Myomo, Inc. (MYO) Q1 2019 Earnings Report, Transcript and Summary

Good morning. And welcome to the Myomo Incorporated First Quarter 2019 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Vivian Cervantes. Please go ahead.

Thank you, operator. Before turning the call over to management, I would like to make the following remarks concerning forward-looking statements. All statements in this conference call other than historical facts are forward-looking statements. The words anticipate belief, estimate, expect, intend, guidance, confidence, target, project and other similar expressions are used typically 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 uncertainty and other factors that may affect Myomo’s business financial condition and other operating results. These include but are not limited to the risk factors and other qualifications contained in Myomo’s filings with the SEC to which your attention is directed. Actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Myomo expressly disclaims any intent or obligation to update these forward-looking statements. Earlier this morning, we issued a press with our first quarter results, a copy of this press release can be found in the Investor Relations section of our website. Representing the Company on this call today is Paul Gudonis, Chairman and Chief Executive Officer; and Chief Financial Officer Dave Henry. At this time, it is now my pleasure to turn the call over to Paul Gudonis. Paul, please go ahead.

Thank you, Vivian, and welcome to all of you. Thanks for joining us on our first quarter of 2019 earnings conference call. I’ll begin this call by providing a business update; Dave will then discuss our first quarter financial results and provide a guidance update; and following the financial updates, I’ll give some close remarks, and then we’ll be available to take your questions. As a result of our investment in scaling up our sales and marketing activities during 2018, I am pleased to report that our first quarter revenue was up 2.6 times, or 165% compared to the first quarter of 2018. This is a very strong start to the year. Given historical seasonality of the O&P industry, it was the first quarter that’s usually slower after the year-end push for reimbursements and patient orders. In the past, we’ve seen upto a 75% sequential reduction in revenues from Q4 to Q1. This year however, first quarter revenues were down only 7% sequentially but they were up significantly year-over-year. Over the past year, we’ve built out a national sales team, recruited and trained orthotics and prosthetics practices to fit patients with our MyoPro braces in the top metro markets in U.S. and organized hundreds of screaming days to evaluate patients for our devices. We also launched our direct-to-patient online marketing effort to reach the many individuals who may need our powered braces for their paralyzed arms. Our reimbursement pipeline was 354 units, as of March 31, 2019, a 15% increase over our pipeline of 306 units, as of the end of the year, December 31, 2018. We grew the pipeline as a result of 111 new adds in the first quarter, as we conducted over 100 screening days around the country. The remainder of the fluctuation in pipeline is explained by 35-unit shift in Q1 and 28 units that exited the pipeline for various reasons. I'm going to explain our reimbursement process and pipeline metrics in more detail. After a patient candidate passes the in-person evaluation and wishes to proceed to obtain a MyoPro, we consider this a new add to the reimbursement pipeline. We then work with the patient and the O&P practitioner and physician to obtain his or her medical history, so that a pre-authorization request is sent to the patient's insurance company. When a patient’s pre-authorization is received, the patient's custom fabricated MyoPro is then delivered to them, and we proceed to bill our O&P customer or the payer directly depending on the case. And if an appeal is required, then this unit stays in the reimbursement pipeline until it’s resolved. We started the quarter with 306 units in reimbursement pipeline, and of those 112 have been submitted to insurance companies for approval, and the other 194 were in the pre-submission stage of prep work. By the end of the quarter, we've grown the total reimbursement pipeline to 354 units of which 203 have already been submitted for pre-authorization, and the remaining cases are in the prep stage. Some patients drop out of the process. For example, the first quarter, this represented 9% of the quarter’s starting pipeline and for a variety of reasons, some may have had a new medical issue, maybe they changed insurance plans or moved, or some just decided they did not want to proceed. So, overall, we made very good progress in both growing the pipeline and then moving it closer to the authorization decisions with 223 total submitted, up 81% from the 112 units at this stage of the process at the beginning of the quarter. We’ve also expanded our U.S. distribution footprint since the beginning of the year, by adding O&P channel partners to serve all the top 50 Metropolitan Statistical Areas or MSAs, thus achieving our goal of being able to serve patients in the top 50 metro markets this year, and increasing the number of paralyzed individuals we can market to. Last year, you may recall, we initiated our direct billing program whereby Myomo is a provider of record and we invoiced the insurance companies directly on behalf of the patients. We partnered with local O&P clinicians, who evaluate candidates at the screening days, fit the custom fabricated brace when we receive the insurance authorization, and then provide local support necessary. This program contributed 22% of our revenue in Q1, which positively impacted our gross margin, which increased to 79%, up from 65% in the year-ago quarter and 75% in the fourth quarter of 2018. This improvement in margin was also achieved by beginning to realize the benefit of cost reductions on the MyoPro units that we shipped in the first quarter. We also continue to see growing revenue from orders placed by our O&P centers of excellence in markets across the country as they partner with us. Turning to Medicare. We’re still waiting to hear from the Centers for Medicare and Medicaid Services, CMS, about their coverage policies and allowable fees for patients who are Medicare beneficiaries. Recall that CMS had issued two new codes for the MyoPro product models back in November 2018. I want to assure you that we’re not just sitting idly by waiting to hear back from and provided clinical guidelines, inclusion criteria for appropriate candidates, and now it's really up to the CMS staff to issue coverage guidelines as well as payment policies. So, while we’re cautiously optimistic about the ultimate determination on this, I still need to emphasize that there's no guarantee that CMS will follow through on this codes with a suitable policy and allow the amount in order to know what their timeframe may be. In the meantime, we’ll continue to submit for reimbursement for those patients covered by commercial insurance plans, workers’ compensation and the VA healthcare system for veterans who need a MyoPro with these newly granted product codes. We also continued our international expansion by signing up O&P providers who reached out to us in Italy, Chile and Australian. For example, NMO, which operates 17 O&P facilities in Australia, recently hosted clinical training and patient screening days in five major cities in Australia, resulting in the addition of several MyoPro units to the evaluation at pre-submission stage of their reimbursement pipeline. While our revenue from international sales is insignificant at this stage, we're encouraged by the sales and marketing activity that our O&P partners have launched in their home markets. With that overview of how our expanded sales and marketing efforts are growing the business, we will move on to the financial review of the quarter and the year by our CFO, Dave Henry.

