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

Good afternoon, and welcome to Sidoti & Company's January Small Cap Conference. Our next company presenting will be Myomo. With us, we have the CEO, Paul Gudonis; and the CFO, Dave Henry. It's a half-hour presentation, we should have a few minutes at the end for Q&A. So if you do have a question, you can type them into the Q&A tab at the bottom of your screen. And with that, it's all yours, Paul. Thank you.

Thank you, Jim, and good afternoon, everyone. I'm pleased to introduce Myomo, My Own Motion to you. Here's our safe harbor statement because we will be making forward-looking statements here during the course of our presentation. So our company designs, manufactures, provides the MyoPro, which is a wearable medical robotic device to restore function in the paralyzed arms of individuals who suffered a stroke, spinal cord injury, brachial plexus shoulder nerve injury and other types of conditions. It's a lightweight portable device that enables people to perform activities of daily living, and it's the only commercially available device of its type. It's registered with the FDA in United States. We have a CE Mark for Europe. And as you'll see, we're getting these devices reimbursed, and we've got a growing business that we've demonstrated over the last several years. So we are the market leader in this new product category. This is a large unmet need. The patient population with chronic arm paralysis just in United States numbers 3 million. And due to the number of strokes alone in the United States, it's a 0.25 million new candidates added to this pipeline every year, and the worldwide prevalence is about 1% of the population. We have an experienced management team that's been scaling this business despite COVID in 2020. Revenues were up almost 100%, and for the first 3 quarters of last year, up 159%. We've been demonstrating strong candidate pipeline growth, record revenues, over $6 million in our backlog. We've been emphasizing our direct billing channel, where we actually bill the payers ourselves and provide the device. That's resulted in higher average selling prices and gross margins. We have a strong cash position, as Dave, our CFO, will describe in a few minutes here. We also had some significant news over the last couple of weeks here. We announced progress on insurance reimbursement issues. Back in our Q3 conference call in mid-November, we announced that a major payer, which had a track record of authorizing units and then paying for them upon our delivery, they started denying claims post-delivery. We appealed those. We announce now that 90% of those claims have been paid in part or full, others are in the appeals process. The payer has told us that they are working on internal processing fix to avoid this issue going forward even though their system keeps kicking out new claims, but we continue to receive pre-authorizations, and we continue to fit beneficiaries of this payer to receive a MyoPro. We executed an amendment to China JV agreement that we had initially entered into last year. As a result of that, we're going to be getting $2.7 million in upfront license payments. Here in the first quarter launched the joint venture with -- providing technology and training to the joint venture staff there to sell MyoPro units in China. And we recently announced the enhanced MyoPro 2+ version of our current product line. And this features 3D printing of the orthotic components. We're introducing digital scanning via telehealth call to measure patients, thereby avoiding a trip to actually take a cast of the patient's arms, and we're actually moving this to an in-house fabrication to reduce our overall costs and expand our cycle times here. And again, we're also reducing travel and personnel expenses associated with this remote measurement. It's all part of what I call the digital transformation of our operations. Key themes being faster, lower cost, more convenient. In the past, our lead generation needs to be done with in-person hospital presentations, looking for referrals from physicians and therapists. A couple of years ago, we moved to direct-to-patient online marketing. As a result, our pipeline has been growing significantly in a cost-effective manner with that type of marketing. The patient evaluations used to be done at an in-person screening day. We moved to telehealth evaluations even before COVID, that just accelerated it. Now we do a majority of our evaluations online. With this product measurement approach, instead of doing in-person casting, we'll be shipping a briefcase with a scanner to the patient's home. They just press the Go button and one of our clinicians will walk them through a remote measurement, sending out those measurements to our 3D printing capability, so we can now accelerate the time for developing that device for them. And then the formerly outsourced manual process for this orthotic fabrication is going to be done in-house with 3D printing. And we continue then to deliver the device in person and train occupational therapists to work with these patients to learn how to use their new MyoPro, but we're doing more