Earnings Call Transcript - MYO Q3 2020

Operator, Operator

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

Kim Golodetz, Investor Relations

Thank you, Operator, and good afternoon, everyone. This is Kim Golodetz with LHA. Welcome to the Myomo third quarter 2020 financial results conference call. Earlier today, Myomo issued a news release announcing financial results for the three months ended September 30, 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, may involve and are subject to certain risks and uncertainties, and other factors that may affect Myomo’s business, financial condition and operating results, including the impact of the ongoing COVID-19 pandemic. These and additional risks and uncertainties and other factors are discussed in the risk factors and other qualifications contained in Myomo’s filings with the Securities and Exchange Commission, including Form 10-Q for the quarter ended September 30, 2020 which was filed earlier this afternoon. Actual outcomes and results may differ materially from what is 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 Paul Gudonis, CEO of Myomo. Paul, please go ahead.

Paul Gudonis, CEO

Thank you, Kim, and good afternoon everyone, and thanks for joining us today. After I provide a business update, Dave will review our third 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 and that you continue to take the necessary precautions for health and safety. As you've heard us discuss on previous calls this year, Myomo will take actions to adjust our operations and we have been able to safely provide our powered arm braces to patients as states opened up this year. I'm pleased to announce that our revenues for the third quarter of 2020 reached a record level of $1.9 million, reflecting a record high number of MyoPro deliveries and payments during the quarter. Q3 revenues were up more than 200% over the year-ago quarter. Year-to-date, our revenues are up 64% over the same period last year, which represents remarkable success in growing our business despite the impact of the Coronavirus. In fact, our revenues for the first nine months of this year are equivalent to our full-year 2019 revenues. During the quarter, we also continued to benefit from our strategic shift to direct billing our products to payers. Direct billing revenues for the third quarter increased six-fold year-over-year and represented 68% of Q3 revenues. The remainder of our revenues came primarily from our U.S. O&P channel partners, the VA and Europe. 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 are awaiting payment to us. Our backlog stood at 162 units at the end of Q3, which is up 35% sequentially from 120 units at the end of Q2. Growth in the backlog was driven by 98 new authorizations and orders during the period, another quarterly record. Based on our average revenue per unit, these new authorizations and orders represent more than $3 million of future revenue as we deliver and receive payment for these MyoPros. And as we've reported in the past, our pipeline of qualified candidates has continued to steadily grow, and we've been able to successfully obtain insurance reimbursement for these patients on a case-by-case basis. The pipeline of new candidates grew during the quarter with the addition of 228 qualified patients. The total number of candidates in the insurance reimbursement process now stands at 756. We've been able to continue building this pipeline with our direct-to-patient online marketing and screening patients via telehealth video conferencing. This approach is safer for the candidates since they can be screened at home. In addition, our field staff is safe and would be much more productive in terms of the number of screens they can conduct per day. We save the time and expense associated with travel to perform these screenings in person. As states began to reopen in mid-year, we were well-positioned to provide devices to patients during the quarter. Specifically, we were able to deliver a record 97 MyoPros to patients, while we recognized revenue on 51 units. The other units are included in our backlog while we await payments under submitted insurance claims. While deliveries spiked in July as states reopened, we have already provided our scheduled more than 50 MyoPro deliveries to patients in the fourth quarter of the current year. We're able to bring back most staff members who've been furloughed earlier in the year, so that we can resume deliveries and our traveling-related expenses are returning to more normal levels in order to fit MyoPros on patients and generate growth in revenues from our growing backlog. Over the past several quarters, we've demonstrated that we now have the operating rhythm and a foundation in place to continue to scale up our revenues to achieve our breakeven goal, which we are targeting for the fourth quarter of next year. Since the Centers for Medicare and Medicaid Services, or CMS, issued new codes for the MyoPro that went into effect in January of 2019, we've been able to provide devices to patients covered by Medicare Advantage plans, which represent 35% of seniors. This number is expected to grow over time, adding to the popularity of these plans. For seniors on Part D Medicare, we've been informed that coverage for a MyoPro will be determined on a case-by-case basis, determined upon medical necessity. We're still waiting for the first device to be approved from claims submitted by one of our O&P channel partners. As directed by CMS, claims are submitted through one of the Medicare's regional administrative billing contractors, which are collectively referred to as the DME Max. These claims are currently in an appeals process to establish medical necessity based on discussions with the prescribing physician and the DME Medical Director. Unexpectedly, CMS would clarify coverage and the payment amount by now, but it seems that the COVID situation has delayed action on our code. To be in a position to directly serve and bill for Medicare patients, during Q3 we obtained certification as a Medicare provider. To do so, we established a comprehensive compliance program because we are a provider in addition to being a device manufacturer. This is a prerequisite for billing Medicare Part B and for entering into contracts with commercial payers and state Medicaid plans. We're starting the process of engaging with certain commercial and government payers to enter into contracts or to become a network provider for reimbursement. Insurance companies go through an evaluation process for new technologies, which can be lengthy in some cases, and they often use Medicare as a benchmark for determining pricing, which as I mentioned earlier is not yet set. As a result, we expect it will take some time to contract with commercial payers. In the meantime, we'll continue to work with them and patients for case-by-case approvals. I'd also like to take this opportunity to thank Dr. Brandon Green, who has served as our Chief Medical Officer for the past four years, and to welcome Dr. Harry Coleman to Myomo in this role. Dr. Coleman brings 25 years of experience in medical devices to the company, including positions involving orthotics and braces at Ottobock and Dinah Splints. He'll oversee our department for patient advocacy for reimbursement support, guide our clinical research program, and manage our scientific advisory board. One final comment about our progress in the quarter: we were issued two new patents, one for the U.S. and one for Europe. These new patents cover our proprietary approach to myoelectrically controlled multiple joints, which are necessary for a functional device for users. With these additional patents, we have now extended the life of our patent portfolio to the year 2039. With that overview of our results and how we've adapted to the COVID-19 operating environments, we'll move on to the financial review of the 2020 third quarter by our CFO, Dave Henry. Dave?

