Myomo, Inc. (MYO) Q2 2025 Earnings Report, Transcript and Summary

Good day, and welcome to Myomo Second Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tirth Patel, Alliance Advisors IR. Please go ahead.

Thank you, operator, and good afternoon, everyone. This is Tirth Patel with Alliance Advisors IR. Welcome to the Myomo Second Quarter 2025 Conference Call. With me on today's call are Myomo's Chief Executive Officer, Paul Gudonis, and Chief Financial Officer, Dave Henry. Before we begin, I'd like to caution listeners that statements made during this 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 risks, uncertainties and other factors that may affect Myomo's business, financial condition and operating results. These risks, uncertainties and other factors are discussed in Myomo's filings with the Securities and Exchange Commission. Actual outcomes and results may differ materially from what's expressed in or implied by these forward-looking statements. Furthermore, 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 today, August 11, 2025. It's now my pleasure to turn the call over to Myomo's CEO, Paul Gudonis. Paul, please go ahead.

Thanks, Tirth. Good afternoon, and thank you all for joining us today. As you've seen in our press release issued earlier today, our second quarter revenues were slightly ahead of our expectations, while several operating metrics were below our plans, and those metrics and trends will impact our near-term performance. We've made a number of adjustments in marketing and operations, and we're already seeing initial signs of success. But before we review our quarterly results, I'd like to briefly address some understandable shareholder concerns. We recognize that our recent stock price performance has been disappointing, and we appreciate your candid feedback. Myomo remains committed to market leadership with our proven MyoPro product line, adjusting our plans to grow the business and managing our financials to sustainable cash flow positive operations. On today's call, we'll dive into this with a transparent discussion of the challenges we faced, highlight tangible progress we're making and outline our plan forward to the -- achieve these goals of sustainable growth and profitability. We appreciate your continued trust and look forward to demonstrating meaningful results. Let me begin with an overview of the dynamics of generating leads and converting qualified leads into our pipeline. Recall that in the first quarter, Meta changed its Facebook algorithm in response to privacy concerns around using someone's health information or browsing history as a means to target advertising. As I discussed during our last call, despite stepping up our advertising spend, the number of new leads did not increase in January and February. So we engaged a new digital ad agency to help us with the workaround and lead flow started increasing significantly in March and April. We are pleased with those results and knowing we need to rapidly add more pipeline a$, we allocated more dollars to digital media in the second quarter, and it worked. We hit a record level of leads in June with 4x as many leads generated as in January earlier this year. And in addition to generating a higher number of leads, our cost per lead returned to historical levels. Consistent with generating a record number of new leads, we expected an even greater number of pipeline adds. To add a prospective patient to our pipeline means we've engaged with the lead on the phone, reviewed their health insurance status and completed a telehealth screening or in-person evaluation to verify that they're medically qualified candidate for the MyoPro. There are 3 factors that prevented a record number of leads generated in the second quarter from turning into pipeline adds at the historical rates or levels. The first is that the lead quality, particularly the Facebook leads were not as good as what we've seen in the past. The reasons for that vary, but the fact is the leads were just the poor quality. Second, as we analyze past data about our pipeline adds, we discovered that there is a cycle time effect. More specifically, about half of our pipeline adds come from leads generated within the past 30 days, while most of the rest come from patients who contacted us 6 or 12 months ago, even longer. At our recent Investor Day, we reviewed the patient decision-making process during which stroke survivors will want to get more information, talk to family members and clinicians and even go back for more rehab therapy before committing themselves to obtaining a MyoPro. Last year, there was a large number of Medicare Part B patients who have been interested in a MyoPro, and they were able to access the device beginning in April 2024 when Medicare coverage began. Currently, we have a large cohort of Part B leads that have expressed interest since the beginning of the year. And based on history, many of them are expected to take the next steps somewhere over the next 6 to 12 months. The third factor impacting pipeline adds is the patient's clinical presentation. To qualify for our pipeline, a patient must meet our inclusion and exclusion criteria during a telehealth screening or an in-person evaluation by one of our clinicians. We typically exclude over half of the patients that approach us. This year, we've seen that percentage increase somewhat. Proper patient selection is necessary to improve long-term clinical outcomes, which is critical for maintaining reimbursement. But going forward, our assumption is that, that percentage of patients we exclude will stabilize, and I'll discuss how we plan to offset this in a bit. The result of these factors and despite achieving a record 816 pipeline additions in the second quarter, cost per pipeline add increased to approximately $2,900. And although this is up from about $1,500 in recent quarters, it's down from nearly $5,000 of pipeline add after Apple's privacy changes