and more online with telehealth follow-up calls. And now we're getting cloud-based data collection from the devices so we can provide dashboards to the patients and their therapists, similar to what a Fitbit would do, for example, for a user. This is a large market, and I'll go through how we size it. If you know 100 people, you probably know someone who needs a MyoPro because of all these neurological injuries. For example, just in the United States with stroke, about 800,000 new incidences a year. Now about 20%, 30% of these individuals unfortunately die from this hemorrhage or blood clot. Others go into therapy, because typically what happens is the damage of the motor cortex paralyzes the other side of the body. Now some people recover by going through rehab therapy, but after 6 to 12 months, about 0.25 million of these individuals every year basically enter the prevalence population. They're told, you can't get any better. You've plateaued, get used to never using your arm and hand again for the rest of your life. And we're showing that that doesn't have to be the case anymore. So this prevalence population is about 3 million in the United States. These indications, stroke, spinal cord, brachial plexus, TBI. We've helped veterans who've been injured due to an IED, for example, in Iraq, CP and other conditions. And then we narrow down this population through our target market. You've got to be living at home because if you're in a nursing home, insurance won't pay for this. Have to be medically qualified, so we do an online evaluation of these patients with a very strict set of criteria. And you have to have insurance that will pay for this. We've got a growing number of payers, which I will cover in more detail, covering the device. And then patients have to be interested. So we narrow it down. We believe our target market is about 10% of these 3 million individuals, that's still 300,000. And at a $35,000 ASP, it's a significant market opportunity. We're selling a couple of hundred devices a year. So we're just skimming a deep pool of patients, and our goal is the market penetration to expand our revenues and help the lives of more patients. As I mentioned, we address an unmet need that the existing upper extremity treatments don't deal with. People try occupational therapy, they try other types of devices, stationary robots, Botox or baclofen, if you have what's called spasticity. And with all these chronic patients -- but what they really need is a lightweight device that they can use at home, for -- it's a use for -- of activities of daily living. And I'll give you an example of some of our users. So Bettina, when she was 15, this German woman had a skiing accident. Left her with a shoulder nerve, what we call brachial plexus injury. She's had a dead arm for 20 years. It's been painful, but not useless. She was going to have it amputated and get a prosthetic arm instead. She learned about the MyoPro, we saved her arm. She can use both arms again for the first time in 20 years with her device. Lucinda had a brain tumor who successfully had an operation to remove the brain tumor, but the bleeding led to a hemorrhagic stroke, left her partially paralyzed. She can now cook, bake again using both arms with her MyoPro. Igal is a professor who had a stroke at age 48. Four years, not able to use his arm. With the MyoPro, got this covered by insurance. He's now cooking for his family. And Dave is a veteran, had had a stroke 7 years earlier. The arm had been paralyzed and the VA covered this for him and other veterans, so he can use both arms for his woodworking in his retirement career. In terms of our positioning in this market, we are at the center of 3 very exciting growth fields: Neuroscience, Robotics and Software. So we have a proprietary computer brain interface with our EMG sensors. These types of devices weren't feasible years ago because you needed really strong microprocessors, small batteries, motors, lightweight materials. We have an extensive patent portfolio, 18 patents for the U.S., Europe, Japan and new recent ones in China. These now extend our patent portfolio out to the year 2039 as we build an IP wall around our technology. And the way it works is, if I asked you to, for example, pick up a cup to have a drink or feed yourself, you would send a signal from the motor cortex through your spinal cord, central nervous system into your arm. And if you're a healthy individual, your arm would respond, you can open and close your hand, feed yourself. However, these individuals who have had this type of nerve damage or neuron damage in the brain typically have an attenuated signal, so maybe less than 1% of what an able-bodied individual has. So therefore, they struggle. They can't move that arm. They can't feed themselves. However, just thinking about making that motion generates enough signal, we call it the electromyogram signal, emitted from the muscle in the arm and in the hand, that we can amplify with our sensors, which just are built into the device, rest non-invasively on the surface of the skin. These can amplify the signal by 100,000x, we've gotten so good at it. We've got onboard signal