Dave Henry, CFO

Thank you, Paul. Good afternoon, everyone. And now turning to our Q3 financial results, revenue for the third quarter of 2020 was $1.9 million, which as Paul indicated was a record, and was up 218% over last year's third quarter. This was also up $1 million sequentially over the second quarter and exceeded the revenue we recorded there in the entire first half of the year. A higher average selling price, along with the sale of a record number of MyoPro units, reflected success with our direct selling channel and our marketing efforts. More specifically, we recognized revenue on 51 MyoPro units in the third quarter of 2020, an increase of 132% compared to both the third quarter of 2019. Revenue from direct billing in the third quarter was 68% of total revenue, a more than six-fold increase over last year, and up from 50% of total revenue during the second quarter of this year. We are very pleased with our success in driving direct billing revenue growth. Our backlog of units, which represents insurance authorizations received but not yet converted to revenue, stood at 162 units at September 30th, and this is up 35% from 120 units as of June 30, 2020. Approximately 30% of the June 30, 2020 unit backlog was converted into revenue in the third quarter. Approximately 85% of the quarter-end backlog is comprised of direct billing units, which compares with 70% at the end of the second quarter. Gross Margin for the third quarter was 56%, up significantly from 46% for the third quarter of 2019. The increase primarily reflects a higher ASP, partially offset by cost of revenue recognized in the quarter for shipments to patients that are expected to be recognized as revenue in future periods. We shipped 97 MyoPro units in the third quarter which means we recognized cost of goods sold on 46 more devices than we recorded revenue on. If we were able to recognize direct billing revenue on delivery, revenue would have approached $3.5 million in the third quarter and gross margin would have approached 75%. Importantly, we believe these shipment figures are more than simply a catch-up on postponed deliveries caused by the temporary suspension during much of the second quarter as a result of COVID-19. But rather, they are the outcome of efforts that began several months ago to refine our marketing strategy and to focus on our relationships with insurance companies that currently reimburse for the MyoPro. Please note that cost of revenue now includes certain fixed costs, such as for our quality organization that were previously recorded in R&D. Prior year gross margin reflects these costs. Operating expenses for the third quarter of 2020 were $3.6 million. This is a 17% increase in OpEx compared to the same quarter a year ago, which supported the 218% increase in revenue. The OpEx increase primarily reflects higher compensation expense associated with the addition of clinical field staff, customer service, and reimbursement personnel. Nearly all employees who were furloughed during the second quarter of 2020 returned to work during the third quarter, and as a result, operating expenses are expected to increase sequentially in the fourth quarter. Operating loss for the third quarter of 2020 narrowed to $2.5 million from $2.8 million in the year-ago quarter. The net loss of the third quarter of 2020 was $2.8 million or $0.70 per share, and this compares with a net loss of $2.8 million or $4.87 per share for the same period of 2019. Net loss for the 2020 quarter includes a charge of $200,000 related to the partial extinguishment of the company's convertible note. Adjusted EBITDA for the third quarter of 2020 was a negative $2.3 million, and this compares with a negative $2.7 million for the third quarter of 2019. Please see the table in today's press release for reconciliation of GAAP to non-GAAP results. Cash and cash equivalents as of September 30, 2020 were $13.3 million. We utilized $1.8 million of cash during the third quarter to fund operations, which was the lowest cash utilization level since the fourth quarter of 2017 prior to the investments we made to scale the business. We do expect cash utilization to increase in the fourth quarter; however, because we expect to pay a deposit to one of our contract manufacturing partners to support planned higher MyoPro volumes during 2021. During the third quarter, we utilized our ATM facility to generate net cash proceeds of approximately $4.4 million through the issuance of approximately 1 million shares of common stock at a weighted average sales price of $4.50 per share. With these proceeds and considering the recent repayment in full of our convertible note, we believe we have sufficient cash to fund operations through the fourth quarter of 2021, which is our target date to achieve cash flow breakeven on a quarterly basis. Assuming public health and travel restrictions are not imposed due to the spread of COVID-19, we do not expect to undertake any additional dilutive financing activities in the near term. Turning briefly to our year-to-date financial results, revenue for the nine months ended September 30, 2020 was $3.8 million, and this is up 64% over the prior year period, despite the impact of COVID-19 during the second quarter of 2020. Despite COVID-19 we have as much revenue through September as we recorded for the full year of 2019. Year-to-date operating and net losses were $8.8 million and $9.9 million respectively. The net loss year-to-date included a charge of about $700,000 related to the partial extinguishment of the company's convertible note. Year-to-date adjusted EBITDA was a negative $8.3 million compared with the negative $7.4 million in the same period a year ago. Following the imposition of travel restrictions and public health lockdowns, we are positioned for a strong fourth quarter. And as Paul noted, we have already delivered more than 50 MyoPro units since October 1st. In summary, our third quarter results represented record revenue, narrowing operating loss, and the lowest cash utilization in almost three years, which are important steps forward on the path to scaling the business in order to reach our target of cash flow breakeven on a quarterly basis by the fourth quarter of 2021. With that overview, I'll turn the call back to Paul.

