Myomo Inc (MYO) 2021 Q3 法說會逐字稿

Good day, and welcome to the Myomo, Inc. Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Ms. Kim Golodetz. Please go ahead.

Thank you, Operator, and good afternoon, everyone. This is Kim Golodetz with LHA. Welcome to the Myomo Third Quarter 2021 Financial Results Conference Call. Earlier today, Myomo issued a news release announcing financial results for the 3 and 9 months ended September 30, 2021. 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 in New York 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, including the impact of the ongoing COVID-19 pandemic.

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-Q for the quarter ended September 30, 2021, which was filed earlier this afternoon. 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.

Thank you, Kim, and good afternoon, everyone, and thanks for joining us. After I provide a business update, Dave will review our third quarter financial results and discuss our financial outlook. And then following the financial update, I'll give some closing remarks, then we'll take your questions. I'm pleased to report that Myomo achieved record revenue of $4.4 million during the third quarter. This represents a significant gain of 128% over last year's third quarter and 19 -- excuse me, 159% increase year-to-date. Of course, 2020 was negatively impacted by COVID-19 and the ongoing pandemic has led to some labor and supply chain issues across the broader economy. Yet importantly, we believe we're successfully navigating through these effects, and I'll discuss that with you shortly, but by and large, business has been very good.

Clearly, we're benefiting from the groundwork that we laid during the past 2 years as we migrated our marketing approach to go directly to patients and their caregivers to establish our own clinical staff and to interact directly with their insurance companies. Fully 85% of our revenue during Q3 was derived from the direct billing channel, which is up from 75% of revenue last quarter. This has led to a higher average selling price and improved operating margins. I can't stress enough that our overarching goal as a company is to improve the lives of people with upper limb paralysis. To see an example of one of our newer MyoPro clients, please check out the Let's Talk Stroke program on YouTube. I participated in an interview with Liz Hayes and how the MyoPro has restored her ability to function with her affected arm. I'll be on the next program with another user tomorrow morning, which will then become available on our YouTube channel.

At the same time, our focus is on increasing MyoPro sales and benefiting from operating leverage as we scale the business towards cash flow breakeven and profitability. Our 3-pronged approach to growth includes our own direct billing operations, where we bill insurers directly and provision the MyoPro with our own clinical staff. Second, we also support orthotics and prosthetics providers in the U.S. and international markets who source their own MyoPro candidates and are responsible for provisioning and billing. And third, we're focused on domestic VA medical centers for veterans and air care.

We earned revenue on 102 units during the third quarter. That's double the number of units during last year's Q3 and as a result of the growth in our candidate pipeline and an increased number of insurance authorizations for MyoPro. The number of authorizations in -- orders in the quarter was 133 valued at more than $5 million in potential revenue, which will be recorded as these orders are fulfilled and insurance payments are received. Of these, 37 units received insurance authorizations and were delivered in the same quarter.

Our backlog 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, and it stood at a record 177 units as of September 30, 2021. This is up 11% from June 30, 2021, and reflects the larger number of insurance authorizations received during the quarter.

Our pipeline is robust and at quarter end, it stood at a record 920 MyoPro candidates with 331 additions to the pipeline during Q3. This is a direct result of success with our digital strategy, which has adapted to the new privacy features implemented by Apple for iPhone users. While there was an initial impact on lead generation earlier in the second quarter, we successfully navigated these challenges with our advertising agency and also increased our ad spending. Our weekly lead generation is now higher than it was in the second quarter, which is leading to the growth in the number of new candidates interested and medically qualified for MyoPro. Our pipeline statistics are an important indicator of future revenue since it can take 6 to 12 months to convert a prospect into an insurance authorization, deliver the custom MyoPro and then receive payment.

Having HCPCS codes for our devices has proven very helpful, especially for Medicare Advantage Plans, which account for approximately 40% of seniors, yet each approval, of course, is based on individual consideration by the payer. Thanks to the efforts of our Chief Medical Officer, working closely with the patient's doctor, we've seen a year-over-year increase in authorizations from health insurance plans. During our last quarterly call, I reported that we had over 20 insurance plans cover their first MyoPro. So we've concentrated our marketing efforts in geographies served by these payers while also continuing to add a few more new payers to the roster in this past quarter.

With the record pipeline and backlog at this point in the calendar year, we expect to enter 2022 in the strongest position in Myomo's history. However, we're unlikely to clear as much backlog during the fourth quarter of this year as we anticipated. This is due to a temporary labor shortage at one of our subcontractors that constrained capacity and deliveries in the early part of this quarter. Capacity at that subcontractor has returned nearly to normal now, but it will be difficult to make up all the delayed shipments by the end of the year. Therefore, these orders may remain in backlog and the effect of deliveries and associated revenue may be realized in early 2022.

