Myomo, Inc. Q2 FY2024 Earnings Call

Good day and welcome to Myomo's Second Quarter of 2024 Earnings Call. All participants are in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Kim Golodetz with LHA. Please go ahead.

Thank you, operator, and good afternoon, everyone. This is Kim Golodetz with LHA. Welcome to the Myomo second quarter 2024 conference call. Earlier this afternoon, Myomo issued a news release announcing financial results for the three and six months ended June 30, 2024. 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 at 212-838-3777 and speak with Carolyn Curran. With me on today's call from Myomo are Paul Gudonis, Chief Executive Officer; and Dave Henry, Chief Financial Officer. 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 words 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. These additional risks, uncertainties and other factors are discussed in Myomo's filings with the Securities and Exchange Commission, including on Forms 10-K and 10-Q. Actual outcomes and results may differ materially from what's expressed in 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 Myomo's CEO, Paul Gudonis. Paul, please go ahead.

Thanks, Kim, and good afternoon everyone. Thank you for joining us today. We are delighted to report excellent financial results for the second quarter of 2024, which was the first quarter since the Medicare fees for the MyoPro powered arm braces went into effect beginning April 1st. As a result of our ability to add patients covered by standard Medicare Part B to our target market, we achieved quarterly records in revenues, additions to and the total number of patients in the patient pipeline, authorizations, and MyoPro orders and shipments. As you know, the MyoPro was reclassified by CMS into the brace benefit category as of January 1, 2024, which resulted in lump sum payments for these custom devices for patients with paralyzed arms. During the first quarter, Medicare paid claims for patients who met the agreed-upon criteria for medical necessity. However, the reimbursement amount was below the proposed allowable rate. The MyoPros delivered to patients after April 1st, the approved fees were $65,872 for the MyoPro Motion-G and $33,481 for the Motion-W model. Just to note the Motion-G represents over 90% of our unit volume, because it enables function of both the arm and the hand. We were able to recognize revenue on 74 MyoPros delivered to Medicare Part B beneficiaries during the second quarter, a population that we previously had to turn away. Shipments to these patients are in addition to the shipments to Medicare Advantage patients, VA, orthotics and prosthetics clinics and international customers, all of which contribute to growth in product revenues of 77% over the second quarter of 2023. Now Medicare Part B patients contact us directly or referred by a physician or a therapist, our direct billing provider team can engage with them. This led to a record number of 550 additions to our patient pipeline in the quarter, and 1,179 patients in the overall pipeline. As a reminder, the patients in the pipeline are those who have begun the reimbursement process. Our marketing spend is now far more efficient as we're able to expand this pipeline at a cost per candidate that was 26% lower than a year ago. During Q2, we received 213 insurance approvals, Part B medical documents, and orders from the VA system and O&P clinics, which is up 70% year-over-year. We received evidence of payments with the Medicare Part B claims much faster than we had anticipated, which, as Dave will explain, led to revenues coming in higher than our guidance. We've also seen our average selling price or ASP trend upward to more than $47,000 in the second quarter with these payments under our direct billing operation, which are typically paid at 80% of the Medicare allowable amount plus any co-pays by secondary insurance or out-of-pocket payments by patients. As for the Medicare Advantage plans, they are required to cover what standard Medicare covers, and we've seen mixed results from these payers so far. Dave will elaborate further in his remarks. We need to obtain a pre-authorization for MyoPro for patients covered by these plans. In some cases, the approval percentage has gone down as these plans try to control their utilization costs post-COVID, which, of course, is contrary to Medicare regulations. Our Chief Medical Officer works with patients to appeal certain cases at administrative hearings, but we've recently seen a positive trend with judges overturning denials by declaring that the MyoPro is not experimental or investigational, but that it is medically necessary since Medicare is covering the device. These are wins for the patients with these Medicare Advantage plans. I hope these decisions set a precedent with these payers and others. More good news is that we've seen some of these Medicare Advantage plans start to remit payments to us at the Medicare rate, which is contributing to the higher ASP. To meet the growing demand from an expanded addressable market, we've been adding capacity across the revenue cycle. We've added intake coordinators to answer inquiries, increased our reimbursement staff and licensed clinicians in the field, and added employees in our manufacturing quality and fulfillment operations. Our staff has increased from approximately 100 employees at the beginning of the year to about 160 currently. We're also finalizing plans to move to a larger production facility in the Boston area later this year to accommodate additional expected growth in shipments this year and in the future. Our international operations, primarily in Germany, continue to do well, generating over $1 million of revenue in the quarter. We also expanded the clinical and business development teams to support the expected growth in this market. With the clarity on the Medicare Part D reimbursement, we've seen keen interest from domestic O&P clinics, since this is a patient population they already serve with ankle foot orthoses and other braces. We recruited an experienced O&P channel team of business development managers and clinical trainers, and we've established a certification program for O&P clinics to become a MyoPro center of excellence. We started training some of these skilled professionals, and they plan to evaluate patient candidates in the near future. After receiving the necessary medical documentation and support reimbursement for their patients, we expect that they'll be placing their initial MyoPro orders later this year. Next month is the National Assembly for the American Orthotics and Prosthetics Association, which is the premier annual conference for the O&P industry. We've already planned to manufacture this workshop and will participate on the research panel to introduce the MyoPro to a larger audience of O&P clinicians. Our plan is to build this distribution channel over the coming months in order to add to the business produced by our own direct billing operation in 2025. Now with that overview, I'll turn the call over to our CFO, Dave Henry for a deeper dive into the quarterly financials, and I'll return to some additional comments on our business plans. Dave?

