regulatory approvals and our decision to withdraw from 10 existing clinic sites before year-end 2021, we continue to anticipate 45 new in-clinic deployments this year. Regarding our gross margin outlook, we remain focused on improving our gross margins throughout the balance of 2021 as we continue to execute on the strategies we have previously discussed.

Thank you, Brian. In closing, our unique pharmacy model continues to resonate in the market as we drive strong revenue growth. We are building upon key enterprise relationships and making meaningful progress on several business development and strategic partnership initiatives. These drivers coupled with the tailwinds of value-based care initiatives in a large and rapidly growing Medicare population provide long-term tailwinds to our business. I'd like to thank our partners, team members and shareholders for their continued support as we work to transform the pharmacy market for patients and our partners. With that, we'll now open it up to questions. Operator?

The first question comes from Charles Rhyee of Cowen.

Yes, Ed, I want to talk about the 10 sites being closed down. You mentioned that during your review, these sites were not aligned with your target model. Can you explain what is not aligned? What has changed at these sites that led to this decision? Additionally, how often do you conduct these reviews or are you planning to do them more frequently?

Thank you, Charles. The 10 sites we are reviewing have been part of our portfolio for over a year, initially brought on during the COVID crisis. These locations have a combination of Medicare and commercial pay, with a current emphasis on a fee-for-service model for Medicare. However, we've found that this model does not generate the level of traction we need for growth at each clinic. Therefore, we made the decision to evaluate our strategy. We conduct monthly reviews of our clinics, and after this assessment, we believe that the sites we have currently deployed and those in the pipeline are well aligned with our future model. This is supported by the fact that 10 of the 12 sites we launched in June are with clients that fit our model effectively.

Can I follow up by asking if these were sites you entered last year during COVID? If you noticed at that time that the mix was largely Medicare fee-for-service, why did you choose to open these clinics?

Well, the belief at the time when we were working with the clients was that we could make it work. However, as we delved deeper into it, considering the model and how they operate their business, I would point to clinics that are operating at risk or have a significant Medicare Advantage presence. They have management systems and incentives for their teams that align closely with what we do. In this scenario, the fee-for-service model allows practitioners a bit more freedom to make their own decisions. Therefore, as we evaluate our core customer base, we are currently expanding with clients like Oak Street, Cano, OptumCare, and CareMore. We are confident that we fit extremely well with them.

Okay. And then when we look at the revenue change in the revenue guidance, obviously, it's pretty significant here. Let's take the top end of the old range. So let's say $10 million. If we were to break down that between the impact of the 10 sites that are being shut down and redeployed and then compare that with the delays in pharmacy board approvals. How would you break that split in sort of revenue impact?

I would say that when we look at it, Charles, what we see is of the approximate reduction that you're talking about, half of it is us staring at our clients returning back to pre-COVID volume levels over the back half of the year and the other half is associated with the clinic access as well as the delays by the Board's of Pharmacy.

Okay. When you mentioned 100% growth in '21, that refers to the remaining sites after excluding the 10 sites. So you are indicating that for the remaining sites, there is a 100% growth in '21. Additionally, you mentioned you expect 100% growth in '22. Is that growth solely from those sites and does it not account for the new sites coming online, or is that the overall expectation for '22?

We're saying that we expect for '22 that we will be growing at the same level and we are growing in '21. So in excess of 100%. In '21, what we're saying is that when you look at our revenue from '20, which when we exclude the $4 million accounting adjustment we had on the revenue line, will more than grow 100% year-to-year from a net revenue perspective.

Okay. So then your comments around '22 is suggesting factoring that we're going to end the year with 45 deployments and then whatever deployments are going to happen next year as well?

Yes. We are...

Can I...

Sorry, go ahead.

I guess my question is about Florida and Texas. Is the time it takes to ramp up those sites in Florida more of a benefit for 2023 in terms of top line revenue? And considering the impact of COVID, especially in Florida and Texas, are you experiencing any delays in the deployments? Any discussions with Cano, the other group you have a contract with?

Regarding our Florida deployments, we plan to launch late in the third quarter or early in the fourth quarter with the sites we've mentioned. We remain optimistic about the openings in Florida during the latter part of the second half of this year. However, there will be minimal revenue contribution from these sites this year since they will only be operational for a few months. This is typical for the launch of such sites. In some states, we have 8- to 12-week intervals where we need to wait for the Board of Pharmacy to conduct on-site inspections before we can start dispensing medications and attracting customers, which has impacted this year. Nevertheless, Cano and the other Florida sites we deploy will positively influence our performance in 2022. As for the COVID situation, we are cautiously optimistic that we will return to pre-COVID levels in the latter half of this year, but we cannot accurately predict that due to the current circumstances.

Okay. And maybe just one last clarification for me. So if the guidance is now, we're expecting at least $21 million for '21, does your commentary basically imply we should expect from next year at least $42 million in revenue? Is that because I'm thinking to account for that $4 million?

We're not providing the '22 guidance yet. We're expecting next year to be growing at in excess of 100% as well, but we've not provided guidance for the year.

Okay. So you're saying in excess of, so at least 100%. But at this point, there's no fixed number.

Correct.

The next question comes from Frank Takkinen of Lake Street.

Wanted to start on site activity a little bit. Of the 12 sites that you deployed in the quarter, what portion of those are actively dispensing given the pharmacy board delays? And then can you speak to the cadence of the remaining 30 or so deployments in the back half of the year, Q3 versus Q4, to get to your 45 guide?

So, Frank, with regards to the ones we deployed in early June, right now, we've got approximately half of those dispensing or just started very recently. And then the others are still to be done. With regards to the quarterly deployments, we haven't broken the quarterly deployments for the back half of the year. But as we said, we remain committed to deploying 45 new sites in 2021. We have talked about Cano and Access Health that we will be going live late Q3 and early Q4 with those sites as we move into Florida.

Got it. That's helpful. And then thinking about when you did the deep dive on the current MedCenters out there, any change in your thought process to the core MedCenter clinics, not the 10 that are being closed down, but the other clinics on their potential to get to that $1 million per MedCenter run rate that we've spoken to in previous calls?

No. No change. In the sites where we see we've got a very close alignment, we see that the $1 million per clinic as very achievable for our business, and that's what we're executing to.

Got it. Okay. And then I just wanted to ask a little bit more broadly speaking just about the model in general. Obviously, a little bit of a noisy quarter, quite a few moving pieces. But just wanted to rehash your thinking. I mean, you talked a lot of it in the closing remarks, but I just wanted you to kind of think through the model with us and given all the learnings that you've experienced in COVID here, pharmacy operations board, and some of the non-core MedCenters that are closing. Has your long-term idea of the model changed fundamentally at all? Or is this more of a speed bump reset and then start to build on the MedCenter base more meaningfully in 2022, and you get to a more normalized strategy execution?

Our view of the model has not changed. As I mentioned in the call, demand for the solution is extremely strong. We're expanding with chains and clinics that are a great fit with our model, delivering on our commitment around better adherence scores and high levels of satisfaction. So the answer is absolutely not. We have not changed. In fact, if anything, we've strengthened. We did need to make a decision on a set of clinics that, quite frankly, when we looked at them, we were putting a lot of resources into driving them. Long term, they just weren't going to be a fit in our view, and we just have too much demand in other places that we wanted to reallocate those resources.

We have no further questions. So I'll hand the call back to Ed to conclude with closing remarks.

Thank you, operator, and thanks, everyone, for joining us today, and have a great evening.

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.