Like many companies, we're taking steps to have more control over our supply chain as well as implementing operational improvements to the fabrication process for the MyoPro. Our goals are to streamline the process, accelerate cycle time and improve margins. We expect to have an announcement on this by the end of the year.

Our international business has continued to grow as well and accounted for approximately 10% of third quarter revenue. As I mentioned, International is a key target for growth. Germany has been a very good market for us where more statutory health insurance payers are covering the cost of the MyoPro. We now have case-by-case coverage for over 40% of the population. We're excited about our joint venture in China with Ryzur Medical Investment Company, which is in the process of being funded. The granting of patents around the MyoPro in China and Hong Kong was a key step toward finalizing the JV with these patents being licensed by Myomo to the newly formed JV.

The next step is to execute a technology license agreement between Myomo and the JV, which is expected to occur once certain operational and financial milestones by Ryzur and the JV are met. At that point, Myomo will receive an upfront license fee of $2 million, and the JV will enter into an escalating purchase commitment for a minimum of $10.75 million in MyoPro control system units over the next 10 years, subject to receipt of regulatory approvals necessary to permit sales of the product in Greater China. Ryzur Medical and its partners have committed to invest a minimum of $8 million and up to $20 million in the JV over 5 years. We believe the JV company and Ryzur remain on track to complete their milestones to allow us to finalize this agreement by the end of the year.

As you know, China represents an enormous market with a population of 1.4 billion people and an estimated 1. -- 14 million people with chronic arm paralysis and an estimated 2.5 million strokes each year. Our shareholders will hold a 19.9% interest in the joint venture company, which can result in significant value creation over time.

Well, now I'll turn the call over to Dave Henry to review our financial results in more detail, and then I'll come back and provide some additional updates and comment on our plans for the rest of the year. Dave?

Thank you, Paul. Turning now to our Q3 financial results. Revenue for the third quarter of 2021 was $4.4 million, the highest quarterly revenue in the company's history. This is up 128% over the prior year third quarter. As Paul noted a moment ago, the direct billing channel accounted for a record 85% of our revenues in the third quarter, which had the effect of increasing our average selling price, which together with a higher number of revenue units drove the higher year-over-year revenue. By comparison, the direct billing channel accounted for 74% of revenue in the second quarter. More specifically, we recognized revenue on 102 MyoPro units in the third quarter of 2021, an increase of 100% compared with the third quarter of 2020. Of the 102 revenue units, 37 were fill units, which means we received orders and authorizations in the same quarter that revenue is recognized.

Our backlog of units consist of insurance authorizations received but not yet converted to revenue. As of September 30, 2021, our backlog was 177 units. Ending backlog reflects 133 authorizations and orders in the third quarter and 14 patients who exited the backlog without converting to revenue. Approximately 77% of the third quarter ending backlog is comprised of direct billing candidates compared with 88% at the end of the second quarter. This primarily reflects a stronger VA backlog entering the quarter. As Paul mentioned, the reimbursement pipeline as of September 30 was 920 MyoPro units which reflects 331 additions to the pipeline during the quarter and 176 dropouts, representing about 20% of the pipeline entering the third quarter. This is consistent with what we've experienced in the last few quarters. As a result of our marketing efforts and continued success in obtaining authorizations from new insurers, more than 80% of the patients in the pipeline at the end of the third quarter are covered by insurers who have previously reimbursed or agreed to reimburse for the MyoPro.

Gross margin in the third quarter of 2021 was 75%. This is up from 56% in the year-ago quarter. The year-over-year increase primarily reflects a higher average selling price, which is tied to the increase in the direct billing channel revenue and improved fixed cost coverage resulting from higher unit volume. There were 108 MyoPros delivered to patients in the third quarter on which we recorded cost of goods sold compared with 102 revenue units. Gross margin also increased 4 percentage points over the second quarter of 2021 despite higher warranty reserves and some material price increases on certain constrained components whose impacts were more than offset by the increase in average selling price.