Thank you, Paul, and good afternoon, everyone. I will begin by reviewing our financial results for the second quarter. Revenue for the second quarter of 2024 was $7.5 million, entirely from product sales, marking a 77% increase compared to the same quarter last year. Total revenue rose by 26% from the previous year, which included a licensing payment from our joint venture partner in China. The growth in product revenue resulted from a 63% increase in the number of units sold year-over-year and a higher average selling price, as Medicare and certain Medicare Advantage payers aligned reimbursements for the MyoPro with CMS fees effective April 1, 2024. Revenue exceeded our initial guidance, driven by faster Medicare payment processing. In the second quarter, 47% of our revenue came from Medicare Part B patients, resulting in an average selling price of about $47,500, up 9% from the previous year. Revenue from Medicare Advantage patients represented 26% of our second-quarter earnings, down 26% year-over-year due to a tougher reimbursement landscape, with more initial claims being denied compared to previous quarters. Of the 158 units sold in the second quarter, about 20% were from fill, which refers to authorizations and orders converted to revenue within the same quarter. Most of our revenue, 78%, came from direct billing, similar to the previous year's quarter. International markets, primarily Germany, contributed 14% of our revenue in the second quarter. Since we successfully secured Medicare Part B payments from CMS as of July 1, 2024, we are recording revenue on product delivery and claims filing. The second quarter of 2024 saw record additions to both our pipeline and total pipeline, which reached 1,179 patients, a 22% year-over-year increase. We added 550 patients to the pipeline during the quarter, a growth of 35% from last year. Medicare Part B patients made up 19% of our pipeline at the end of this quarter, with 167 of the new additions being Medicare Part B patients. Our reported backlog, which reflects insurance authorizations and pending orders, stood at a record 282 patients at the end of the quarter, a 58% increase from the same quarter in 2023. This backlog includes 96 Medicare Part B patients who have been approved for delivery or have already received a MyoPro, with claims filed but not yet paid. The Medicare segment of our backlog saw a 16% sequential increase, and we achieved a record 213 authorizations and orders, increasing by 70% year-over-year. The gross margin for the second quarter was 70.8% from product sales, down from 71.8% the previous year, largely due to the absence of 100% margin licensing revenue last year, mitigated by a higher average selling price. Excluding licensing revenue, the gross margin for product sales last year was 60.5%. Our operating expenses for the second quarter were $6.4 million, reflecting a 20% increase compared to the same quarter last year, primarily due to increased hiring in clinical and reimbursement areas, and engineering staffing to expedite ongoing projects, though somewhat offset by lower stock-based compensation. Our advertising expense of $800,000 remained the same year-over-year, but the cost per pipeline ad decreased by 26% to $1,545. We reported an operating loss of $1.1 million for the second quarter, unchanged from the previous year, while the net loss was also $1.1 million, or $0.03 per share, compared to $1 million, or $0.04 per share, the previous year. Approximately $770,000 of prefunded warrants were exercised this quarter, with about $7.7 million still outstanding from our 2023 and January 2024 offerings. These prefunded warrants count as common stock equivalents under GAAP. Our adjusted EBITDA for this quarter was negative $1.2 million, compared to negative $800,000 a year ago. For the six months ending June 30, 2024, our revenue was $11.3 million, up 20% from last year, with product revenue, excluding licensing, rising 47% from the previous year’s first half. We achieved a gross margin of 67.6% year-to-date compared to 70.1% last year. The operating expenses for the first half of 2024 totaled $12.6 million, a 22% increase from the same period last year, leading to an operating loss of $5 million, compared to $3.8 million in the prior year. The net loss for this period was $5 million, or $0.13 per share, versus $3.7 million, or $0.14 per share, last year. Our adjusted EBITDA for the first half was negative $4.7 million, up from negative $3.2 million a year ago. Now, regarding our cash position, as of June 30, 2024, we had $9.0 million in cash and short-term investments. Cash utilized in operations for the second quarter was $1.9 million, compared to $0.3 million in the prior year. On July 11, 2024, we established a line of credit with Silicon Valley Bank for accounts receivable, allowing us to borrow up to $4 million based on eligible receivables. We have not yet accessed this credit line. We believe our available cash will sustain our operations for at least the next 12 months. Our shelf registration statement on Form S-3 expired in May 2024, and we plan to file a new one soon, similar in size to the previous. Looking ahead, considering our backlog and anticipated revenue from Medicare Part B patients, we expect modest sequential revenue growth in the third quarter in the range of $8.0 million to $8.5 million. This represents year-over-year growth of 58% to 67%. We plan to increase advertising spending in the latter half of the year to attract more patients, which we believe will enable us to handle a higher volume of leads. This increased expenditure will set us up for growth in the first half of 2025, though we may see some incremental revenue from this in the fourth quarter as well. We still aim for a full-year revenue target of $28 million to $30 million, supported by our clinical reimbursement and manufacturing capabilities. Our projections for the full year and third quarter suggest fourth-quarter revenue might approach $10 million. We remain confident that achieving operational cash flow is possible in the fourth quarter, although our higher advertising costs in the latter part of the year could influence this goal.