processing capability, small motors, and we create that type of movement, what we call My Own Motion. We're based in Boston, the technology was spun out of MIT, working with staff at Harvard Medical School. In terms of competitive positioning, we're part of the multibillion-dollar orthotics and prosthetics industry. Prosthetics are for amputees. Pretty mature business, with so many people who have lost a limb, and they're both upper and lower limb products. Orthotics, which is the clinical term for braces, is where we're positioned. If you look at the lower limb paralysis, if you've got some type of impairment, a foot drop, you need stance control braces, there are exoskeletons for paraplegics. There are wheelchairs for spinal cord injuries. So lots of options for lower body paralysis. There's nothing for the arm and hand. We've got the only commercially available devices to restore this type of function for home use, and that's why we are focusing as a company on being best-in-class in penetrating this very large market for this device. We've got some good tailwinds behind us. There's already a large -- a growing pool of candidates because stroke incidence increases with an aging population. Underlying health conditions, such as diabetes, high blood pressure, tend to be precursors to a stroke and those are just increasing. There's been this move and the pandemic has accelerated it from centralized to decentralized patient care. People can use our devices at home. Also people are substituting in-person visits with telehealth sessions enabled by broadband internet. And in the past, individuals would look to a clinician, a doctor or a therapist, someone to make a recommendation. Now if a family member of yours had a stroke or other type of injury, what would you do? You'd be going online searching for solutions, and this is why we shifted our education activity to direct-to-patient marketing. So we're on Facebook, Google, other online platforms. And our overarching strategic goal now is market penetration. Improve the lives of a growing number of patients each year, increase our market awareness. We've got a very cost-effective customer acquisition cost, a couple of thousand dollars to add a candidate to the pipeline. As I mentioned, our ASP is running about $35,000 with 70% gross margins. You've seen how we are introducing digital technologies to accelerate our cycle times, reduce costs. We've announced over the past year, we've had several dozen new payers reimburse the MyoPro for the first time, and we're increasing our market penetration in selected international markets. And the way we go to market, and there's several steps to obtaining our device, first, we start with the lead generation and evaluate the patients. Then we go through the reimbursement process headed up by our chief medical officer and his team. And then once we get an authorization, we custom fabricate the MyoPro. We outsource the robotic kits to Cogmedix, which they manufacture in large quantities for us, and then each of these are custom fabricated. They're now moving, as I said, from the traditional process of O&P to 3D printing. Our team then delivers these or an orthotics and prosthetics practice does. We then bill the insurance company and receive payments. We fill the pipeline at the front end of the whole process here with our online marketing, social media. For example, Sara here, had a paralyzed arm for 6 years from a hit-and-run motorcycle accident. She got her MyoPro. She's on TikTok, YouTube. You can see her playing the electric guitar, it has 700,000 likes, 100,000 followers now. And then we moved to telehealth evaluations to speed up the process and make it more convenient for patients. On the reimbursement side here, we're getting commercial payers to pay for this on a case-by-case basis. The military started paying for this several years ago and over 40 medical centers in the VA have covered this for veterans. And then we had a major milestone in January 2019. We got our own HCPCS or billing codes for the MyoPro product line. As a result, we've been able to bill for Medicare patients, their Medicare Advantage plans, and that's about 40% of seniors, so that's been a growing part of our revenue. And then for Part B Medicare, we're still in discussions with CMS to obtain coverage there. That's been delayed between COVID, change in administration and so on, so we plan to continue those discussions this year. Hopefully, we'll get a resolution so we can serve those Part B patients as well. We are accredited as a Medicare provider so that when and if we get Part B coverage, we can serve those patients and bill Medicare directly. And then on the international front, we are in the U.S., Canada. We have a CE Mark for Europe. Our biggest market there is Germany, 90 million population, significant market need there as well. We've got a strong distribution channel of local O&P providers. And we've been successful in having statutory health insurance, with payers covering 52% of the population paying for the device, and so we are expanding our presence there in Germany. And Dave, I'll have you talk about where we are with China.