a few years ago. To improve our top of the funnel metrics and generate more qualified leads, we redirected advertising dollars from social media to television. Our experience shows that a higher proportion of leads generated by the TV ads engage with us right away to pass the telehealth screening and move forward into the pipeline. Our cost per lead in the third quarter is expected to increase with a higher mix of television advertising, but we expect that the cost per pipeline ad will decrease. Early indications so far indicate that this shift has increased pipeline adds, reflecting better patient engagement. Since we increased our ad spend, we reduced costs elsewhere in the organization. In July, we undertook a headcount reduction that impacted about 8% of our U.S. workforce. We also cut back on outside services spending and are limiting new hires until we see a significant uptick in our revenue growth. These actions are expected to save us at least $2 million in operating expenses and capital expenditures over the next 12 months. And we will continue to be disciplined in our spending, emphasizing those areas that produce revenue and increase our competitive position. In addition to the challenges in converting leads to pipeline adds, we've been experiencing a lower conversion rate from pipeline adds to authorizations, which is impacting backlog growth. To address this, we're expanding our clinical referral program by increasing education activity at rehab hospitals with our field clinical staff. Expansion of this program is expected to result in more high-quality patients entering our pipeline. To date, we've trained over 1,500 occupational therapists on the MyoPro all across the country. And now that Medicare and collagen in place is in place, we believe that they will be referring more patients to us and to our O&P channel partners. The number of qualified patients from clinical referrals doubled over the last year, and we are organizing screening days at facilities to accelerate this momentum. We're creating what amounts to a new sourcing channel for our direct provider business and O&P partners to participate with us in these clinical events. For example, I recently attended a patient evaluation training day at one of our O&P partners in Virginia that is becoming Myomo certified. After our training, these clinicians have now fit their first patient with the MyoPro, and we're eager to introduce the MyoPro to rehab hospitals in the area where they have strong working relationships, which our clinical team participated in just this past week. We're actively certifying O&P clinics by having them evaluate and fit several patients until they meet our standards and are self-sufficient to provide the devices to their clients. We're seeing a growing pipeline of O&P patients in the reimbursement process. In fact, the number of O&P orders doubled from Q1 to Q2 of this year, and we're expecting continued order growth from this channel going forward. Another factor impacting the conversion from pipeline adds to authorizations is the behavior of the Medicare Advantage plans. Since just over half of seniors are covered by Medicare Advantage plans, we are taking steps to increase the number of authorizations from these payers. We're appealing more denials and taking more appeals all the way to an administrative law judge or ALJ hearing, and I'm pleased to report that we're winning a larger percentage of appeals, reflecting the standards we set for patient inclusion and the strength of our legal position. As discussed during our June Investor Day event, we plan to double the number of ALJ hearings in the second half of the year in order to generate more authorizations and put more pressure on these plans. In this environment, the only way to grow Medicare Advantage revenue is to put more shots on goal. Since these patients are being unfairly denied access to MyoPro in violation of the code of federal regulations, we intend to escalate our concerns through formal appeals and direct engagement with plan administrators and regulators, reinforcing that Medicare Advantage plans are obligated to follow national Medicare policy. As I mentioned a moment ago, Medicare Part B patients are critical to our growth plans, and we'd like to see more of them in our funnel. While we don't control the insurance coverage of prospective patients, we proactively engage with those covered by Medicare Part B and their health care providers to accelerate the path to MyoPro. And roughly half of our fill units in the second quarter represented Medicare Part B patients. We're also starting to see more authorizations for patients covered by the contracts we entered into over the past year, and we have additional negotiations underway to increase patient access to the MyoPro. We've expanded our contracting to now cover 35 million lives with signed or pending agreements. So in summary, we're moving as quickly as possible to improve our results in the direct billing channel. Our international and O&P channels also continue to grow, complementing our direct billing channel and diversifying our revenue streams. Our strategy for expanding access, improving conversion and efficiency and managing costs positions us well for the second half of 2025 and beyond. While we expect 2025 to be another year of revenue growth, reflecting the number of leads, pipeline adds and insurance authorizations year-to-date in the direct billing channel, we are updating our expectations for revenue growth to 23% to 29% in 2025, as Dave will discuss. For all those who have followed Myomo over the past several years, you've seen us pivot strategically when necessary, develop new opportunities such as Medicare coverage and adjust our operations to support our 10-plus year track record of volume and revenue growth. With that overview of our performance and actions, I'll turn the call over to our CFO, Dave Henry, to provide more of the financial details.