Thanks, Dave. Well looking ahead, we are prepared to serve a larger number of patients with our expanded clinical team and manufacturing capacity. And we have said we would double our output from 40 to 50 units per month at the beginning of the year, up to 80 to 100 MyoPros per month by the end of the year. I'm pleased to tell you that we produced 80 MyoPros to ship to patients and O&P customers during the month of July. So we are ahead of plan in meeting this objective. We're also increasing our investment in R&D as we continue to innovate in product development and to build upon our first-mover advantage in this market, and we expect to be making several product announcements later this fall. So with that update and overview of our plans for the rest of 2024, we're now ready to take your questions. Operator?

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

Before we turn to your questions, I want to mention that we will be participating in several investor conferences in the next two months. The Needham 9th Annual Virtual MedTech & Diagnostics one-on-one conference on Monday, August 12; the H.C. Wainwright 26th Annual Global Investment Conference being held September 9 through 11 in New York City and virtually; and the Lake Street Best Ideas Conference on September 12 in New York City. Our presentation for the H.C. Wainwright Conference will be pre-recorded and available on demand beginning September 9 at 7:00 A.M. Eastern Time. We're also available for virtual and in-person investor meetings at all of these conferences, so to arrange the meeting contact the conference organizer or alternatively contact LHA Investor Relations, who can assist you to schedule a meeting. Okay operator, we are ready for the first question.

Good afternoon, everyone. Thanks for taking the question. Just first Paul, good to hear on the 80 MyoPros in July. Maybe just speak to the confidence around increasing capacity from there and then kind of when you would expect to need to increase that footprint on manufacturing to kind of support your internal growth expectations? Is that Q4? Is it the first half of next year? Just kind of benchmark us there when you would need to increase that footprint? Thanks.

Sure. Thanks for the question, Chase. So, we've been rapidly able to expand our monthly manufacturing capacity. And as I mentioned, we're in the process of finalizing plans to move to a larger facility here in the Boston area in the suburbs. That will give us a broader footprint. We can hire more people. So, I expect that we'll have expanded capacity beyond that, 80 units per month by the fourth quarter. Now we've got the runway to expand that next year even more, possibly a second shift. So we will keep expanding capacity as the pipeline grows and the orders come in.

Got it. Thanks. And then maybe just shifting gears to the O&P opportunity. What do you have as kind of goals for that channel team that you're hiring there over the short to medium-term? Is it the number of clinics in which they have trained? Is it starting to be orders here in the back half of the year? And then just maybe on the O&P channel, when would you expect it to be material from a standpoint of kind of when that would be a material source of revenue for you guys? Is that this year yet or more of 2025, at least in the US O&P opportunity? Thank you.

Yes. This year, I see us building the channel relationships, the infrastructure, getting all the training done. This is a major commitment for a CPO working for one of these O&P clinics. They have to take three days out of the clinic in order to become really deeply experts on the MyoPro. So we are organizing classes. We started to train some of these O&P clinicians. They said we will be at the major conference next month in September. We'll sign up other O&P clinics at that conference to run what we call the COE Center of Excellence classes in the fall. Then typically after getting trained to evaluate their first patient, wait for reimbursement, place their orders and see how those patients do and make sure they get paid as expected, and then that order flow should start to build in 2025. So we don’t see a lot of material increase in orders this year, but we're really building it for next year. Now we've set a goal; I mean I'd love to see 80 to 100 of these O&P clinicians trained by the end of the year.

