MYOMO, INC. annual report, FY2017

MYOMO, INC. — 2017 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter items are discussed where disclosed.

Business Context

Myomo is a commercial-stage medical device company developing and selling MyoPro, a custom-fabricated, myoelectric upper-limb orthosis for people with neuromuscular disorders, including stroke, spinal cord injury, brachial plexus injury and traumatic brain injury. Products are sold through orthotics and prosthetics practices, the Veterans Health Administration and distributors, including Ottobock.

MyoPro is registered with the FDA as a Class II medical device.
Myomo obtained CE Mark approval in July 2017 and a Canadian medical device license in October 2017.
The company completed its initial public offering in June 2017 and a follow-on public offering in December 2017.
At December 31, 2017, Myomo employed 22 full-time and two part-time employees.

Key Financial Metrics

Metric	2017	2016	Change
Revenue	$1.559 million	$1.103 million	Up 41%
Gross margin	$1.054 million	$0.821 million	Up 28%
Gross margin percentage	68%	74%	Down 6 percentage points
Research and development expense	$1.752 million	$1.121 million	Up 56%
Selling, general and administrative expense	$5.850 million	$2.975 million	Up 97%
Loss from operations	$6.548 million	$3.275 million	Loss increased
Net loss	$12.097 million	$3.617 million	Loss increased
Net loss available to common stockholders	$12.659 million	$4.384 million	Loss increased
Basic and diluted loss per share	$2.93 loss	$4.13 loss	Loss per share improved due primarily to share issuances
Adjusted EBITDA	$6.257 million loss	$3.173 million loss	Loss increased
Cash used in operating activities	$6.153 million	$3.203 million	Cash use increased
Cash used in investing activities	$0.067 million	$0.002 million	Cash use increased
Cash provided by financing activities	$18.383 million	$2.959 million	Material increase
Cash and cash equivalents at year-end	$12.959 million	$0.797 million	Material increase
Working capital	$12.361 million	$(1.855) million	Improved materially
Accumulated deficit	$34.973 million	$22.875 million	Deficit increased

Revenue, Margins and Operating Results

Product revenue increased approximately 33%, while grant revenue increased to approximately $118,000 from approximately $21,000.
Revenue growth was partly offset by lower-margin demonstration-unit sales to Ottobock, a $24,000 excess and obsolete inventory reserve, and the absence of certain high-margin minimum-purchase revenue recognized under the prior Össur arrangement.
Operating expenses rose substantially as Myomo expanded sales, marketing, engineering, clinical research, administrative staffing and public-company infrastructure.
The 2017 net loss included a $5.172 million non-cash debt discount charge associated with conversion of convertible notes at the IPO, a $135,000 loss on early extinguishment of debt and a $117,000 favorable change in derivative liability fair value.

Liquidity, Financing and Debt

Financing activities generated $18.383 million during 2017, including net proceeds of approximately $4.368 million from the IPO, $2.923 million from a concurrent private placement and $10.408 million from the December follow-on offering.
The December offering sold 4,801,250 common shares and warrants to purchase 4,801,250 shares, with warrants exercisable at $2.95 per share through December 2022.
Convertible notes totaling approximately $5.467 million, including accrued interest, converted into 1,055,430 common shares at the IPO.
Myomo repaid the MLSC note for approximately $875,000 in December 2017 and settled approximately $1.081 million of shareholder notes through issuance of 193,509 shares in November 2017.
No principal debt was reported at December 31, 2017; current liabilities included $39,930 of derivative liabilities, $1.277 million of accounts payable and accrued expenses, and deferred revenue.
Despite year-end cash of approximately $13.0 million, the auditor reported substantial doubt about Myomo’s ability to continue as a going concern because of recurring losses, operating cash burn and the expected need for additional financing.