Thank you, Paul, and good afternoon, everyone. Let me start with a review of our second quarter financial results. Revenue for the second quarter of 2025 was $9.7 million. This represents a 28% increase versus the prior year and was driven by a higher number of revenue units and a higher average selling price or ASP. We delivered 178 MyoPro revenue units during the quarter, up 13% with 95 of those units from authorizations and orders received in the second quarter. This higher velocity is also reflected in the fact that approximately 91% of our second quarter revenue was recorded at either shipment or delivery. Our ASP increased 14% versus the prior year to approximately $54,200. Medicare Part B patients represented 56% of revenue in the second quarter. Medicare Advantage revenue was 20% of second quarter revenue and in dollar terms was down slightly from a year ago. Medicare Advantage revenue remained constrained on the high number of pre-authorization denials forcing us into an appeals process in order to serve these patients. 77% of revenue in the second quarter came from the direct billing channel compared with 78% in the prior year quarter. International revenue was $1.5 million in the quarter, representing 15% of the total, primarily from Germany. International revenue was up 41% year-over-year. As of June 30, 2025, the pipeline stood at 1,611 patients, an increase of 37% year-over-year. 61% of the quarter end pipeline were patients with Medicare Advantage or other commercial insurance. In the second quarter, we added 816 patients to the pipeline, which is up 49% over the prior year quarter. This includes 54 patients who are identified by our OMP centers of excellence as we start to get visibility into their individual pipelines. While the pipeline adds were a record, they were lower than we expected given the lead flow and were also lower than we needed them to be given Medicare Advantage authorization rates and our expectations. Paul analyzed the pipeline in detail, so I won't repeat that here other than to point out that there were 213 Medicare Part B patients added in the second quarter or 28% of the total direct billing adds and the total Medicare Part B pipeline was 256 patients at quarter end or 16% of the total. As a result of the lower lead quality, cost per pipeline add, excluding the COE additions, was $2,926 in the second quarter, which was up 89% year-over-year. Backlog represents insurance authorizations and orders received but not yet converted to revenue. And in the case of Medicare Part B, patients for whom we've collected medical records and deemed qualified for delivery based on our inclusion criteria. We ended the quarter with a backlog of 230 patients, including 72 Medicare Part B patients, down 19% versus the prior year. The decrease in the total backlog reflects our higher intra-quarter conversion velocity and reduced Medicare Advantage authorizations and the fact that intra-quarter fill units are making up an increasing percentage of our quarterly revenues. Indeed, 53% of second quarter revenue units came from fill units. We received 207 authorizations and orders during Q2, a decrease of 3% year-over-year. Gross margin for the second quarter of 2025 was 62.7%, down from 70.8% for the prior year quarter. The decrease was driven primarily by higher material costs, demo unit builds and overhead spending, including payroll and higher lease expense for the new facility. Operating expenses for the second quarter of 2025 were $10.6 million, up 65% over the second quarter of 2024. This increase was driven primarily by higher advertising spending to compensate for lower conversion of leads to pipeline adds and by higher headcount throughout the organization as we increased capacity in the direct billing channel and spending on R&D efforts, including added headcount and outside engineering services. Advertising expense in the second quarter was $2.2 million, an increase of 162% year-over-year. As Paul discussed, we reduced fixed costs in July to better align operating expenses with revenue and to offset the higher advertising spend. We expect cash savings from this initiative to be at least $2 million over the next 12 months. Operating loss for the second quarter of 2025 was $4.6 million compared with an operating loss of $1.1 million in the prior year quarter. Net loss for the second quarter of 2025 was $4.6 million or $0.11 per share. This compares