And then as far as how that might look from a kind of contribution to your business next year, do you have any goal as far as kind of units through that channel next year? Any way for us to think about kind of your expectations maybe during the year with 100 O&P clinic professionals trained? And then I'll hop back in queue. Thank you.

Well, we'll really be looking to see at what pace they want to bring the MyoPro to their patients. Typically, we've seen this with other new O&P products in the industry. They'll place an initial order, fit the patient, follow that patient and then place another order. The volume will start to increase over time. So I see it more as kind of linear growth rather than a step function. But over time, we ought to see more and more what I’ll call same-store sales growth, but that will take some time just because of the clinical nature of this profession.

Thank you. Good afternoon. And congratulations, really strong numbers and trends in a tough environment. So congratulations for that. Just a couple of questions. First on the gross margins back at the 70% level, which is really strong, should we think about that 70% as sort of a base from here with volumes increasing? Will that start to be a typical margin?

I think it's a good baseline for us. I think there's some gross margin expansion opportunities. I think it has more and more Medicare Advantage plans. We mentioned in the call that some of them are starting to see reimbursements at the Medicare allowable as more and more do so. We think there's opportunity to grow that to increase the ASP a little bit more which will help the gross margin. And certainly, more volume will help it as well. We're fortunate that there are not a lot of fixed costs absorbed, so it’s really an asset-light model in terms of our manufacturing. So it's just adding capacity, space and people. There’s not a lot of CapEx that's required to do that. So I think 70% is a good place.

Great. And then you gave us a lot of metrics on the pipeline and backlog. And one of the things I look at from quarter to quarter is that backlog drops. Sometimes there’s noise in it from changes in the way it's calculated or one thing or another. But it looked like in Q2 more than the typical number of drops came from the prior backlog. Now, there's a lot of moving parts right now. Anything to see there? Or is that noise? And do you agree with that statement as well?

Well, we've been within 15% to 20% sort of backlog drop rate. That’s where we've been operating recently. If you do the math, the drops came in at around 48. So that would put us at 18%-ish of the beginning backlog which is in the range that we've been seeing.

Okay. I had a higher number but perhaps there's some ample start just in there. I'll go through that offline.

Yes. So the math is 275 beginning backlog, 158 revenue units, 213 authorizations and orders, and I think with 282 ending backlog, 48 is what falls out. I think if my math is right off the top of my head.

Thank you for that feedback. I've been following the company for several years and have noticed that during election cycles, advertising can become challenging due to increased competition in pricing and limited availability. Should we consider the elections when thinking about pipeline additions, and might there be some disruptions in Q3 or possibly Q4 because of this? Or are you now large enough that this won't be an issue?

It's a very perceptive observation. We notice this all the time in the third and fourth quarters, especially in an election year because we will be competing with Medicare Advantage plan advertising later in the year. There's all the political advertising, and then holiday advertising starts to kick in. We've increased our advertising spend now to reach more people, their family members, physicians, and so on. Typically, we scale it back somewhat because prices go up and availability decreases, and then we ramp it back up after the first of the year. However, we have a large number of people in the pipeline, as well as others who are not yet in the pipeline but are interested, and our intake coordinators are following up with them. We'll maintain that flow, but we usually see this on a seasonal basis.

Okay. It seems like you should be able to build on the 550 pipeline adds you had in Q2, which set a new record for you.

We’d like to see that, yes.

Thank you. Yes. So I was just wondering as you look at the pipeline, is there anything that you're doing specifically or that you can do to increase the conversion rate just looking at it whether that's more outreach directly from the company? And then, secondly, as you plan to increase the marketing side of it how do you balance that without negatively impacting your bottom line? Maybe just talk a little bit about the puts and takes that you're thinking about as you balance that for the remainder of the year.

I am curious about your pipeline. Is there anything you are doing or can do to improve the conversion rate, such as more direct outreach from the company? Additionally, as you plan to boost marketing efforts, how do you ensure that it doesn't adversely affect your bottom line? Could you discuss some of the considerations you are weighing as you manage this balance for the rest of the year?

I believe we're seeing some improvement in the authorization rate, which you referred to as the conversion rate. If we look at the authorizations and orders divided by the beginning pipeline entering the quarter, we achieved about a 19% conversion. This is an increase from where we had been regarding pipeline conversions into backlog. The increase is largely driven by Medicare patients, as they do not stay in the pipeline as long and we avoid the reimbursement process necessary for Medicare Advantage patients. This trend may continue as more Medicare patients become a larger part of our pipeline, potentially increasing that rate over time.