Operating expenses for the third quarter of 2021 were $5.3 million. This is up 47% compared with the same quarter a year ago, and primarily reflects higher payroll costs supporting growth in the company's clinical and reimbursement headcount and higher advertising costs as spending is being increased to generate more leads and pipeline additions while ad competition is driving up spend as well. Our operating loss for the third quarter of 2021 was $2 million, and this continued to narrow from $2.5 million a year ago and $2.6 million in the second quarter of this year. Net loss for the third quarter of 2021 was $2.1 million or $0.36 per share. This compares with a net loss of $2.8 million or $0.70 per share for the third quarter of 2020 and with $2.6 million or $0.46 per share for the second quarter of this year. Adjusted EBITDA for the third quarter of 2021 improved to a negative $1.7 million, which compares favorably with a negative $2.3 million for the third quarter of 2020 and a negative $2.2 million for the second quarter of 2021.

Turning briefly to our year-to-date financial results. Revenue for the 9 months ended September 30, 2021, was $9.8 million, up 159% over the prior year period. Year-to-date revenues are higher than the revenue we achieved for all of 2020. The year-to-date operating loss and net loss attributable to common stockholders were each $7.6 million compared with an operating loss of $8.8 million and a net loss attributable to common stockholders of $10.5 million for the 9 months ended September 30, 2020. Net loss attributable to common stockholders for the 2020 period includes a charge of approximately $700,000 for a deemed dividend on the price reset of certain warrants. Year-to-date adjusted EBITDA improved to a negative $6.7 million compared with a negative $8.3 million in the same period a year ago.

Turning to the balance sheet. Cash and cash equivalents as of September 30, 2021, were $12.6 million. Cash used by operations was $2.2 million in the third quarter. Accounts receivable increased to $2.2 million compared to $1.1 million in the second quarter. The increase was driven by both an increase in revenues as well as an aging of accounts receivable from a major insurance payer. We can report that more than 800,000 has been collected from this payer so far this quarter and the aging is improving accordingly. However, the same insurer has begun to deny claims made after receipt of authorization and delivery to the patient. We filed appeals on a number of these claims and are awaiting a response. Though we are optimistic we will prevail, adverse decisions on these appeals could signal a change in the payers' reimbursement practice with respect to the MyoPro. We're monitoring the situation closely.

The aging of receivables I mentioned earlier, impacted cash burn in the third quarter. As a result of that and our plans to further increase advertising spend to generate more leads and grow our pipeline in support of our growth strategy, we undertook some financing activities in order to maintain an appropriate cash balance. During the third quarter, we sold 107,500 shares under our ATM facility at an average selling price of $12.02 per share, which generated net proceeds of approximately $1.3 million. There have been no sales under the ATM so far in the fourth quarter.

In October, we announced agreements with select warrant holders from our 2020 follow-on offering to exercise their warrants at a discounted exercise price of $5 per share. Aggregate net proceeds from that exercise were approximately $4.8 million after deducting financial advisory fees. The only dilution to shareholders then from these financing activities was the shares sold under the ATM, which represented less than 2% of the outstanding shares. Pro forma for the warrant exercise transaction, our third quarter ending cash balance was $17.4 million, which represents just under 2 years of cash at our current annual burn rate. As a result, we believe our existing cash is sufficient to fund operations for at least the next 12 months.

Turning to our near-term expectations. We entered the fourth quarter with a record backlog, but also some near-term challenges. As Paul mentioned, our fabrication subcontractor experienced a labor shortage early in the fourth quarter, which impacted their capacity and deliveries to us. While capacity has nearly returned to normal, the shortfall in deliveries will be difficult to overcome given the upcoming holiday period. In addition, should the post-authorization and delivery appeals with this major payer I mentioned earlier, be unsuccessful, that may cause us to reassess the timing of revenue recognition for this major payer, which is currently recognized at delivery. The ability to assert that payments will be made once we receive a pre-authorization and provide the device to the patient is required to continue to recognize revenue at delivery. While we are highly successful winning appeals with this insurer, if we could no longer assert that payments after delivery are forthcoming, this would entail a return to waiting until payment to recognize revenue for this major payer.

Revenues from patients associated with this payer comprised 32% of total third quarter revenues. This insurer continues to provide us with pre-authorizations. As a result, we're cautiously optimistic that these denials are more of a processing issue inside the insurer as opposed to some kind of reimbursement policy change. That being said, these factors make it difficult to provide either quantitative or qualitative guidance on revenues in the fourth quarter. We can assure you that we're doing everything possible to maximize deliveries in the fourth quarter and the status of the appeals I mentioned, is being closely monitored.

With that overview, I'll turn the call back to Paul.