with a net loss of $1.1 million or $0.03 per share for the second quarter of 2024. During the 2025 quarter, approximately 2.7 million prefunded warrants were exercised. As of June 30, 2025, approximately 4.4 million prefunded warrants remain outstanding from our offerings in 2023 and January 2024. These prefunded warrants are considered common stock equivalents under GAAP accounting and are included in our weighted average shares outstanding. Adjusted EBITDA for the second quarter of 2025 was a negative $4 million compared with a negative $1.2 million for the second quarter of 2024. Turning now to our balance sheet and cash flows. Accounts receivable were $7.1 million as of June 30, up from $4.7 million as of March 31. The decrease was -- the increase was due to one of the DME MACs holding payments on claims for the entire quarter until CMS processed or address change in their systems. All aged claims have now been paid, but that payment hold affected second quarter cash flow by approximately $1.5 million. In addition, there were 2 other DME MACs that have been conducting prepayment audits of our claims since the beginning of the second quarter. To date, out of the 27 audited claims with determinations, 21 have been paid and 6 were denied and are currently in the appeals process. The claim audits take roughly 60 days to complete, which has negatively impacted our days sales outstanding. We expect that the majority of these claims -- of these denied claims will be reimbursed after appeals. Cash, cash equivalents and short-term investments as of June 30, 2025, were $15.5 million. During the quarter, we drew down $4 million on our credit facility to help finance additional advertising expenses and to offset the growth in receivables. Excluding this borrowing, cash burn was $10 million in the second quarter. Our guidance assumed an elevated cash burn due to a higher sequential operating loss, 2024 employee incentive payments and higher capital expenditures for the build-out of additional manufacturing space that will be coming online in the third quarter, capitalized software development costs and demo units for our clinicians and our O&P channel partners. Additional drivers of this elevated burn for the payment hold and a higher DSO in the DME MAC regions conducting audits as well as the repayment of approximately $700,000 to an insurer that overpaid us in a prior period. Excluding these additional drivers and the bonus payment, Q2 cash burn was $4.9 million, which is more reflective of our operating performance in the quarter. This normalized amount is a close approximation of the total cash burn we expect in the second half of the year. We believe that our cash, cash equivalents are sufficient to fund our operations for the next 12 months. Looking ahead, taking into account our historical cycle time from lead generation to pipeline adds and factoring in current conversion rates through our revenue cycle, the best path forward to sustainable positive cash flow is to continuing to spend on advertising while minimizing fixed costs. Despite the lower conversion rates and a higher cost per pipeline add, the direct billing channel still generates meaningfully positive incremental contribution margin. Cutting spending that supports the direct billing channel would begin to decrease revenues within a short period of time, which is a step backward on the path to positive cash flows. While the recent -- with the recent workforce reduction, our headcount is only about 10% above where it was at the start of the year, with new hires primarily supporting capacity in the direct billing channel, revenue growth in Germany and R&D. We plan to make only a few critical hires during the rest of the year and expect to exit 2025 with a significantly lower headcount than we had planned at the beginning of the year. Let me close with our financial guidance. Given our backlog entering third quarter and anticipated field units, we expect third quarter revenue to be between $9.5 million and $10 million, up 3% to 9% year-over-year. For the full year, we now expect revenue to be in the range of $40 million to $42 million, up 23% to 29% versus 2024. This revised guidance assumes recent history continues regarding Medicare Advantage authorization and pipeline conversion rates and moderate improvement in Medicare Part B patient flow. With that financial overview, I'll turn the call back to Paul.