Material Changes Versus 2016

Revenue grew 41%, but operating expenses grew 86%, resulting in a substantially larger operating and net loss.
Gross margin declined from 74% to 68% because of product and channel mix, inventory reserves and the loss of certain minimum-purchase revenue benefits.
Cash increased sharply following the IPO, private placement and follow-on offering, while operating cash consumption nearly doubled.
All outstanding preferred stock converted into common stock at the IPO, eliminating the preferred-stock balance and related preferred dividends from the year-end capital structure.
Common shares outstanding increased significantly, and potential dilution expanded to 6.277 million shares from outstanding warrants and 369,004 shares from stock options at year-end.
Myomo early adopted ASU 2017-11 in the fourth quarter, allowing the December offering warrants with down-round provisions to be classified as equity rather than derivative liabilities.
The December 2016 balance sheet was revised to reclassify approximately $1.194 million of MLSC debt from non-current to current liabilities; total liabilities and previously reported earnings were unchanged.

Guidance, Outlook and Management Commentary

Management expects product revenue to grow through expanded selling and marketing efforts, but expects grant revenue to become less significant.
Management expects research and development, sales and marketing, administrative and reimbursement-related expenses to continue increasing.
Ottobock was a major customer in 2017, but the parties agreed that there would be no guaranteed minimum purchase requirement in 2018; management expects Ottobock revenue to decline significantly in 2018 compared with 2017.
Myomo plans to pursue Medicare reimbursement through two requested HCPCS codes. The application remained subject to CMS review, with no assurance of approval, favorable coverage or adequate reimbursement.
Clinical research, including a pivotal multi-site randomized controlled study, is intended to support product adoption and reimbursement, but the filing does not provide a specific completion date or outcome.
Management stated that additional capital will be needed to fund operations and execute its business plan. No committed external financing source was available at year-end.

Principal Risks and Unusual Items

Going concern: The company has a history of losses, negative operating cash flow and an accumulated deficit of approximately $35.0 million. Additional financing may be unavailable or dilutive.
Reimbursement dependence: Sales depend heavily on case-by-case reimbursement from Medicare, commercial insurers, the VA and other payers. Failure to obtain a unique HCPCS code or broad coverage could materially limit demand.
Customer and distributor concentration: Three customers represented approximately 54% of 2017 revenue excluding grant income. Ottobock’s 2018 purchase commitments were not guaranteed.
Manufacturing concentration: Cogmedix manufactures the electromechanical kit and GRE, a related-party business owned by a Myomo executive, provides custom fabrication. Disruption at either provider could affect production.
Regulatory and product liability exposure: FDA, foreign regulatory and quality-system requirements could result in recalls, restrictions, delays or additional costs. Long-term clinical data remains limited.
Intellectual property: Myomo relies on exclusive MIT licenses for two core patents, with minimum annual maintenance payments and royalties. The licensed patents expire in 2023, and the license may be terminated for certain uncured breaches.
Dilution: Outstanding warrants and options could materially increase the common share count. At year-end, warrants covered 6.277 million shares and options covered 369,004 shares.
Tax assets: Federal and state net operating losses are subject to Section 382 limitations; management estimated that approximately $5.0 million of pre-change federal NOLs will expire unused.
Related-party activity: The company purchased fabrication and consulting services from a related party and recognized approximately $356,000 of related-party charges in 2017.

Most Important Facts to Verify

Whether Myomo obtains CMS HCPCS codes and broad, economically sufficient reimbursement for MyoPro.
Actual 2018 revenue from Ottobock and whether direct sales and new geographic markets offset the expected decline.
Cash burn, financing activity and the timing and terms of any additional capital raise in light of the going-concern qualification.
Unit shipments, product-level gross margins and the sustainability of the 68% consolidated gross margin.
Progress, results and funding commitments for the pivotal clinical study and other reimbursement-supporting research.
Manufacturing capacity, supplier dependence, warranty claims and inventory reserves as sales scale.
The fully diluted share count, including the 6.277 million year-end warrants, options, restricted stock and subsequent warrant exercises.
The filing contains inconsistent descriptions of certain subsequent warrant exercises; the exact number of warrants exercised and shares issued after December 31, 2017 should be confirmed against later SEC filings.