Myomo, Inc. (MYO) Earnings Call Transcript & Summary

Good day, and welcome to the Myomo Inc. First Quarter 2020 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kim Golodetz. Please go ahead.

Thank you, operator, and good afternoon, everyone. This is Kim Golodetz with LHA. Earlier today, Myomo issued a news release announcing financial results for the first quarter of 2020. If you would like to be added to the company's email distribution list to receive future announcements, please register on the company's website at myomo.com or call LHA in New York at 212-838-3777 and speak with Carolyn Curran. With me on the call today from 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, 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, including the impact of the ongoing COVID-19 pandemic on Myomo's business operations. These and additional risks, 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 the Form 10-K for the quarter ended March 31st, 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. Well, I hope that you and your families and colleagues are all well during this pandemic caused by the coronavirus and the effects that COVID-19 has had on our personal lives and the global economy. It's affected everyone and the full impact on our way of life is still unknown at this time. As I will describe today, we've taken actions to adjust Myomo's operations to deal with this changed environment, while continuing to address the large need for our powered arm braces for those with upper extremity paralysis. After I provide a business update, Dave will review our first quarter financial results and discuss our financial outlook. And following the financial update, I'll give some closing remarks. And then, we can take your questions. Our revenues in the first quarter of 2020 were $1 million, up 21% from the same quarter a year ago, and our highest first quarter revenues ever. The quarter's results reflect the strategic actions we took in 2019, which include our direct-to-patient online marketing and the emphasis on our direct billing channel where we bill the patient's insurance company directly. Direct billing increased to 62% of revenues in the quarter, up from just 26% of revenues in the same period last year. This has resulted in higher revenue per unit and higher margin per unit compared to a year ago. We also increased the size of our backlog, mainly MyoPros that have been authorized by payers, but are either in the process of being delivered to users or are awaiting payments to us. Our backlog stood at 80 units at the end of Q1, up from 53 units at the start of the quarter. Last year, we started screening patients via telehealth video conferencing to assess them as a MyoPro candidate and to move them forward into the pipeline for reimbursement in future fittings. With the travel restrictions and social distancing measures that have been put in place in response to the COVID-19 in the past two months, we've been able to continue building the front end of our pipeline by remote screenings 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 could be much more productive in the number of screenings they can conduct per day, and we save the time and cost associated with travel to perform these screenings. So in spite of the coronavirus-related shutdowns, we added a record 307 patients into the reimbursement pipeline in the quarter. And that's up 58% from the 194 adds in the fourth quarter of 2019. And 93% of the domestic cases added to the pipeline are to be directly billed by us to the health insurance company. That totaled more than 700 candidates that are now in our pipeline, up from 594 at the beginning of the year. However, we are one of our O&P clinical providers need to see the patient in person to measure and cast their arm for fabrication of the device and then we need to deliver the MyoPro in person for a perfect fit and to adjust the software settings. This has resulted in a growing backlog of units to deliver for payment and revenue recognition. And that number has grown from 80 units at the end of Q1 to 100 units as of today. This delay in being able to fabricate and delivering product to the users means that our revenues pushed out for several months, since we have to invoice the payers upon delivery, we typically have to wait 90 days or longer for payments. So far, the churn in our backlog typified by candidates who change their insurance which requires a new authorization or candidates who exit for medical reasons has been limited to just a few cases and has not noticeably increased due to the impact of COVID-19. I have to caution although it's still early in this pandemic and the social and economic effects of COVID-19 are only beginning to be realized. The good news is that some states are opening up, so our MyoPro deliveries have already restarted in certain geographies. And we expect that this trend will continue in May and June, allowing deliveries to resume in even more locations. We have instituted a new patient interaction policy as a result of COVID-19. And we've been able to procure supply of personal protective equipment in order to keep both our employees and our patients safe as we restart patient visits where public health restrictions are being eased. About a month ago, we warned about the negative impact on Q2 revenue due to the impact of COVID-19. Because of this impact, we took a number of steps to reduce our operating expenses and cash utilization. We had to make the difficult decision to eliminate some physicians, furlough other employees until we are able to deliver devices in their regions, freeze headcount, and reduce other costs such as rent, travel and outside service fees. With these actions, we've been able to reduce our operating expenses in the current quarter by over $500,000 from the prior quarter and we've reduced our spending plan for the rest of the year. And since we're unable to meet with children and their families in person to complete the pediatric MyoPro device testing, we've pushed the national launch of that product out which will save us additional cash this year. 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 of the MyoPro. For seniors on Part B Medicare, we followed CMS' direction for the MyoPro as a durable medical equipment or DME rental, and one of our O&P partners has provided additional supporting documentation on initial claim, as we await the decisions on coverage criteria and payment amount for these patients. We've also had inquiries recently in our work with the Veterans Administration. MyoPro's reimbursed for VA patients and over 40 VA Medical Centers have purchased MyoPros for veterans in their care. In fact, we just started the delivery process for several veterans with VA purchase orders in our backlog just in the past week. The VA and the Department of Defense are also funding research on the value of the MyoPro. So we're pleased with our relationship with the VA and the work we do to help our nation's veterans. With this 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 first quarter by our CFO, Dave Henry. Dave?

