Chit Chat Stocks - Myomo (MYO) | Fundamental Analysis

Episode Date: February 21, 2021

Myomo is a medical wearable robotics company. The company aims to fix neuromuscular disorders through its product offerings. Although Ryan and Brett are not professionals when it comes to robotics or neuroscience, they are able to break-down companies like Myomo. As always enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Subscribe to us on YouTube: https://www.youtube.com/c/ChitChatMoney Follow us on Twitter: https://twitter.com/chitchatmoney Email us: [e-mail] Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Fundamental Analysis Show, our Sunday episode on Chit Chat Money, where we're going to go through an individual company. Today, we got a recommendation from

someone on Twitter. I actually was going to pull it up, but it is Myomo, a micro-cap company, Something that we haven't been aware of before, but I will pull up the name. But Ryan, before we get started, we've got to talk about 7investing and the deal we have for our listeners. Yeah, you get $10 off. Typically, it costs $17, but you get $10 off your first month. I mean, it's a killer discount, and it's good service. We always enjoy it. And you know what else they do that I really like is those conference calls.

They have it like it's like you can respond, essentially. You can ask them questions on some of their holdings. So like if they recommended something and you thought it was pretty interesting and you read the whole report, you can ask them follow-up questions through that conference call. I think that's a big value add. I'd agree as well. Yeah, it's not like they're just putting out the picks

and then they don't talk to you. I mean, they're not calling you every day or anything, but if you want to talk to them, they are available. Looking forward to who their seventh analyst is going to be. I know they've got a new one coming on. We are excited for that. And if you use code CCM when you sign up and then you're in that conference call, tell them CCM sent you. Yeah, yeah.

I'm sure we'll get that from Matt and Simon. All the guys there will be excited for that. All right. MyOMO. I'll talk about them. Wait, let me find the person. It is Adu Subramanian. That is your Twitter handle.

I don't know if that's your real name, but Adu, thank you for finding this company. But yeah, Ryan, get right to it. Yeah. So, Myomo is a wearable medical robotics company. So, it's for patients with upper limb paralysis or neuromuscular disorders. So, common causes are like strokes, getting a car accident, or you have a spinal cord injury, cerebral palsy, even there's some other ones. But basically if someone has lost the ability to control voluntary movements to like their arm or their hand, this is what the MyoPro is for. And so it's this brace that goes all the way up your arm and it can help detect your basically movements, what you're trying to do with your arm. It uses whatever their patented technology is and obviously we are terrible. I mean you might understand it a little better than I do. At a basic level, again, I'm not an expert on the product, but at the basic level, they use EMG, which is essentially they're taking the electrical signals from either your spine or your brain, and they're using that to trace what you want your arm to do, and they're actually getting your arm to do it.

It's a lot more complicated than that, but I kind of think that's their technology they're using. It's kind of a cool robotic arm. I recommend going and looking at some YouTube videos because they have some pretty inspiring stories on there. But sales pretty much occur through my almost partners. So orthotics or prosthetics providers, veterans administration, they refer to that as a VA in their 10K or just different distributors in the geographic areas. So basically you go in, you get examined or let's say like a therapist or rehab specialist, someone who's examining you says you're not going to be able to rehab your way out of this. Would you consider a myopro? It's this arm that would allow you to kind of control your movements.

And then if they say, yeah, that's something they're interested in, then they will do a screening and do a custom fitting. And so this fitting is used to mold the brace, which Myomo outsources the actual manufacturing of it. And then they tack on their sort of software technology and then sell it. And most of the time it's insurance providers that are paying them. So they'll bill the insurance provider directly or sometimes they'll issue these braces to whoever the caretaker is at like a wholesale price. So the caretaker can buy it a little bit cheaper and then give it to their client that way. But history, the name Myomo is short for My Own Motion. And the company was actually founded all the way back in 2004 in Dr. Woody Flowers Mechanical Engineering Lab at MIT.

Good name. Interesting name. Dr. Flowers had apparently always been a pioneer in the prosthetic limb space. But while he was working with two of his grad students, they thought the prosthetics could help a different audience, not just people that lost limbs, but people who had the limbs, but they couldn't fully function them. And so they entered the MIT business competition and won $50,000. And this was sort of their product. And then with the help of someone named Steve Kelly, they spun it out of MIT and became their own company. And now Myomo's CEO is Paul Godanas.

Sorry if I'm mispronouncing that. And he found the company. He was friends with Steve Kelly who kind of – it sounds like he was sort of this aide, sort of advisor from MIT that – Spinning out from a lab to a company. Yeah. And so Paul Godanas was friends with him. And so he came on as CEO to sort of run it like an actual business. in 2011. And they went public in 2016. And now they are headquartered in Cambridge, Massachusetts.