Paul Gudonis, CEO

Thank you, Dave. Well, as you've heard us describe today, we quickly adjusted our business earlier this year in response to the changing personal health and economic environments. We have been able to generate record levels of revenue, deliveries, backlog, and patient pipeline during this period. We have successfully moved a larger percentage of our business through the direct billing channel, which leads to higher revenue and higher gross margin per unit. The growth in the number of candidates considering MyoPro and the size of the authorized backlog are leading indicators 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.

Operator, Operator

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

Paul Gudonis, CEO

Thank you, operator. But before we take the first question, I want to mention that we are available for virtual investor meetings and calls during this time with more limited travel. So, please contact our Investor Relations firm to set up a time. Their contact information is in our news release that went out today. We also have plans to present at several upcoming virtual conferences, including the Sidoti and the AGP conferences, both being held on November 19th. All right operator, we're ready for the first question.

Operator, Operator

The first question today comes from Kyle Bauser of Colliers Securities. Please go ahead.

Kyle Bauser, Analyst

Great. Good evening, thanks for taking my questions and really nice results here. So, a lot of updates, I'm curious on the digital marketing efforts through Facebook and Google, for example. If you have an estimate for the cost of a patient acquisition, so kind of cost per click if you will and then separately, what percent of people who click on the advertisement end up being medically qualified for MyoPro?

Paul Gudonis, CEO

We are gathering data on this. I tell you it's fluctuated widely during this election season. Facebook ads are priced on an auction basis. But they typically run a couple of hundred dollars for a good lead. Then we do these evaluations where a large majority of the candidates who do the clinical evaluation pass and then move into the pipeline. So, we'll have better data on that in a couple of months. As we review the year, we cut back on advertising back in March, as the COVID lockdown started to happen, because people started changing their social media habits, obviously doing more searches about the virus and the disease. Then we increased the advertising spend in Q3, and that led to a growth in our pipeline. So, our pipeline numbers are starting to rebound. So as I said, it's a couple hundred dollars per qualified lead and then of those, a high proportion move into the pipeline.

Kyle Bauser, Analyst

Sure, sure. Got it. I appreciate that. And remind me, the people who qualify for MyoPro, what's the percentage that actually end up getting converted and revenue is recognized?

Dave Henry, CFO

The question is once somebody gets evaluated and enters the pipeline, how many ultimately turn into revenue? That's a percentage. Obviously, we're focused on this intently and we're trying to increase it. People enter into revenue a couple of ways. First is through, whether we're able to get them authorized the first time. When they're evaluated, we collect their medical documents and then receive insurance authorization without having to go through appeal. The vast majority will have to go through appeal, and then we win a number of appeals. So long as the process is allowed to play out in full, probably the best way to answer your question is maybe to look at what's our success rate for the first time. If we get an authorization from an insurance company, somewhere around 15% of the time we will ultimately get a revenue unit out of that. After that, revenue units come from the appeals process, which is a little bit more difficult to measure.