Thank you, Paul, and good afternoon, everyone. Revenue for the first quarter of 2020 was $1 million, which is up 21% compared with the year ago quarter. We achieved this growth through a higher average selling price, reflecting a record amount of direct billing revenue. More specifically, revenue from direct billing for the first quarter was a record 62% of total revenue, and this is up from 26% of total revenue in the prior year quarter. The increase in direct billing revenue reflects efforts to emphasize this channel compared to the same period a year ago, and we're very happy with this continued progress. Note that these direct billing sales also have a positive impact on our gross margin, which has expanded nicely. Our backlog of units, which represents insurance authorizations received, but not yet converted into revenue, was 80 units as of March 31st, 2020. This is up 51% compared with 53 units in backlog as of December 31st, 2019. Approximately 30% of the December 31st, 2019 unit backlog was converted into revenue in the first quarter and roughly 47% of our first quarter revenue units came from orders received during the quarter. The majority of these were from our O&P, VA, and international sales channels. Gross margin for the first quarter of 2020 was 68.4% compared with 65.4% for the first quarter of 2019, a gain of 300 basis points. The increase primarily reflects a higher average selling price, again owing to the higher prices in the direct billing channel. Starting in 2020, certain costs that were recorded primarily in R&D during 2019 are now being recorded in cost of revenues. This change accounts for almost all the sequential decrease in gross margin. Prior year gross margin reflects this reclassification. Operating expenses for the first quarter of 2020 were $4.1 million, an increase of 27% over the first quarter of 2019. The increase primarily reflects higher compensation costs associated with the additional sales, customer service, and reimbursement personnel, as well as higher marketing expenses and professional service expenses. Note that we expect operating expenses while the COVID-19 pandemic is ongoing will be lower due to actions we've undertaken in recent weeks. The operating loss for the first quarter of 2020 increased to $3.4 million from $2.7 million in the first quarter of 2019. Net loss for the first quarter of 2020 was $3.8 million compared with a net loss of $2.6 million for the same period of 2019. The net loss in the first quarter of 2020 includes a charge of about $200,000 related to the partial extinguishment of the company's term loan. Net loss attributable to common stockholders was $4.5 million in the first quarter of 2020 or $2.54 a share compared with $3.4 million or $6.82 per share in the prior year's first quarter. We recorded a deemed dividend in the first quarter of 2020 of approximately $671,000 to reflect the repricing of warrants originally issued in December 2017 concurrent with our February 2020 public offering. We revised our financial statements for the first quarter of 2019 to reflect the deemed dividend of approximately $798,000 on the repricing of those same warrants as a result of our public offering in February 2019. Note that per share amounts reflect the company's 1-for-30 reverse stock split effected January 30th of this year. Adjusted EBITDA for the first quarter of 2020 was a negative $3.3 million compared with a negative $2.5 million for the first quarter of 2019. Please refer to the table and the press release we issued earlier today for a reconciliation of GAAP to non-GAAP accounting. Cash and cash equivalents as of March 31st, 2020 were $13.7 million compared with $4.5 million as of December 31st, 2019. Excluding the net proceeds from our public offering in February 2020 of $13.5 million and the prepayment of 50% of the outstanding balance of our term loan concurrent with the closing of the offering, our cash burn was $2.4 million for the first quarter. Today, we also announced that we amended our term loan with Chicago Venture Partners, trying to get into a convertible note which allows us to repay the note in cash or stock at our option. This amendment includes a restructuring fee of $105,000, which was added to the outstanding balance. As of the amendment date, the outstanding balance of the term loan, including the restructuring fee, was approximately $1.851 million before reported discounts. Please refer to our 8-K filed today, which more fully describes the terms of the amendment. Turning now to our near-term expectations. The impact of COVID-19 has altered our outlook. As one would expect, public health mandates and travel restrictions are temporarily constraining our revenue, and we expect second quarter revenue to be substantially below first quarter revenue. That said, certain geographies are starting to open up to economic activity, and we are hopeful that operations will return to a more normal pace by the end of the second quarter. In the meantime, we have been building an impressive authorization backlog that is expected to put us in the position to convert some of the backlog into revenue during the third quarter. The extent to which we can accelerate revenue growth in the third quarter will depend on how quickly we can resume something closer to normal operations in the coming weeks. Turning to our cash position. Our cash burn is expected to increase substantially in the second quarter, as we expect [ the net ] usage of cash for working capital as cash inflows are being muted by the impact of COVID-19 on the business, while we expect to pay down liabilities. Despite the higher expected cash burn in the second quarter, we believe we have sufficient cash on hand to meet our operating requirements for at least the next 12 months. However, if we can presume something closer to normal operations in the coming weeks, we may require additional capital to fund our operations beyond the second quarter of 2021. Longer term, the MyoPro opportunity remains significant. We believe we are putting in place all the necessary components to accelerate revenue growth when the country gets back to work. With that overview, I'll turn the call back to Paul.