They have about 50 full-time employees. Sorry if I'm getting that number wrong. I think they went public in 2016, but they've done a lot of sort of financial engineering. They went public pretty early on. So, I mean, it's only a six, you'll get into this, but it's only like a $70 million company. So, it's pretty small. Yeah. We're definitely looking at a micro cap here. I'll get into the valuation that leads right into it ev right now or enterprise value is about 68 million micro market cap is a bit above that they do have some cash on their balance sheet from a recent equity raise they did ticker is myo very easy to find i bet it trades on the otc markets but let's just check yeah i

believe so or no new york stock exchange wow there we go all right big guys yeah playing with the big dogs even though you're only that market but they were kind of a busted ipo uh so they might have been hyped up with that technology at the start you know uh the the share price has come down a bit um evd sales is still not cheap it's about 9.3 but it feels it feels okay for someone that's almost you know they've proven the product they're getting the revenue out there they're just trying to scale it up now so that you know with these pre like not it's not pre-revenue anymore but a lot of these early stage companies the sales ratios and even especially the profitability ratios are just kind of hard to even take stock of because you're really betting on a binary outcome

of all right does this product work like it says and okay is everyone going to start using that needs it that's what a lot of these health care companies kind of come down to yeah it is unprofitable as you probably would expect no dividend they have cash to last about another year at last year's burn rate but they did say they want to get to operating cash flow positive by the end of 2021. Definitely want to hold the feet to the fire there because we know that they have burned a lot of money in the past and companies aren't always, you know, they can say they're going to do that, but a lot of companies don't actually get there. Share count is growing quite rapidly. So that will be the main source of funding operations that they still don't make

money. Luckily for them, their share price has exploded. In the last few months here, we've talked about this frequently in the past few weeks, but basically every micro cap is going insane right now. But they did also do a reverse stock split. Yeah. Well, I don't think that was a while ago. I believe it's adjusted on Coifin, which I'm looking at, but over the last three months, stock is up from $6 a share to 16. Okay. Well, I'll get into the earnings then. So revenue for the first nine months of 2020 was $3.8 million. That's up 64% year over year. They reported preliminary fourth quarter results. And it was a little, it was another meaningful acceleration. But the gross margin on that was 58%. They had about $9 million in operating

losses in that time. So 3.8 million in revenue, 9 million in operating losses. They spent 10 million on SG&A and less on, yeah, I'm just going to remind you again, it's less than 4 million in revenue, $10 million in SG&A. So they're losing a lot of money right now. Definitely early stitch. Right. I mean, they've been around for a while, but yeah. So weighted average common shares outstanding went from about $591,000 to $4 million. That probably came from the reverse stock split too a bit. Some, yeah, but they do have a history of doing a ton of share offerings. I think from 2015 to 2017

share count quadrupled and that was without any stock reverse stock splits i'm pretty sure so that's sort of how they're financing it but then their authorization backlog is at 162 units up 35 quarter over quarter on december 31st the company had 12.3 million dollars in cash so that's about how much they have left right now and they do refer to cash burn as cash utilization which is a little bit of a friendlier term but they have they've said that cash utilization is at its lowest point um it has been yeah so they're getting closer and closer to breakeven and if you look at that backlog you think 162 units is small but these go into the tens of thousands of dollars uh for what something will cost there and they did have something about changing um they're not

going direct to consumer but they changed uh they took out some middlemen right and that's kind of been increasing gross margins correct yeah there's something about that they can i believe they can do direct but i mean if you think about it they aren't super inclined the the end patient comes to more of like these specialists you know they like the the care of a specialist and then the specialist saying hey yeah they need maybe you could use a myopro i so the middleman's kind of important there this isn't really yeah so it's not that i don't i want to look it up but i don't think it was the clinician middleman but yeah they definitely want to still go through that doctor relationship that's kind of what they need that doctor relationship to get the uh the products

to market because no one's going to be like all right i'm going to use this yeah it's a little bit of a strange dynamic because you like hope that there's less customers because well they're gonna i mean they're gonna be there right but um all right yeah do you have anything else i mean that's it for the earnings no i mean very simple company like the technology seems complex but when you look at this business you can see all the important things there's only a few things to actually look at and they have the required patents i believe they're the only company that does this um there are different technological ways to help with the limb paralysis but they're the only ones that have this kind of robotic arm and that patented technology and so they're able

to sort of price those arms for something pretty expensive a lot of it's obviously covered by insurance so um yeah yeah that's where if you see their gross margins improving it's more than likely just from price hikes yeah definitely definitely they do have that pricing power when something costs that much and when it's going to insurance uh but yeah we'll take a quick break here and then get to the second half of the show cox panoramic wi-fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one.

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in the Panoramic Wi-Fi app. Restrictions apply. Okay, welcome back in. digging trenches is up next what do you think about my omos moat zero one two or three um i feel unqualified to judge it honestly i'd say maybe a 1.5 because there might be legal there might be legally protected from competitors like someone probably couldn't produce the exact same thing as them because they have that patent around it but they are there's always technological in advancements in this space so the chips that people talk about um like being able to uh they

mentioned that in their 10k that you can like have the chips put into your brain and i know it starts to sound a little over my head but that can kind of totally make the arm obsolete or no need for it if there's a chip that you can put in the brain not the arm but the arm brace right and then the other one is they have there's these body suits um which is apparently does a similar thing but those are mostly for the lower limbs right now um they said potentially that those body suits could start to expand into the upper body as well now is that a myomo product or that is such a competitor competitor product okay yeah i mean i i'd say it's probably similar for me um you look at those patents it's probably pretty strong you know the patent and technology matters in the health care