Kyle Bauser, Analyst

Great, no, that's helpful. Appreciate that. And then just lastly, are you seeing any competition out there? I know you provided an update on your IP which extends that quite a ways out, which is great. I know locally here in Minneapolis, Bill tech has found some traction, though may or may not be directly competitive. But just any thoughts on the competitive landscape would be helpful? Thanks.

Paul Gudonis, CEO

Kyle, we haven't seen anybody really have a device like this, that is EMG powered, that’s lightweight and portable. I know the company you referred to has a device that’s based on a chair, sort of locked into a chair. So it's going to have some limited utility, but something that is useful is something you can take to work and use both arms on the job, for example. We haven't seen anybody else that has devices designed for home use, for portable use, like we have.

Kyle Bauser, Analyst

Okay, great. Hey, thanks for the updates and congrats on the quarter.

Paul Gudonis, CEO

Thank you.

Operator, Operator

Next question today comes from Scott Henry of Roth Capital. Please go ahead.

Scott Henry, Analyst

Thank you. Good afternoon and congratulations, very strong results. I do have a couple of questions as it goes through the model. The first and my numbers may be off a little bit. But first pass, it looks like in the quarter, the percent of backlog that dropped out was closer to 4% or 5% versus, it used to be up in the 15% to 20% which is a good thing. My question is, am I interpreting that right? And do you think that number is coming down? What do you think about that number?

Dave Henry, CFO

You're correct. The number that dropped is actually five, so five out of the beginning backlog of 120. That was a little under 5% that dropped out in the third quarter. I mean, we'd like to see the number stay that way. We think it will fluctuate from time to time just because people’s circumstances will be different and with such a low population, the reasons could vary widely.

Scott Henry, Analyst

Okay, thank you. And then how do you think about Q4 relative to Q3? Is it a trend? Is it just a strong quarter? I mean, how are you thinking about it?

Dave Henry, CFO

We think the quarter can be strong, as I mentioned in my remarks. If you look at the 162 units that we took revenue on in the third quarter, the conversion rate of the backlog was a little over 30%. In addition, of the 162 that are in the ending backlog at September 30, 67 of those had been delivered. So all we have to do is wait for payment on them. There’s the possibility for a good number of those to be paid in the fourth quarter. We expect the fill rate to continue to modulate down here as the direct billing percentage increases. But we believe there are opportunities for revenue growth in the fourth quarter.

Scott Henry, Analyst

Okay, that's a lot of numbers. In the quarter, you shipped 97 units and delivered 51. So, based on that, there are 46 units that were shipped but haven't been recorded in the income statement yet. Do you have a cumulative total of how many units have been shipped but haven't been recognized in the income statement?

Dave Henry, CFO

Yeah. I mentioned 67 units of the backlog have been delivered to patients, so all we're waiting on is payment.

Scott Henry, Analyst

Okay.

Dave Henry, CFO

Yes.

Scott Henry, Analyst

Thank you, Dave. And then the only other question the 230 of the reimbursement pipeline ads, it's a good number, but I think your breakeven is close to 300 units in a quarter. So obviously, that pipeline ad number has to go a lot higher. But how do you think about that pipeline ad number going forward?

Paul Gudonis, CEO

We have fine-tuned our advertising, and we've also increased the advertising spend this quarter. We expect that number to trend upward here in Q4, because we have to get to a certain number of units per quarter, per month out 12 months from now. The revenue cycle can go from six to 12 months; therefore, the front-end pipeline building we're doing this quarter and in Q1 is setting the stage for that breakeven point next year.

Scott Henry, Analyst

Okay. So we should look for that number to just sequentially climb?

Paul Gudonis, CEO

We saw over 300 in Q1. As I mentioned, we cut back, because we, like everyone else, didn't know what this environment was going to be like once the COVID restrictions came on. We were able to open that back up in the summer months.

Scott Henry, Analyst

Okay, great. Thank you for taking the questions.

Paul Gudonis, CEO

Thank you.

Dave Henry, CFO

Sure.

Operator, Operator

Next question comes from Edward Woo of Ascendiant Capital. Please go ahead.

Edward Woo, Analyst

Yeah. Congratulations on a strong quarter. My question is, how is international doing? How is the European market for you guys?