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

And before we take the first question, I want to mention that we are available for virtual investor meetings and calls during this time of more limited travel. So please contact our Investor Relations firm to set up the time. Their contact information is on today's news release and you may also find our 2019 Annual Report on the Myomo website under the Investor tab. All right, operator, we're ready for the first question.

The first question today comes from Scott Henry of ROTH Capital.

A couple of questions. I didn't hear, did you mention how many units were sold in Q1?

We [ sold 30 ] revenue units in Q1.

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

That's right. We can't -- we have an authorization, but after that, we've got to be able to fit the patient and we're not able to -- we haven't been able to complete deliveries because of the public health restrictions.

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

Okay. And is there a capacity restraint on your ability, like say, the backlog, it's very large and you get to Q3, is there -- what's your capacity to go from backlog to revenue?

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

Okay. And then kind of the final question, I just want to focus on the reimbursement pipeline. That 307 number is a big number. And the question is, it's really a two-part question. First, what does it take to become a pipeline add? And what are the boxes you have to check? Obviously, you need insurance to go to the backlog, but what does it take to become a pipeline add? Has that changed at all over time? And how do you think about that 300 number, once we get post COVID-19? Can you maintain that heightened level?

Yeah. Thanks, Scott. So our definition of what enters the pipeline hasn't changed. We had leads from patients and their families through the social media, Facebook, Google, activity plus we get referrals from doctors and therapists at rehab hospitals and O&P clinics. So then, we have a customer experience team that does this over the phone, they interview the patient candidates. We ask for their insurance. We verify that they would have likely reimbursement from some of the plans that are regularly reimbursing for the MyoPro. And then, we get their permission to collect their medical documents, so we have to get a doctor's written order. We get their medical history. For example, they had a stroke seven years ago. They are chronically paralyzed. They want to go back to work use their arm again, the medical necessity. And then, our reimbursement team prepares the package to submit to the insurance company. And that either goes through an O&P provider or 90-plus-percent of these new pipeline patients are through our direct billing channel. So then, we submit those directly to the payers. At that point, they are considered part of the pipeline. And the number, I'm very pleased with how large it has expanded here to over 300 in the quarter. We're doing a 100 of these evaluations. And the big change, you may recall a year ago or plus, we used to set up screening days around the country. We'd get patient leads and then refer them to -- for example, we're going to do a screening day in Chicago or New York or LA, but that might be put out, might be a month or two later. So we have compressed that timeline and we're doing it via telehealth. So our field clinical team is able to have someone, if they contacted us today. Our customer experience team will verify their insurance. And we can set up an evaluation tomorrow. And it takes maybe an hour, 1.5 hour video conference evaluation. So we have really compressed their time, but also are saving a significant amount of travel dollars. So that's why, moving from these in-person evaluations to doing all by telehealth has enabled us to increase that pipeline adds significantly even from quarter-to-quarter.

The next question comes from Kyle Bauser of Dougherty & Company.

This is actually Greg Bogdanski on for Kyle. First off, it looks like states are reopening quickly here. Last I saw there about 39 states that have reopened for electric procedures. Can you share of your backlog, what percent of these could actually move forward right now with the in person visit as required as part of the fabrication process?