Sure. So a week or so ago, we announced that we amended our joint venture agreement with Beijing Ryzur Medical in China. We entered into that agreement originally in January of 2021. In the intervening 12 months or so, we -- the JV company got established. We agreed with Ryzur on the business plan for the JV. Ryzur finalized the funding commitment from a third investor Chinaleaf, which is affiliated with Shanghai Electric. And so we had to -- as a result of bringing that party in, we needed to amend the JV agreement. The announcement a couple of weeks ago was that it was finalized as well as executing the technology license and trademark license agreements. So we're making progress and getting ready to start operations in China. Next step is to be paying our license fee of $2.7 million. That's not coming upfront, instead in a couple of different tranches. And we will hopefully receive that by the end of the first quarter according to the contractual terms, and that's a non-dilutive source of capital. Moving on to our revenues. We are continuing to grow the direct billing channel, that represents more than 80% of revenue, as you can see by the blue bar. That has been cannibalizing the gray bar, which is the O&P and VA channels, so it's more of the O&P channel that's getting cannibalized. We continue to accept referrals and we continue to want to do business through VAs, and we'll always do at least 10 or so devices a month and provide those to VA hospitals. And international is growing in dollar terms, that is roughly about 10% of our overall revenues. Revenue recognition on those top 2 bars is based on the contractual terms, either delivery or upon shipment. And then for the direct billing channel, it's generally upon payment, but we recognize revenue for certain insurers upon delivery where we have contractual payment terms. And we -- our announcements at the -- about a week ago was that we had one insurer that was denying claims after we've received authorization and after we had delivered. That's very unusual. With that announcement, we said that about 90% of those claims that were outstanding at the time in November had been paid, either in whole or in part. And our intention was to not change our revenue recognition practice at this time because even though the insurer continues to deny these claims after service, we continue to be paid. So the impact right now is more an extension of our AR aging because we have to go an extra step to get paid with that insurer. But revenue continues to be -- assumed to be collectible, so we'll continue to recognize revenue on delivery until something else changes. Moving on to our key metrics pipeline and backlog. These are the nearer and longer-term indicators of revenue. Pipeline represents those patients where we have received or have completed a successful telehealth evaluation, but we have not received insurance authorization yet. That pipeline stood at 920 patients at the end of the third quarter, with 331 adds to the pipeline. An authorization will decrement the pipeline and you enter the backlog after that. Backlog represents those patients that we have received insurance authorization but have not taken revenue yet. In third quarter, that represented a record 177 patients, and that growth in backlog has come because we are growing the number of authorizations each quarter and both second and third quarters, now up over 130 authorizations per quarter. And as a result, the revenue units in each quarter are steadily climbing, up to 102 revenue units in the third quarter. And with that 102 revenue units came a record level of revenue in the third quarter of $4.3 million. That compared to just over $2 million in the third quarter a year ago, so substantial revenue growth. That insurance issue that I'd mentioned earlier gave us pause as we talked about what our potential fourth quarter revenues could be. Fourth quarter revenue a year ago was $3.7 million. With the backlog, we have the ability to potentially exceed that, but the issues that we were dealing with in the third quarter included that reimbursement issue with our insurer and also some supply chain issues where we were down capacity by about 50% for about 4 or 5 weeks beginning in the fourth quarter. And we did a good job recovering on that, but we had to deal with COVID, the holidays, et cetera. So lots of challenges in the fourth quarter. As a result, we didn't give any particular guidance for fourth quarter. But year-to-date, annual revenue through 9 months of $9.8 million more than the entire 2020 annual revenue. Turning to the P&L. In general, we've discussed revenue gross margin was 75% in the third quarter compared to 56% a year ago. Operating expenses grew to $5.3 million. Remember, third quarter a year ago was the COVID quarter, and we were just basically coming out of the lockdowns and such so that's the reason for the large growth in operating expenses. That, and that we're spending more money on advertising. We're adding heads. We got close to -- we're approaching 100 heads now total in the company. But what we're trying to do as we grow revenue and grow operating expenses, we want to make sure we decrease the operating loss. We want to show leverage necessary to get to ultimately to cash flow breakeven at some point. And operating loss decreased to $2 million in the third quarter compared to $2.5 million a year ago. On the cash front, we had $12.6 million of cash ending the third quarter. We also did a transaction to incentivize the exercise of certain warrants that were in the money that were issued in our February 2020 offering. Those had a strike at a $7.50. We lowered the exercise price to $5 for certain large warrant holders. A number of those warrant holders exercised as a result, and about 1 million of those warrants were exercised resulting in net proceeds of about $4.8 million after banking fees. So adding that $4.8 million from that October transaction to the Q3 ending cash gives us about a pro forma cash balance of about $17.4 million entering the fourth quarter, which represents on our current burn rate, somewhere around 2 years of burn. And in terms of the warrants outstanding now after that transaction, we have about 700,000 warrants outstanding, about 600,000 of those are in the money. And then pro forma for those exercises, we have about 6.9 million shares outstanding at the end of the third quarter.