Thanks, Dave. We're now ready to take your questions. Operator?

[Operator Instructions]

Before having the first question, I just want to thank all of you who attended our June 18 Investor and Analyst Day event, either in person or online. We posted materials and a webcast of the day on the IR section of our myomo.com website and members of our senior leadership team continue to be available to discuss our current operations and plans to scale the business significantly over the next few years. We will also be attending the H.C. Wainwright Conference virtually on September 8 through the 10th. Operator, let's now go ahead and take the first question.

The first question comes from the line of Chase Knickerbocker with Craig-Hallum.

maybe, Dave, just to start out, I'm trying to understand Q3 guidance a little bit more. If I look at it in my model, it looks like kind of conversion from backlog would have to tick up fairly meaningfully sequentially, and there'll also be kind of meaningful improvement sequentially in kind of backlog adds and so can you kind of elucidate what you're seeing so far through July and kind of mid-August here? Are you seeing a lot more fill units kind of would make kind of that elevated conversion for backlog makes sense.

And that's exactly what it is. We are seeing more fill units that are being a higher percentage of our backlog. So that's precisely what we're seeing. But even with that, we are -- the guidance is $9.5 million to $10 million, which is basically flat with where we were this year -- in the second quarter. .

Got it. And if I look at Q4, kind of what that implicitly guides to, you were talking about a decline year-over-year. And so if we also think about some of that O&P volume kind of being there, hopefully, again, the direct billing channel is down year-over-year, certainly. So can you kind of help with kind of specifically what you think maybe even outside of kind of some of the advertising wells, it's clear we're not getting kind of word-of-mouth benefit. I mean can you just kind of give me some overall thoughts as far as you think some of the challenges may be outside of advertising as well?

Yes. And I think that one of the things that we want to do is that -- and Paul mentioned it in his remarks, which is the referral program, we would like to be less dependent on advertising spending. And I think there's a good -- and Paul had a good quote in his comments earlier that we want to move up into that continuum of patient's care, and we're going to be helping us, ourselves and our O&P providers by doing a lot of the heavy lifting with trying to generate referrals for both of both our R&D partners and ourselves by looking into that incidence population and not relying so much ourselves on the prevalence population. And so we think by doing that, that will help with the conversion rate of pipeline adds because these people are closer to when their stroke occurred, and they may not have had some of these other comorbidities that might pop up as we might -- as we currently see with the prevalence population.

Got it. And if I think about the O&P channel, the 50-odd leads in the quarter, that's -- maybe share how many O&P providers you have trained at this point, but it's a fairly small number of kind of leads per O&P head. Is there kind of any plans as far as how we can kind of accelerate that contribution to the pipeline to maybe kind of, again, diversify away from the direct billing channel on the advertising side?

Sure. We plan for significant growth in the O&P channel. We've got about 100 CPOs in that process from -- they've gone through their evaluation training. They've started to do evaluations to become fully certified with us. You only have to build a pipeline, you have to get the authorizations and then you have to fit 3 MyoPros. And our clinical team has been expanded to work with these O&P providers around the country. And so we're getting more of them all the way through that process to get certified. That pipeline is growing compared to where it was earlier this year. We're going to be at EIOPA, which is the National American Orthotics Prosthetics Conference assembly coming up early September to recruit more of these O&P partners to meet with the ones that have already signed up. So I'm expecting we're going to continue to see growth in that channel. And as I mentioned, we want to get more of the incidence population. There are 800,000 strokes a year, 500,000 or more of those individuals survive the stroke and go to these rehab hospitals and half of them come out the back end where they've got chronic arm paralysis. So we've already engaged with these therapists to train them on the MyoPro. Now we're actively seeking to have them refer those patients to us and to our O&P partners so we can basically have more medically qualified patients earlier in their patient journey. So we think that's going to be a really good new source of patient leads for us.

Dave, just 2 last kind of financial questions for you. So first on kind of the advertising spend. Should we model that continuing to accelerate from a spend perspective kind of sequentially? And kind of where do you see that going? And then as we're shifting to kind of TV a little bit here, I mean, should we expect that cost per pipeline add stabilizes, goes a little bit higher, starts to come in a little bit? I mean, kind of talk to me about kind of that it's a little bit less focused advertising. Should we be modeling cost per pipeline add? How should we be modeling it?

Yes. I would assume that advertising dollars are roughly flat in third quarter with second. And then in fourth quarter, they generally go down. Historically, they're a bit lower because we -- there's competition from holidays and Medicare Advantage plans that are renewing their memberships and things like that. So we generally lower the advertising spending in the fourth quarter. As I think Paul mentioned in his remarks, with putting more of the advertising mix into television, cost per lead is expected to increase, but we do think the cost per pipeline ad will be lower in the third quarter compared to the second quarter. I don't -- I mean, it's going to take a while, I think, to get back to what a $1,500 was because there's -- we have -- there's conditions that I think are a bit more chronic that we have to overcome, like, for example, Medicare Advantage rates and the fact that some of the patients that we see are also -- we're disqualifying more of them. And so it's less of the pipeline is converting to -- in the backlog.