Thank you, Paul. Turning to our financial review. Revenue in the first quarter of 2019 was approximately 830,000, an increase of 165% versus the comparable period of 2018. Results for the three months ended March 31, 2019 reflect both the higher sales volume and a higher average selling price. The 35 units sold in the first quarter represented a 150% increase over the 14 units sold during the first quarter of 2018. As Paul mentioned, direct billing represented 22% of first quarter 2019 revenues which was the driver of a higher year-over-year average selling price. Gross margin was 79% and 65% for the quarters ended March 31, 2019 and 2018, respectively. The increase in gross margin was primarily due to the aforementioned improvement in higher average selling price as well as beginning to realize the benefit of cost reductions on the MyoPro. Operating expenses were approximately $3,337,000, an increase of $729,000 or 28% during the three months ended March 31, 2019 versus the comparable period in 2018. The increase in operating expenses primarily reflects the impact of additional personnel in the second half of 2018 in support of the Company's expansion of its sales, marketing and reimbursement functions. The Company's net loss for the quarter ended March 31, 2019 amounted to approximately $2,598,000 or $0.17 per share compared to the net loss of $2,345,000 or $0.20 per share for the corresponding period of 2018. Adjusted EBITDA for the quarter ended March 31, 2019 was a loss of $2,454,000 compared to the loss of 2,052,000 for the corresponding period of 2018. Please see our press release issued this morning for a reconciliation of net loss to adjusted EBITDA. Cash on hand at March 31, 2019 was approximately $9,234,000 compared to approximately $6,541,000 at December 31, 2018. On February 12, 2019, the Company successfully completed the follow-on public offering of its common stock, generating net proceeds of approximately $5.6 million. Excluding proceeds from the offering, cash burn in the first quarter was a little under $3 million. Turning to our forward-looking guidance. In our last earnings call, we gave the following guidance for 2019. First, that 2019 revenues would grow significantly compared to 2018; second, that we would see operating leverage in the business in 2019 as incremental gross profit dollars in 2019 were expected to exceed incremental operating expenses; and finally, that our cash balance is sufficient to fund our operations through the end of 2019. Today, we are reiterating that guidance. As Paul previously indicated, we ended the quarter with 354 units in our reimbursement pipeline, including 203 units, which have been submitted for approval to insurance companies as of March 31, 2019. This is up from 306 units at the end of 2018, including 112 submitted for reimbursement approval and compares well with our sale of 92 units for all of 2018. The strength of our reimbursement pipeline supports our continuing expectation, a significant revenue growth in 2019. While operating expenses increased 28% year-over-year in the first quarter, that compares favorably to the 57% year-over-year increase in the first -- in the fourth quarter of 2018. This decrease contributed to a lower operating loss in the first quarter compared to the prior quarter. This supports our expectation that while operating expenses are expected to increase in 2019, that increase is expected to be less than our anticipated increase in gross profit dollars, resulting from the higher revenues, I just mentioned. Finally, our cash burn rate in Q1 supports our expectation that our available cash is sufficient to fund our operations in capital expenditure requirements through the end of 2019. Beyond 2019, we expect to need to raise additional capital in order to reach breakeven. With that, I'll turn the call back over to Paul.