Okay. Great. And then just as you're looking at the end of the year in terms of your increase in marketing how are you balancing that? How should we look at that?

We understand that balancing various factors could potentially affect us. It's something we need to manage as we aim for operating cash flow breakeven in the fourth quarter, while also focusing on revenue growth in 2025. We want to minimize any potential seasonal impacts, especially since the first quarter is typically slow for us. Our goal is to maintain momentum, which begins with making investments now and attracting more patients to our services.

Yeah. Congratulations on the guidance for the back half. It's pretty solid. Is there any seasonality in your business that we should expect in 2025? What was the seasonality historically for Myomo?

Generally, revenues in the second half of the year tend to be stronger than in the first half, although we haven't pinpointed the exact reason for this. My assumption is that patient deductibles and related expenses reset at the beginning of the year, leaving many in our patient population with minimal out-of-pocket expenses by the second half. This eases decisions regarding products like the MyoPro. Consequently, we usually see revenues rise, with the first quarter being the weakest. Growth typically continues through the rest of the year, though there may be a slight flattening in the fourth quarter compared to the third, often due to challenges with advertising during election years like we anticipate for this year's fourth quarter.

Very well. Thank you for answering my questions and wish you guys good luck. Thank you.

We have time for one more question here. And that question will come from Ben Haynor with Lake Street Capital Markets. Please go ahead.

Yes. Good afternoon, gentlemen. Thanks for taking my questions. First off for me, on the O&P channel. I appreciate the commentary there of getting to 80 to 100 folks trained by the end of the year. Any chance you can share how many have started training thus far?

We've just started that with several of the O&P clinics including Hanger. We haven't disclosed how many we have. It's just started going because we just hired this business development and clinical training team in the second quarter. So they're getting trained themselves. They're starting the training. We are riding along with some of these CPOs to assist in the evaluation work and the fittings. So it's a smaller number now, but that will start to take off in the second half of this year.

Okay. That's helpful. So clearly, Hanger is interested and recognizing they have a former executive on your Board. Is there any more color you can offer with regard to Hanger specifically?

No other than to say I've met with their CEO and senior leadership over there. They have a keen interest and it will be up to them. They've made a commitment to deploy this assign people to get trained on the device. I really don't want to say much about any one particular customer other than now we enjoy a good relationship there and we hope to both flourish and make this a win-win-win for their patients themselves as a company and of course for Myomo.

Congratulations on achieving 80 units in July. Can you share what it will take to increase that number to 125, 150, or even 200 units per month? Are there specific obstacles you face, and how challenging is it to address them or to hire the necessary resources? Any insights you could provide would be appreciated.

Well, what we've been doing is our senior leadership team has been looking across that revenue cycle, making sure we balance the growth in each of these functions to avoid bottlenecks. As we increase the advertising generate more leads inquiries, we've added more people in the intake coordinator side, then we've added more people in our department of patient efficacy for reimbursement. We’ve added more people in manufacturing, more people in our field clinical staff. Again, it's balancing all those functions so that, again, we can scale this without running either bottlenecks or having people idle. As you can see, while operating expenses went up from 20%, product revenues went up over 70%. So we're getting that type of operating leverage by doing it in a smart way.

Makes sense. So the way to think about it is where you're right now you can kind of titrate things how they need to be adjusted to kind of get the units out the door. There's nothing holding you back?

That's right, other than hiring good people, training them, making sure we can order all the components in the supply chain. Some have longer lead times than others. But again, our team is working at every stage of that revenue cycle to make sure we've got enough capacity to keep on growing.

Make sense. Congrats on all the progress, gentlemen, and thanks for taking the questions.

Well, thank you, operator. This decision by CMS to cover the MyoPro for the Part B beneficiaries supports its goal of health equity and has led to a real inflection point for our company. Everyone at Myomo is keenly aware of the life-changing benefits our device brings to patients and that’s a wonderful motivator around here. As just one example, we recently provided a MyoPro to a Medicare beneficiary who suffered a stroke some 25 years ago. Our device enabled him to perform various activities of daily living around the house that he was unable to accomplish on his own in the past. He's extremely grateful for this newfound independence and the ability to regain control over at least this part of his life. It's a whole new world for stroke survivors now and others with neurological injuries. We look forward to keep improving the lives of many more patients in these selected markets worldwide as we scale our operations. Well, thank you again for joining our call today and have a nice evening.

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