Next question comes from the line of Scott Henry with AGP.

First, if I could just for clarity, when you were talking about the O&P channel, I thought on the second quarter call, you noted 300 CPOs. Could you give us an update to that number, how many certified prosthetic orthotists have been trained?

Yes. That's right, Scott. About 300 have gone through the evaluation training. And then there -- it's up to them to then actively go out and seek their own pipeline, evaluate patients and then move forward through the certification process, where there's 3 in-person fittings with us. So out of those 300, we've got 100 active ones in addition to the hanger clinicians.

Okay. I think -- in my notes, I show it was 160 in the fourth quarter, '24. It was 300 at the end of the -- it was 160 at the end of the fourth quarter, 300 at the end of the first quarter. So for this quarter, is it a flat number? Or is it up -- maybe you don't have that number in front of you, but it's up some amount.

Yes. That number is probably up because a lot of people will take our online course about evaluations. But our O&P team is out there working with the active clinicians because -- not unexpectedly, not every clinician that goes through the training is out there marketing this. So the ones we're focusing on are the really active ones and it is about 100 of them right now.

I think we're -- as Paul mentioned, the 300 relates to sort of the eval training was the first -- which is the first step, but we're focused a bit more downstream now in getting these O&P certified.

Okay. All right. Yes, that's helpful. It clarifies a little apples to oranges there. But let's -- walking through the metrics. Obviously, a lot has changed. It's pretty hard to -- I mean, it seems like a lot of this information is evolving. But starting with the pipeline adds of 816, I know you're focused on quality as well now. Would you expect that number to be in the 900-plus range in the third quarter? Is it still growing? Or as you focus on quality, I don't know if you'll -- that may kind of just flatten out in an effort to get better leads. But curious your take on how we should think about that number.

Well, we're not giving specific guidance on pipeline adds for third quarter, but the things that we are doing is meant to grow the number of pipeline adds over time because we obviously need to do that if we're going to achieve the top line results that we're looking for. So no, we're not cutting back or anything like that on trying to grow pipeline adds. We're trying to -- through various means like the referral program and things like that, trying to generate more of them but maybe rely less on advertising to do so.

We are working through a record number -- Scott, we are working through a record number of leads though in June that we got from the advertising. So even at a lower rate of conversion of lead to pipeline, there's still a significant backlog of these leads for our call center and clinicians to work through.

Okay. And just another -- there's a couple of metrics that obviously jump out the past couple of quarters. That authorization rate, you may use a different fraction, but using my numbers, it used to be around 17% to 18%. In Q1, it was 14%. It looks like it's around 13% in this quarter. Would you expect that to get back up to the 17% range and over what time period?

No, I think it -- I think that rate is going to probably continue. Hopefully, it stabilizes here, but I think it's going to -- I don't know if it returns to the 17% until Medicare Advantage plans start authorizing more because as I mentioned, we had 1,611 patients in the pipeline, 61% of them were Medicare Advantage. And so the first-time authorization rate for a Medicare Advantage patient is somewhere around 15%. That means 85% of the pipeline adds for Medicare Advantage kind of sit there while we go through an appeals process and try to move them all the way through to an ALJ hearing. So that that's part of -- that's the headwind we face on trying to improve that authorization rate.

Okay. And then the final number in that model was the percentage of the pipeline that is lost. It used to be -- it's been a little higher. It's been as low as 22%. Now it's up kind of around 30%. Do you think -- is that number going to start improving? I guess, in theory, if the leads are better, that number should be decreasing. But just trying to get a sense of what you expect for that. I guess it's an attrition rate would be a...