Thank you, Dave. As you heard us describe today, our transition from a controlled introduction into scaling up our commercial operations during the past year is generating strong revenue growth and increasing number of MyoPro units in the pipeline for future sales. So, to recap, we had a record first quarter in 2019 with our revenues growing 165% compared to the same period a year ago; we continue to grow the reimbursement pipeline through our direct-to-patient marketing and screening days; we have a growing distribution footprint of O&P providers in the U.S. and in additional international markets and obtaining suitable Medicare coverage would expand our ability to address the needs of more paralyzed individuals as we continue toward our goal of becoming the worldwide standard of care for upper extremity paralysis. This concludes the formal part of our presentation. So, operator, we're now opening up the call to questions.

Thank you. [Operator instructions] Our first question comes from Jim Sidoti, from Sidoti and Company. Please go ahead.

Good morning, Paul, good morning, Dave. Can you hear me?

Yes, we can, Jim.

Great, great. So, very impressive top-line growth and gross margin expansion. Can you talk a little bit about O&P centers, and do they have a preference whether you bill directly and get paid directly by the patient's insurance company, or is there any advantage for them if they do that process?

Well, it really depends on the O&P provider. Many that we worked with to-date, have preferred to follow the traditional O&P model of recruiting the patients and then purchasing the unit from us at a wholesale price at on their clinical services and bill the insurance companies. In other cases, the providers prefer to work with us where we pay them on a fee-for-service and we do all the marketing work, we do reimbursement support and so on, in which case we earn a higher margin. But then, there's less risk and less investment on the part of COE.

And if it is that latter case, how does the O&P center make money from the patient?

Well, we pay them, since we're getting paid by the insurance company. We pay the O&P provider for their clinical services. So, they participate in the screening day for which they receive a fee, they are involved in -- after we get an authorization, in measuring the patient and they fit the patient's device and then they provide local clinical political support that is necessary.

I see. And do you anticipate that that will be the more common mode going forward or -- I mean, because that’s going to have a big impact on gross margins?

Well, our approach is, I would call a hybrid approach here where we have strong center of excellence relationships with the existing O&P providers around the country. We will continue that teamwork model in new markets where we've been growing. We’ve been opening up those new markets under the direct billing mode where we can find a suitable O&P clinical partner to work with us on a fee-for-service basis, which many are interest in doing so.

The R&D expense, little over $500,000, up pretty significantly year-over-year. Is that related to headcount and is this a good number to model for the rest of the year?

Yes. It’s primarily headcount driven, the increase. We are spending R&D as we’re working on the launch of a pediatric device later this year. So, that’s the reason for the increase. But, in terms -- I would say there is -- and I think we mentioned this last quarter. We’re expecting a lower increase in OpEx in 2019 compared to 2018. So, I would say, other than just normal inflationary increases, this is a -- I would say the $500,000 that we had in the first quarter is fairly reasonable for a going forward run rate.