Thanks, Dave. As far as our leadership team, you can read our bios on the website. We've got a team of people who've scaled technology companies as well as deep expertise in orthotics, prosthetics, reimbursements. We have a scientific advisory board headed up by Dr. Ross Zafonte of Harvard Medical School with outside Board of Directors, I serve as Chair. Our Board members have deep experience in orthotics and prosthetics, medical devices as well as health insurance. And in the near term here, some additional catalysts. We expect to have continuing growth in revenue in 2022. We continue to work with payers to increase the win rates for patients seeking a MyoPro. We're getting more payers to cover the MyoPro. We introduced the new MyoPro 2+. We're restarting the MyoPal device for pediatric patients, but due to COVID, it'll probably be introduced next year, but that opens up additional patient population for us. There's third-party research that we published this year. We have a patient outcomes registry that is enrolling subjects where we will be providing long-term outcome data to payer medical directors. And as Dave mentioned, the China JV company funding is on its way. So Jim, thank you for the opportunity to present to your audience today, and we're available for a few questions.

Great. Great. And I just want to be clear on that one point about the payer that was an issue in the third quarter. The fact you're still recognizing revenue when you ship units, that leads me to believe you're confident that going forward, you'll continue to be paid for units from that payer. Is that correct?

Yes, that continues to be the case. None of the -- we've had to go through appeals on each of those denials, post-service denials. None of those appeals have been denied, 90% of the claims have been paid. So right now, the insurer is not really acting any differently than they were a quarter ago, except for the fact that we're getting these denials that are happening that seem to be based on our interactions with this payer. An internal processing issue that, hopefully, will be resolved here in the coming weeks and months. And hopefully this doesn't progress too much further because the real impact of it right now is less on the revenues than it is on just an extension of the AR aging because we have to go an extra step to get paid.

Okay. And then the other question, I just wanted to follow up on the 2-year window for your 2-year -- your cash balance, which you think is at least 2 years worth. That does not include any cash from China or the outstanding -- the remaining outstanding warrants, correct?

Yes. No, that does not include that -- any -- that money from China. And it assumes that the current burn rate continues. Hopefully, the current burn rate decreases over time and that runway is longer, but just taking a look at it at a point in time, it's 2 years at the current burn rate.

Got it. Okay. And then some questions from the audience. What is the breakdown of users by age?