Paul Gudonis, CEO

In Europe, as you know, they've gone to more lockdowns because the Coronavirus cases have jumped significantly. Now we're getting some orders out of a couple of countries, mostly from Germany. Germany was doing better in the summertime. We estimate that international probably will be in the range of 10% to 15% of our overall revenues, just because we've seen much stronger growth in terms of units and advertising here in the U.S.

Edward Woo, Analyst

Great. And then you mentioned that you're going to spend more and fine-tune some of your advertising spending. How much cynically more than you will increase your spending over the next couple of quarters? Is it just marginally or are we talking about multiples of what you're spending now?

Paul Gudonis, CEO

Dave, would you like to address that?

Dave Henry, CFO

Yes. I would expect the advertising spend to increase because as we pull a number of folks, we're tracking towards metrics that we're trying to work backward from the number of units that we need to have in the backlog by the fourth quarter of next year in order to recognize the revenue on the units required to get to cash flow breakeven. The expectation is that the number of leads will continue to increase as we move through 2021. We know what we have to do; it's just a matter of executing at this point.

Edward Woo, Analyst

Great, well, thanks for the color and good luck. Thank you.

Operator, Operator

The next question comes from Jim Sidoti of Sidoti & Company. Please go ahead.

Jim Sidoti, Analyst

Hi, good afternoon. Can you hear me?

Paul Gudonis, CEO

Yes, sure.

Jim Sidoti, Analyst

Great. So I just want to make sure I have all my numbers straight. You said you recognized 51 units in the quarter? So based on that, it seems like the average selling price is around $38,000, is that right?

Dave Henry, CFO

That's right.

Jim Sidoti, Analyst

And how does that compare to a year ago?

Dave Henry, CFO

A year ago the ASP was, let me get my reading glasses on because my piece of paper is far smarter than I'm capable. The ASP last year was a little over $27,000.

Jim Sidoti, Analyst

Okay, so it seems like the shift to direct billing is really paying off.

Paul Gudonis, CEO

Yes. That's right, Jim. Yes, it's up about 50% over the last 12 to 18 months as we've made this shift to direct billing. Because again, we're directly billing to payers and fulfilling the devices ourselves, so we have two things working simultaneously. We're getting more pipeline, more authorizations, quarter by quarter. If you look at our numbers in Q3, we had 2.5 times the number of authorizations we had just six months earlier in Q1 of the year. We've got more units being authorized, and we're getting a higher revenue per unit. And that's why we're experiencing this amplification effect with our revenue growth.

Jim Sidoti, Analyst

And you have 162 units that you shipped that you haven't gotten paid for, is that right?

Dave Henry, CFO

That's 162 units in backlog. The backlog starts where the insurance is authorized. But that backlog includes units that have been delivered and units that have not been delivered.

Jim Sidoti, Analyst

Okay, so sorry, the number that have been delivered was 67?

Dave Henry, CFO

Of the 162, yeah.

Jim Sidoti, Analyst

So if you didn't ship a unit in the fourth quarter, you would just get paid for the units that were delivered. You're looking at revenue around $2.5 million for the fourth quarter?

Dave Henry, CFO

If you had an ASP, I'm not sure what ASP you used. But I guess I would caution that we said the revenue cycle payment from insurance companies can be anywhere from 90 to 120 days.

Jim Sidoti, Analyst

Okay, so there's no guarantee you'll get paid for all those units in Q4?

Dave Henry, CFO

That's right.

Jim Sidoti, Analyst

So sometime in the next six months, you should recognize that $2.5 million in revenue to net to be $38,000.

Dave Henry, CFO

That's right.

Jim Sidoti, Analyst

And then, last question for me. Do you think that some of the units that were shipped this quarter were units that were not pulled from the second quarter? And that this is artificially high? And if so, any idea how to quantify them?

Dave Henry, CFO

Yes. As I mentioned earlier, 38 of the 51 units that were shipped were recognized revenue on in the third quarter, came from the beginning backlog. About 25% were new units from incoming orders. Those are primarily VA, O&P and international orders.

Jim Sidoti, Analyst

Got it. All right. Thank you.

Paul Gudonis, CEO

Yep.

Operator, Operator

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

Paul Gudonis, CEO

Thank you, operator. In closing, we're closely monitoring the COVID-19 situation. As long as restrictions are eased across the country, we're able to deliver MyoPro’s to patients in our backlog and continue our strong revenue growth. At the same time, we're increasing the number of cases in the reimbursement pipeline, obtaining a record number of insurance authorizations, increasing the percentage of direct billed patients, and delivering a greater volume of product orders. We're addressing a large unmet need with a very valuable, unique product line while continuing along the path to our next milestone of cash flow breakeven. Once again, thank you for your time today everyone and for your interest in Myomo. Have a good evening.

Operator, Operator

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