And back to the O&P center, the payment you make to them, when you get reimbursed directly, is that come out of your cost of revenue or is that an SG&A expense?

It should be cost of revenue.

And then, the last question for me with regards to CMS, have there been any communications during the quarter, or other than you calling up, asking them what’s going on, have you had to provide them any information during the quarter? Are you pretty much in a waiting mode right now for them to make a decision on the reimbursement amount?

Since they issue the codes, they are deliberating what type of coverage policy and guidelines they will issue for the device. We’ve had some limited amount of contact during this time period. We’ve submitted our recommended inclusion criteria that we believe are the best candidates for the device that would be Medicare beneficiaries. And so, it really evolves in their court. As you recall, at the beginning of the year, the government was on furlough for a month. And now, I know CMS is already evaluating the next set of code applications for their upcoming public hearing, which typically happens in June. So, imagine they’ve got quite a backload of workload to do right now.

Okay. So, do you still anticipate getting some kind of decision this year?

As our best estimate is sometime this year. But again, there's no specific timeline. However, the fact is they did issue the codes, one would assume that they're going to follow through here with coverage policies and payable amounts.

Our next question comes from Alex Silverman from AWM Investments. Please go ahead.

Hey. Good morning. Wondering, one, can you give us a sense of the 203 submitted for pre-authorization and the 111 new adds, what proportion of those are direct billing as opposed to going through one of your providers?

We don't typically -- we don't provide that level of detail between what's direct billing versus what's the other O&Ps. I suppose maybe at some point, we can look at doing that. But, for right now, we haven't -- we're not breaking out that level of detail, because of that.

Would you assume that that 22% rate that you saw in the first quarter is a good number to work off of, or should that be up or down? Can you give us some sense?

Well, I think given the economic benefit to us of doing the direct billing and going and trying to using that channel, if you will, I would say, it would be in our benefit to try to increase that proportion over time.

Okay. That's helpful. And then, last question, your comment about the first quarter being typically slow, which is clearly the case in your industry, given the reset or reimbursement. Is that the case with generating leads as well, or is that really just on the closing of the -- or on the placement of the unit?

Yes, Alex, two aspects there. So. you're right. Q4, everyone is trying to close out the year, oftentimes, patients deductible limits have been reached. So, their out of pocket costs may be zero for the device. So, the O&P provider really works with us, and with their contracted insurance payers to try to get all those year-end orders. So, yes, as I point out, sometimes there've been some steep drop-offs, it’s across the industry. We did not see that type of steep drop-off, because, again we've even building that pipeline. This quarter’s adds 111 compared to 139 in Q4, I think some of that might have been weather-related, just because when you're doing screening days, you got wintertime up here in the north, that might have slowed things down a little bit, but not much. We're still adding close to 10 new patients into the pipeline every week. So, we expect that will continue to speed up as we continue the advertising, which is again, being really effective in drawing people into these screening days.

And my last question, among the 28 that exited the pipeline for various reasons, is there an effort underway to chase these folks down, see if they haven't, if you can't get their new reimbursement -- or I’m sorry, the new insurance numbers and all that kind of stuff or is that sort of a lost opportunity?

We do follow up with these individuals. We have a customer experience team, managing our call center. So, they follow up these patients. But, again, sometimes someone has had another fall for example, because they can only use one arm and they haven't been approved for the MyoPro yet. They may just go into what we call hold, and then we may revisit that case three to six months later. Sometimes we will follow up with them. If people are interested, we're going to do our best to keep them engaged in the process with us.

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

Again, I would like to thank all of you for joining us on today's call. In summary, we're following through on the growth programs that we've outlined and they're demonstrating year-over-year increases in revenue and a large increase in our potential revenue pipeline with a record number of patients in the queue to be authorized for MyoPro, which could translate into significant growing revenue in the months ahead. So, thank you again for your time this afternoon, and have a good day.

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