Yes. One of the things that we're doing now, and we mentioned it is that there's -- for some patients, there will be a pipeline add and if they successfully pass that initial telehealth screening. But there are some patients that successfully passed that first screening that we view as patients that might be more marginal and might not be good candidates. So in order to try to weed out some of those patients more earlier in the process as opposed to waiting until potentially a fitting when we have the device in the patient's home, we're doing a second in-person evaluation for some of those more marginal patients. And so if those -- and about half the time for those second in-person evaluations, those patients won't continue. And then half the time, they will move on to the process. So for those half of the patients that don't continue, that reflects as a drop from the pipeline. So I would -- because we're going to continue to do that in order to try to get more patients that shouldn't be in a MyoPro out of the process sooner, I would expect that drop rate to continue to be in that 30% range that it is now.

Okay. And I mean, just -- I would just say in perspective, you guys have done a great job growing this business. I know it's a little tough right now, but if we look back a little further in the rearview mirror, it's been considerable growth. So I commend you for that even if it's challenging right now. But the final question is, do you feel that your confidence is improving in the metrics? I mean, I know at the Analyst Day, you kind of felt like you had it under control, but this wouldn't necessarily suggest that. But now that you've reset expectations, are you feeling an increased confidence? Or are you still trying to figure out how these levers are moving?

Yes. I would say we're encouraged by the July results on the metrics that gives us a sense that the modeling that we do internally is making sense versus what we're seeing. And so I would say the answer to that is I think we have identified -- I mean, there's a -- there's a lot of issues there and that we've talked about in the call. But I think we've identified most of them, and we have put plans in place to deal with those things. And we -- and where there's things like it's the leads, we've put fixes in place or it's things like a higher percentage of patients being disqualified. We know that, and we're dealing with it. We're putting plans in place to assume that, that continues and deal with it.

Next question comes from the line of Sean Lee with H.C. Wainwright.

My first one is on reimbursement. So you mentioned you're seeing a higher percentage of challenges, denials, especially from Medicare Advantage payers. So I was wondering whether you're seeing the same thing from commercial payers and whether this high number of denials is more of an industry trend that you're seeing or more specifically related to the lower quality leads that you've had in Q2? And do you expect this number to improve in the second half?

Sean, so what we've seen is, I think what the whole health care provider industry is seeing is that these Medicare Advantage plans are trying to deny to delay approvals. And so we are taking more to hearings, and we're winning more. In fact, our winning percentage has increased over the last 2 months because we have a strong medical case, and we have a strong legal case based on the code of federal regulations. On the commercial plans, some follow the same approach as Medicare Advantage. However, I can tell you that we are getting authorizations with commercial plans such as some of the Blue Cross Blue Shield plans where we've entered into contracts. And as I mentioned on previous calls and as Dr. Coleman presented at the Analyst Day, we're getting more and more state Blue Cross Blue Shield plans under contract, and that's facilitating authorizations under those plans.

Great. My last question is on the supply side. So you mentioned a part of the reason for the higher cost of goods was the increased supply cost. I was wondering whether these were related to the recent tariffs? And if we expect this number to hold steady for the rest of the year?

Yes. To clarify, I mentioned higher material costs, but that's not necessarily due to pricing increases. That's due to things like higher material used for like warranty, for example, warranty work, higher inventory adjustments that might happen during the quarter. So for things like that. We haven't seen too much in the way of price increases yet as it relates to tariffs, and we've only had, I think, a couple of vendors actually start to actually place price increases on us for that. So it's not meaningful right now. We put out -- we analyzed this a few months ago, and we still expect that the impact from tariffs might be only about 100 basis points on gross margin this year.

Next question comes from the line of Jeremy Pearlman with Maxim Group.

First question related to -- you mentioned earlier on the call that the leads from Facebook were of a lower quality than what you experienced in the past. Maybe do you have any reason why you think that was? And you did say you were shifting some of your -- the ad spend into television. Is there -- do you think that these lower quality Facebook social media leads are something that that's what's going to be in the future? Or is there a way to get that back to the higher quality leads that you've had in the past?