Well, thank you, Dave. So now our strategic goal, just to remind everyone, is to assist more paralyzed individuals regain function with the MyoPro and to increase our market penetration in this new product category. The pillars of this growth strategy are to increase our marketing activity, to generate additional patient candidates from MyoPro, to increase the number of insurance authorizations by working with payers and physicians to expand access to the MyoPro, to emphasize our domestic direct billing channel for greater revenue and margin and to expand into international markets to tap into additional patient demand. To handle this growth, we've added to our professional staff during the past 9 months, more clinicians in the field working with patients, more reimbursement specialists for the increased volume and an increased number of MyoCare coaches to support a new MyoPro user with their therapists. We've done this while demonstrating strong operating leverage with revenues growing much faster than operating expenses as we continue our march to a larger scale and eventual cash flow breakeven operations.

Adding to these growth initiatives is our investment in product development as well as our investment in clinical research to demonstrate the positive health outcomes of using MyoPro. We're expecting several independent studies to be published and additional studies are underway that will further support our marketing and reimbursement efforts. These include a patient outcomes registry and additional RCTs, which will build upon our body of scientific evidence. We also look forward to a number of near-term catalysts, including announcement about the adult version of the MyoPro and resuming development launch of the MyoPal orthosis for children.

Well, this concludes the formal part of our presentation, Operator, and we're now ready to open the call to questions.

(Operator Instructions)

And before we take the first question, I want to mention that we are available for virtual and in-person investor meetings. So please contact LHA Investor Relations to set up a time. We plan to be in San Francisco, meeting with investors and analysts in the second week of January, concurrent with the annual J.P. Morgan Healthcare Conference. So please contact LHA if you plan to be there and would like to meet with us in person. Their contact information is on today's news release.

Okay, Operator, we're ready for the first question.

Our first question today comes from Kyle Bauser of Colliers Securities.

This is Kayla Hostetler, on for Kyle. So I guess, first off, as far as average selling prices of MyoPro, how should we model this going forward? Should this be steady? Or is there room to increase with direct billing channel growing?

Well, I think the -- one of the things that we did say is that revenue -- or the average selling price was high this quarter because of the record amount of -- the record percentage, I should say, of direct billing revenue as a percentage of total revenue. We did say that the backlog, though, comprised 77% of patients that were under direct billing, and that was compared to 88% last quarter. So that would kind of say that I think that the ASP would be expected to be lower in the fourth quarter compared to the third quarter.

Okay. And then -- Looking at marketing, are you using third party for your targeted direct market initiatives? And then can you talk about how you're targeting various vision populations?

Well, sure, we use a digital ad agency here in Boston. And then we use social media platforms like Facebook, the Google Display Network to basically put our message out in front of our target audiences on different websites. So that's the way we generate awareness and that leads to all these prospects finding us and then becoming a lead at the front end of the pipeline.

Great. And then how should we think about the OpEx bucket moving forward?

We're seeing, as I mentioned, advertising spending is increasing. That's of our own volition because we're looking to increase the adds to the pipeline, but we're also seeing increased competition out there amongst other companies for digital advertising space. And so those costs are going up, and we're having to compete with others. And so for those 2 reasons, certainly, the advertising spend is going to go up. And then as it relates to the rest of the OpEx, roughly 50% of our operating expenses constitute payroll. So as we're looking to grow the pipeline, that creates a lot of work inside of our various organizations as we continue to process those patients through the pipeline. So as -- if we are successful in growing the pipeline and adding to our backlog, then I would expect the payroll would go up as well to support that.

Our next question comes from Ben Haynor of Alliance Global Partners.

So on the pre-authorization that this insurer is providing, but apparently not providing reimbursement once you build them. The appeal process that you're going through, is that something that you -- that is statutory where you know when a resolution might take place? Or is it kind of up in the air?

Well, there's no specific timeline on that, Ben. But we have filed appeals on those because, look, the standard practice in the industry is that you get a pre-authorization, you deliver a device, file the claim and then you receive payment. To be denied a payment after delivery, you can only result from a patient no longer being eligible. For example, if they change insurance plans, and we always verify insurance before we deliver a device. So we think it's more of a system glitch in the process because we continue to get new pre-authorizations and we also got payments on a number of older receivables from the same payer. So we hope to resolve this quickly. But again, I don't have a specific timetable on that.

So no, you don't view it as kind of a Charlie Brown and Lucy and the football situation where they give you the prior authorization to deliver the device is the football to kick, right?

Yes, it's not even -- it's even a little bit worse than that because like I said, we're being denied after pre-authorization and then delivery. So we've -- So we've delivered the device to the patient and then the insurer is coming back saying, Well, I've changed my mind. I don't want to pay for it. And so typically, to hear back on appeals of when we are appealing a denial for an authorization, that process might take 30 to 60 days, so we would anticipate something similar for this.

