Myomo, Inc. Form 10-Q Summary
Business context and reporting period
Myomo develops and sells MyoPro myoelectric upper-limb orthoses for individuals with neuromuscular disorders. Products are sold through orthotics and prosthetics practices, the U.S. Department of Veterans Affairs, hospitals, and distributors including Ottobock. The filing covers the three and six months ended June 30, 2017, with comparisons to the corresponding 2016 periods. Myomo completed its IPO and concurrent private placement on June 9, 2017, and began trading on the NYSE American under “MYO.”
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $306,683 | $254,070 | $522,914 | $470,990 |
| Gross margin | $208,042; 68% | $203,884; 80% | $345,704; 66% | $361,738; 77% |
| Operating loss | $(1,933,442) | $(688,578) | $(3,297,131) | $(1,246,695) |
| Net loss | $(7,381,854) | $(759,889) | $(8,938,254) | $(1,387,460) |
| Net loss available to common stockholders | $(7,754,584) | $(950,745) | $(9,500,044) | $(1,769,175) |
| Basic and diluted loss per share | $(3.35) | $(0.94) | $(5.52) | $(1.76) |
| Adjusted EBITDA | $(1,655,786) | $(670,047) | $(2,997,167) | $(1,215,011) |
- Six-month revenue increased 11%, but product revenue declined by approximately $15,000; the increase primarily reflected approximately $67,000 of additional grant revenue.
- Cash used in operating activities was $2.75 million for the six months ended June 30, 2017, compared with $0.98 million in 2016. Investing cash use was $4,987.
- Financing activities provided $9.07 million, including $4.42 million of net IPO proceeds, $2.92 million from the private placement, and $1.77 million from convertible notes.
- Cash increased from $797,174 at December 31, 2016 to $7.11 million at June 30, 2017. Working capital was approximately $5.78 million versus a $1.86 million deficiency at year-end 2016.
- Total liabilities were $3.91 million, including $876,458 of shareholder notes, $1.16 million of MLSC notes, $167,592 of noncurrent accrued interest, and $311,733 of derivative liabilities.
- The accumulated deficit was $31.81 million. Management stated that the financial statements raise substantial doubt about the Company’s ability to continue as a going concern and that additional capital will be required.
Material changes versus the prior comparable period
- Revenue growth was modest and was driven mainly by grants rather than product sales. Product revenue was pressured by lower unit sales and a greater mix of lower-priced distributor sales.
- Gross margin declined from 80% to 68% in the quarter and from 77% to 66% for the six-month period. Drivers included lower average selling prices, Ottobock demonstration-unit sales, and approximately $36,000 of excess and obsolete inventory reserves.
- Research and development expense rose 174% in the quarter and 126% year to date, reflecting product development costs and a $300,000 incentive bonus to an engineering executive.
- Selling, general and administrative expense increased 126% in the quarter and 127% year to date because of higher stock-based compensation, personnel, public-company professional fees, travel, clinical research, and executive bonuses.
- Net loss was significantly affected by a $5.17 million noncash debt-discount charge related to the conversion of convertible notes, as well as $155,008 of year-to-date derivative-liability fair-value expense.
- All outstanding Series A-1 and Series B-1 preferred stock converted into 2,622,187 common shares at the IPO. Convertible notes and accrued interest totaling $5.47 million converted into 1,055,430 common shares.
- The December 31, 2016 balance sheet was revised to reclassify $1.19 million of MLSC notes from noncurrent to current liabilities; total liabilities and equity were unchanged.
Guidance, outlook, commentary, risks and unusual items
- Management expects continuing operating losses and negative operating cash flow while expanding sales and marketing, developing products, funding clinical research, pursuing reimbursement, and absorbing public-company compliance costs.
- Ottobock distribution began in 2017 and includes minimum purchase requirements. Management expects revenue from the primary reseller to exceed prior-year levels, although distributor sales may carry lower margins.
- The Company obtained the CE Mark for MyoPro on July 31, 2017, enabling sales in the European Union. The filing does not provide formal revenue or earnings guidance.
- A revolving credit commitment of up to $1.0 million was provided by the CEO, subject to definitive documentation, at a 10% annual interest rate and generally terminating by December 31, 2018 or upon qualifying external financing.
- Shareholder notes were extended to June 8, 2019, and MLSC notes were extended to May 7, 2019, with repayment terms and acceleration provisions described in the filing.
- Major risks include dependence on third-party reimbursement, limited operating history, continued losses and financing needs, reliance on Ottobock and other distributors, dependence on Cogmedix and GRE for manufacturing and fabrication, regulatory and product-liability exposure, competition, intellectual-property licenses from MIT, customer concentration, and potential NYSE American listing requirements.
- The filing states that no material litigation was pending. There were no off-balance-sheet arrangements.
- Subsequent to quarter-end, the Company issued 50,637 shares upon stock-option exercises. Management concluded that disclosure controls and procedures were effective as of June 30, 2017.
Important facts for investors to verify
- Whether the $7.11 million cash balance and financing proceeds are sufficient given the $2.75 million six-month operating cash burn, continuing losses, debt repayments, and the disclosed going-concern uncertainty.
- The actual mix of product, distributor, grant, and minimum-purchase revenue, and whether Ottobock volume can offset lower distributor pricing and margin.
- The status and timing of reimbursement expansion, including Medicare coverage and any future HCPCS code, which management identifies as important to market adoption.
- The terms, documentation, availability, and utilization of the CEO’s proposed revolving credit line and the maturity or acceleration provisions of outstanding notes.
- The potential dilution from outstanding options and warrants, including approximately 1.43 million warrants outstanding at June 30, 2017, in addition to options and subsequent option exercises.
- The effect of the IPO, private placement, preferred-stock conversion, convertible-note conversion, and related noncash accounting charges on capitalization and future share count.
- The filing’s differing presentations of IPO net proceeds: the financial statements report approximately $3.99 million net of offering costs, while MD&A also discusses approximately $4.66 million net of selling-agent commissions before certain other expenses.