While Meta, which owns Facebook, implemented some new privacy policies around health care earlier in the year, similar to what Apple did with its iOS operating system a couple of years ago in that they used to be able to provide you with a more targeted group of people who might have been interested in stroke or rehab and so on. And that was very successful for us for the last several years. But with this change at the beginning of the year, we had to do some workarounds, look at what I call lookalike groups and so on. And we just found that the leads we were getting from Facebook, while the volume was increasing, they weren't as high quality, meaning the patients -- or whoever was responding to the leads have just been very curious or they weren't responsive to our call center. We make thousands of calls back to leads every month. And we just found that they weren't as engaged as in the past. So we just said, as Dave mentioned, we're shifting our dollars to what works. And so in our case, the targeted TV advertising we use has worked. We get more response to our call center and the ads there. And then will it change with Facebook? I don't know. We're kind of expecting it to be status quo. We'll see if we still put some of our advertising dollars into Facebook, but we've also diversified it to YouTube, Google ads and so on. So I can't tell if it's going to improve at Facebook or not.

Okay. Understood. And then I know you mentioned that roughly half of your pipeline adds come from leads within the past 30 days and then the rest 6 to 12 months. Is there any -- is there anything you could do to maybe shorten that 6- to 12-month time frame? Just -- I mean, again, just my assumption that a patient who's engaged initially might be more -- might be a higher quality than someone comes back 6 to 12 months down the line. Is there any way to shorten that time frame?

Well, we engage with the patients. We follow up with them. We'll send them information either online or by mail. And some people have been like waiting for this. And so it's like, yes, get me screened. I'm going to my doctor and so on. And we've seen a number of people. This is not like buying an impulse item. They say, this looks interesting. Let me talk to my family about it. Maybe I'll go back to my doctor. I'll go talk to other people. I'll go talk to the rehab hospital. Now there's only so much we can do because -- and there's a good part of our presentation during the Investor Analyst Day that talks about the steps in that patient journey, that we stay in touch with them. They're in our CRM system. We've got thousands of these people who've expressed an initial interest, and we find that they do come back. And when they come back, they are engaged because they say, okay, now I've thought about it. I want to move ahead.

Okay. Understood. And just last question from us. You mentioned, I think you said roughly 8% of the workforce was cut to help lower expenses, reduce expenses. Is there any part of the business that you're or plans that you had that are being pushed off now and delayed until, let's say, revenue comes back up to expectations? Or it's going to be business as usual in this you were able to find cuts that didn't -- are not affecting your really the day-to-day in your plan that you had?

Well, look, it's always tough to do a riff. We looked at how can we not impact the company's operations, both from a revenue perspective as well as quality of operations. We basically pretty much across the board, except in a few clinical areas, which are absolutely critical to the company's and the patient's success. We took down some headcount there. And as they pointed out, we're not adding any headcount because until we see that revenue growth, we're staffed up right now to build 80 to 120 devices a month. So that's kind of our target is let's get to that level of revenue units.

Next question comes from the line of Edward Woo, Ascendiant Capital.

It looks like you had another strong quarter in international, particularly Germany. Is there -- what's working over there? And is there any plans to accelerate growth even more than you have?

Well, in Germany, you're right, it's our strongest growing segment year-to-date. And they've done a good job with recruiting, training O&P providers, and they've got over 100 locations now that are certified on the MyoPro. And they also have a whole clinical team that has -- goes out to the rehab clinics and sources patients from those clinics, attends a lot of medical conferences. I've been to some like OT World. And that's been a good source of patient candidates. We're actually replicating some of that success here in the U.S. now going forward.

Great. Is there any plans for you to maybe step on the gas in Germany?

We are continuing to add a few more people in Germany. It's about hiring more business development managers and hiring more clinical staff. John Frijters, our Head of International, will tell you that the unemployment rate for occupational therapists is 0.6%. So our challenge there is recruiting quality therapists who want to leave the rehab hospital and come joining us. But we've been successful in doing that and the team is very motivated once they join the company.

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

Well, thank you all for your questions and for your ongoing interest in Myomo. And there was a lot to unpack in today's release, and I hope we've conveyed that we are making the adjustments that will lead to continued revenue growth and greater efficiency in our operations. And we appreciate the support of our shareholders and the Board as we drive the business forward, these goals of penetrating this large market to serve many more patients with chronic arm paralysis and building sustainable, profitable business here at Myomo. We'll speak to you again in about 3 months when we report out our Q3 financial results. Have a nice evening, everyone. Thank you.

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