Okay. That makes sense. I mean that sounds like it will most likely get worked out. And I know you guys have had some success with your Chief Medical Officer, Dr. Kovelman in chatting with the insurers and getting more coverage. I think you said something last quarter like something like 20 new insurers began reimbursing for the device. They're covering it. Do you -- has that trend continued? Is there any more color that you can provide there?

Yes, we had a few more, what we call, new payers, pay for their first MyoPro. But we also concentrated on the existing good payers, just further market penetration of patients that already are covered by those health insurance plans. We're balancing. The time to get a new payer to pay for a device requires a longer period of time to go through the medical review and so on. So it's a balance to continue market penetration with payers that are already covering the device while adding a few more new ones each quarter.

Okay. Great. And then any updates -- sorry if I missed this, on MyoPal? Should we be expecting to hear more on that in the near future.

We expect to make an announcement about that by the end of the year. So nothing new at this time.

Our next question comes from Edward Woo of Ascendiant Capital.

Yes. Can you talk about inflation? Any impact on your margins?

We are seeing some price increases on some of the components as we've had to -- and we're also seeing extended lead times. But so far, with the success in increasing the percentage of direct billing as a percentage of total revenue and the resulted increase in ASP we're kind of -- those 2 effects are kind of offsetting each other, and we're able to maintain our gross margins in the mid-70s.

Next question comes from Jim Sidoti of Sidoti & Company.

Can you just say again how much revenue was with that insurer where you're having the appeals now?

Patients who have that insurer as their primary insurer represented 32% of third quarter revenue.

And how much -- what percentage of revenue was that insurer billed for the year? Is it about the same?

I don't -- I actually didn't calculate the number for the full year, but I can try to get that to you. It's going to be somewhere in the range of 20% to 30%, I think, for the full year.

And with the supply issue, how long -- was it 4 or 5 weeks where you were out of commission? Or can you just give us any sense on how many units you think you have to make up?

Well, there are a couple of technicians that had part of that Great Resignation that reduced capacity. It didn't go to 0, although it was diminished. Fortunately, our subcontractor was able to hire some new qualified staff, is training them, and they're back up to normal capacity now. But that gap there for a couple of weeks slowed down our deliveries while we had a very large number of new castings to take patients measurements due to the large number of authorizations. So they're in the backlog and we're going to try to catch up as much as we can this quarter, Jim.

So I mean if we look at these tuitions, are you fairly confident that both issues will be resolved as we end the year, and that you'll be back to normal growth rates in 2021?

I think the supply chain issue has been, for the most part, resolved. Now the issue is how quickly can we catch up, and how much residual effect will there be by the end of the quarter, and how much will sort of bleed into the early 2022. On the other issue, on the appeals issue, I think we'll know more once we hear back from -- start hearing back on the results of those appeals. Right now, it's difficult to say. All I can say is sort of in the optimistic case, it's nothing -- it's just a delay in getting payment and we move forward with our existing revenue model, and we continue with what we've been doing. In the not optimistic scenario, it means that the insurance continues to deny, they're changing something with respect to the reimbursement and we may have to say, well, we can't recognize revenue on delivery anymore. We have to wait until payment. That will add 60, 90 days back to the revenue cycle time for that insurance.

So it would be more of a timing issue.

More of a timing issue, yes.

It does look like we have another question from Ben Haynor.

Just 1 more on the insurer issue. Are there any kind of commonalities amongst the patients that you guys can see that they've denied the claims on?

Well, there is a commonality in terms of the denial. The denial reason was that we -- is that the device they believe, is experimental and investigational. But we have successfully, many times, won on appeal with this insurer overcoming that denial reason. So we're not sure why it's come up again because it's -- and the fact that it's unusually happening after we've delivered instead of while we're trying to get an authorization just makes us -- gives us pause, and we're monitoring the situation closely.

Yes. And as I mentioned now, we continue to get new authorizations from the same payer.

It's kind of a bizarre situation. Just thought I'd ask whether there's anything that was odd with the patients, but -- okay, that makes sense.

At this time, it looks like we have no further questions. I would now like to turn it back over to Paul Gudonis. Please go ahead.

All right. Well, thank you. Well, just in closing, we're optimistic that the economy here and in the developed countries around the world will continue to open up and that hopefully, the worst of the pandemic is behind us. Myomo provides an essential product to people suffering from neurological disorders and (technical difficulty). We're confident in our ability to continue to reach patients and receive buy-in from payers, and eventually from Medicare and Medicaid as well.

So once again, thanks for your time and interest in Myomo. Have a good evening.

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