Well, typically, our patient population sort of reflects the general stroke population because stroke is our biggest diagnosis, where about 1/3 of patients are under age 65 and about 2/3 are above age 65, so that's pretty much the demographics of our population now. A lot of those patients are Medicare Advantage patients that are getting this device. [indiscernible] patients, while there's some stroke, they tend to be more brachial plexus or traumatic brain injury or spinal cord injury patients.

And now that you're doing a lot of the steps virtually, have you decreased the amount of the time it takes to get a device to a patient? And if so, by how much?

So a couple of steps that we've taken, for example, instead of having to do an in-person screening, we used to post on our website, here's upcoming screening days over the next 1 to 2 months, it would take sometimes 30 to 60 days to set up an appointment, we can now set up that appointment the next day, right? Because all we have to do is set up a Zoom telehealth evaluation, so we've compressed that cycle time there. This next step with the remote telehealth measurement. Again, that should shave several weeks off the process as well. So those are the types of things we're doing, Jim, to accelerate that cycle time.

And you mentioned that you've transitioned the manufacturing to your plant in Boston. How is that going? Because that's a relatively new -- that's a fairly significant change, I would think, for you.

Yes. Well, last year, we took advantage of the real estate market being depressed. We got new space at -- much larger space at a lower cost, and then we established our own in-house assembly group. So now we have our own in-house manufacturing team. We still use GRE, our outside contractor, because there's certainly a number of casts that are in the process of getting built there. But we tested the remote measurement and the new MyoPro 2+ on patients here over the last couple of months, and we're just starting to fabricate the units in-house this month. So the first shipments are going to go out in January.

And then another question from the audience. Where do you get most of your leads from the digital marketing effort?

So the leads we get -- we use social media platforms that are out there. Facebook, the Google Ad Network, YouTube, paid search on places like Google and so on. We've looked at other sites like the American Stroke Association, AARP and so on. That's the majority of our leads coming through these online sites. And then we still get clinical referrals, of course, from rehab hospitals, physicians, therapists, who see other candidates that are in their care and they recommend a MyoPro for them.

All right. Overseas, you mentioned that Germany is a big market. Are there other countries in Europe that could potentially -- you could potentially place a device? And what do you need to get that started?

Thanks for the question. We are established with distributors in the U.K., Denmark and Italy, and we are getting a small number of orders from those locations. As you know, some of those countries have been locked-down very hard due to COVID. The Germans have been able to cope with it better, and so the German market has been our best. But we're starting to see a slow reopening of some of those other markets and orders start to come in as well.

All right. And then one more, I'll squeeze one more in. On the U.S., you've had the HCPCS code since 2019. You're a CMS-approved provider. What do you think the holdup is in getting that quantified?

Well, you can see our revenue growth has accelerated since 2019 when we got those HCPCS codes because we've been able to serve the Medicare Advantage population, which is 40% and a growing percentage of Medicare patients as more people enroll into Medicare Advantage. On the Part B side, we've had discussions since 2019 and [ by the way ] between COVID, the change in administration from Trump to Biden, new appointee of a CMS director just happening a few months ago, drug pricing topics, home testing, it's been tough to get enough attention at CMS, but we continue to knock on the door and see if we can get coverage for these Part B patients in the coming year.

But do you think that that's as critical as maybe you thought it would have been 2 or 3 years ago in order to grow the business?

Well, what we're finding is we've got a substantial market size just between that 40% of patients that are Medicare eligible that are on Advantage plans. So between them, certain commercial payers like the Blue Cross Blue Shield plans, the VA, Workers' Comp, I mean, we've got a substantial market size to grow our business just among that target population. And I look at Part B as just a further expansion. And it will help reduce our marketing cost because many people contact us and we have to put them on hold until we get Part B coverage.

Right. Okay. All right. Well, I think I'm over as it is right now, so I just want to say thank you again for the presentation. There's been a ton of progress over the past couple of years, so it's really been a fun story to watch. Thank you.

Thank you, Jim, and if anyone likes to contact us, please call or e-mail myself or Dave. Thank you, all.

All right. Thank you.