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

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

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

And then lastly, I know there is early COVID impact [ of course in ] international markets first and then the U.S. Do you anticipate the demand to be staggered? In another words, are you seeing things come back internationally already with the expectation that the U.S. will follow thereafter?

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

[Operator Instructions] The next question today comes from Jim Sidoti of Sidoti & Company.

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

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

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

Yes, which then means we can't -- there is no claims filed for payments with the payers. And now -- there were some, but not a lot, a couple of international ones. But now that we are able to again go out there, fit and deliver devices, while submit those claims for payments. But as there is a cycle, it takes about 90 days usually, maybe a little bit longer to actually convert that into cash revenue to us. So more likely to be received in Q3.

I mean, Q2 is kind of -- Q2 is we have to live off of for the most part, things that we're in, there were potential claims that had already been filed that we could potentially get paid on from a direct billing standpoint. This is why we say that second quarter revenue is going to be down sequentially -- or down substantially, because there is not much we can -- not much we can do to grow second quarter revenues without some help from public health. But even with getting that help, we still have the cycle time, particularly if it's direct billing to get from actually fitting a patient to be actually getting paid and being able to take revenues. So this is like playing for third quarter right now to try to really accelerate third quarter as much as we can.

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

It was much higher. We had a -- direct billing was 62% of revenue in this year's first quarter, 26% last year. And so as a result, the average selling price was much lower in the first quarter. It's probably, I would say up about -- I want to say first quarter's might have been somewhere in the range of $25,000, $26,000, somewhere in that ballpark.

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

Yes, that's right, because with our inability to actually go and visit with those patients to fit [ in and so on], we had to take the step of furloughing about half of our clinical field team and we just brought one back this week. And so as we get more areas opened up and we need to visit all and do deliveries in those areas, we will over the next month or two, probably bring some of those people back.

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

Well, it just continues back and forth between the O&P provider who [ submitted this claim ]. These are first-time claims against this DME rental code that we got, L8701 and L8702. There is dialog back and forth between provider relations of the DME medical contractors and the O&P provider. And no published decision yet on any coverage and payment policies, so that continues. In the meantime, we're focusing on the Medicare Advantage plans that are now paying for this device for the 35% of seniors who are on Medicare Advantage, as well as the commercial payers, VA workers' comp plans that are regularly paying for MyoPro.

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

Well, thank you, operator. Well, in closing, now that the shelter-in-place restrictions are being eased in some locations, our ability to catch up on delayed revenues is underway and we're doing so with reduced operating expenses, while 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. So we're addressing a large unmet need with a very valuable unique product line and we continue along the path toward our next milestone of cash flow breakeven. Well, again, thank you all very much for your time this afternoon and be well.

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