Myomo, Inc. 10-Q Summary
Business Context and Reporting Period
Myomo develops and sells MyoPro myoelectric upper-limb orthoses for people with neuromuscular disorders. Products are sold through orthotics and prosthetics practices, the Veterans Health Administration, hospitals and distributors, including Ottobock. This Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30, 2018 | Year-over-Year Change | Six Months Ended June 30, 2018 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $632,369 | +106% | $945,548 | +81% |
| Gross margin | $431,923; 68% | Margin flat | $637,022; 67% | Margin up from 66% |
| Operating expenses | $3,113,987 | +45% | $5,721,983 | +57% |
| Loss from operations | $(2,682,064) | Loss increased | $(5,084,961) | Loss increased |
| Net loss | $(2,629,561) | Improved from $(7,381,854) | $(4,974,963) | Improved from $(8,938,254) |
| Net loss per share | $(0.21) | Improved from $(3.35) | $(0.41) | Improved from $(5.52) |
| Adjusted EBITDA | $(2,512,039) | Declined from $(1,655,786) | $(4,563,981) | Declined from $(2,997,167) |
Product revenue increased 159% in the second quarter and 113% in the first six months, driven by higher unit volumes, increased direct sales and a higher average selling price. Grant revenue declined to approximately $4,500 in the quarter and $9,000 year to date, compared with $64,000 and $82,900, respectively, in 2017.
Research and development expense declined 31% in the quarter and 19% year to date, primarily because of a $300,000 engineering executive incentive bonus recorded in the second quarter of 2017. Selling, general and administrative expense increased 83% in the quarter and 89% year to date due primarily to additional sales, marketing and administrative personnel, professional fees, travel, facilities and marketing costs.
Cash and cash equivalents were $11.7 million at June 30, 2018, compared with $13.0 million at December 31, 2017. Including restricted cash, total cash was $11.8 million. Working capital was $11.2 million, compared with $12.4 million at year-end. Operating cash use was $4.6 million for the six months, compared with $2.7 million in 2017. Financing activities provided $3.4 million, primarily from warrant exercises, while investing activities used $81,457.
Total liabilities were $1.6 million at June 30, 2018. The filing states that outstanding debt had been repaid and convertible notes had converted into common stock; current liabilities primarily comprised accounts payable, accrued expenses, derivative liabilities and deferred revenue.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated, with product revenue more than doubling year to date, while grant revenue continued to decline.
- Gross margin remained broadly stable at 67% to 68% despite higher warranty costs associated with a three-year standard product warranty.
- Operating expenses increased substantially, particularly SG&A, as Myomo expanded its commercial organization and reimbursement efforts.
- Reported net loss improved because 2017 included a non-cash $5.2 million convertible-note debt discount charge and higher derivative-liability expense. Underlying operating losses and Adjusted EBITDA losses worsened.
- Warrant exercises generated approximately $3.6 million of proceeds and increased common shares outstanding. Approximately 5.1 million warrant shares and 594,861 option shares remained potentially issuable at June 30, 2018.
- Myomo adopted stock-compensation accounting changes effective January 1, 2018 and recorded $492,080 of stock-based compensation in the first six months.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative revenue or earnings guidance. It expects product revenue to grow through expanded O&P channel and direct sales efforts, but expects grant revenue to become less significant. Ottobock had no guaranteed minimum purchase requirement for 2018, and management expected Ottobock revenue to decline materially from 2017 levels.
CMS issued a favorable preliminary decision on two proposed HCPCS L-codes for MyoPro products. If made permanent, the codes were expected to become effective January 1, 2019; payment terms remained pending. Reimbursement from Medicare, private payers and other third parties remains a central commercialization risk.
The financial statements state that substantial doubt exists about Myomo’s ability to continue as a going concern within one year after issuance. The company has incurred recurring losses, had an accumulated deficit of approximately $40.0 million and used $4.6 million in operating cash during the first six months. Management expects to seek additional equity or debt financing, but provides no assurance that capital will be available on acceptable terms.
On July 2, 2018, Myomo filed an S-3 shelf registration for up to $75 million of securities and entered into an at-the-market agreement for up to $15 million of common stock, subject to limitations, with a 3% sales-agent commission. Any future equity issuance could dilute existing holders.
Additional risks include dependence on third-party reimbursement, a single contract manufacturer and limited suppliers, related-party fabrication services, regulatory and product-liability exposure, reliance on licensed MIT technology, customer concentration, competition, limited operating history and potential dilution from outstanding warrants, options and equity awards. No material litigation was pending at the filing date.
Important Facts for Investors to Verify
- Whether CMS finalized the proposed HCPCS codes and established reimbursement levels sufficient to support profitable sales.
- Myomo’s cash runway given quarterly operating cash burn and the company’s stated need for additional financing.
- Revenue concentration, including the related-party customer that represented approximately 26% of six-month revenue and 40% of accounts receivable at June 30, 2018.
- The sustainability of product-revenue growth after the expected reduction in Ottobock purchases and the decline in grant revenue.
- The effect of expanded SG&A spending on operating leverage, Adjusted EBITDA and future financing needs.
- Potential dilution from approximately 5.1 million outstanding warrant shares, stock options, restricted stock and the proposed at-the-market offering.
- Manufacturing, fabrication, reimbursement, regulatory, warranty and intellectual-property contingencies that could limit commercialization or increase costs.