space or the health tech space but they're very small uh i don't know it's kind of hard to describe you know it's definitely not three yeah i mean let's say there was a one of those chips that was kind of normalized and super successful it could totally bypass the need for the brace so that is where there is always the risk that uh innovation is happening a little bit faster and could just supersede anything that myeloma has so yeah that's probably the biggest threat to any sort of competitive advantage they have yeah all right further reading what are you looking for uh relationships with insurance providers so this is a thing i'll probably say for um or at least one of the things i always want to look for if it's a health care company and what typically

keeps health care companies into our too hard pile when looking at investments is just the relationships with insurance companies doctors medicare it's all i mean as everyone knows it's super convoluted uh no one can make sense of it most people don't understand any part of it including myself uh and that just puts it in too hard pile there's a huge hurdle to understanding uh the healthcare industry now understanding my almost products i don't think is a huge hurdle um it's really easy to see the use case in the value proposition it is an insanely strong value proposition you get one of your body parts back but understanding the business relationships is tough very very tough there's also a history of uh bad practice in health care especially devices

like this certain kickbacks um obviously that uh the theranos is always the tall tale that's kind of scary uh whenever you're investing in a kind of medical device company but for me i'm looking at the total addressable market so if i were interested in this business i'd really have to understand realistically how many customers could they have because it feels niche well they said one percent of the world population has some sort of um either partial or you know full paralysis so it's maybe larger than you think but but if you have full paralysis i'm not sure this can do anything for you that's the thing that i don't understand is how many customers actually would uh be fitting for this because they do have to go through a lot of screenings to make sure

that this is the right product for someone and how many can afford it because even if you have insurance you know it's a big it's a big thing yeah so just i guess paying attention to that tam um future growth opportunities i'll go first here uh they highlight this as sort of their big one but it's other body part prosthetics so they say in their 10k that they want to become the market leader in myoelectric limb orthotics. So right now it's all for arms. It's that giant arm brace that goes all the way pretty much from the shoulder to the hand. But they said they would potentially want to expand into shoulders, knees, legs, ankles, be able to fit for adults, also fit for children. So not sure how hard that would be, but obviously that's the end goal. That

is the bigger picture that they can just be really the myoelectric prosthetics for any sort of partial paralysis yeah and you could think i mean whatever the neurons or the electrical signals throughout different parts of the body are very similar it's the same little you know neurons and stuff firing back to your uh your brain so it seems like it'd be scalable to every part of the body but uh i mean there's a lot of parts that go into this so they have to get it right for each thing because the brace is super important with the functionality and stuff like that but you know I mean, it feels like the leg market, and I hate talking about this in a business sense, but it feels like there's more leg injuries that result in that kind of thing than arms. Yeah.

But the leg motion is a lot harder because you have to do that dynamic motion of people walking. Yeah. And I'd also, I guess this maybe could have gone to my further reading, but what's their relationship like with the Veterans Administration? because I figured they get a lot of veteran clients or customers from accidents abroad and stuff like that. Yeah, military stuff. All right, yeah, yeah, that makes sense. Okay, I'll hit mine.

So this isn't really like part of the technology, but making it more sleek. So if you look at their current product, it's very bulky, it's very clunky. So for future iterations, if they're able to maybe resell another updated product through the insurance providers, it could appeal to more customers. Now, I know that technology comes first and people, you know, really like it when they get there. It's probably amazing when you get your arm back, but it's bulky

and it looks like it's not perfect, you know, because it's kind of, you're still kind of having a big arm brace. It looks similar to what, you know, there's a lot of football players in the NFL that wear those things on their elbow. It looks similar to that where, okay, yeah, you got some of your range of motion back but it's not the same so they can make it smaller something like that that could really maybe appeal to more people yeah i think maybe some people are maybe appearance goes out the window when it when you're talking about getting a limb back but if you can be able to

tuck it under a coat or a sweatshirt something like really easily yeah just i think there's room for that as i don't know people it's way above our expertise uh you know internet of things, stuff like that, getting the computing and stuff into just ever smaller stuff to get the arm motion back. But next up is highlights and lowlights. What do you got for this business? So what they're doing for the world is great. So that is kind of the highlight is, and people are willing to pay a lot to get a limb

back. So that's- Great value proposition. That is, yeah, that part is good. And the technology is patented. I think it's a confidence booster for me that it was developed in the MIT lab. I don't know why. Just the namesake kind of gives a little more sense of trust that way.

I did watch an interview with the CEO and he doesn't – it feels less like – this is a business that was built for customers and not really built for shareholders. Yeah. They are in the financial markets to finance the ability to serve their customers and the CEO felt like he was centered on that. So if you're investing, it's like, yeah, you're doing it for a good cause but I'm not sure you're going to be able to get that much value back. And the other part is there's been a ton of financial engineering. The reverse stock split, they did like a shelf offering at one point. There's been – They do have an at-the-money offering, yeah.

I think it might be outstanding, too, where that's how they raise money in the summer, potentially. I mean, the dilution has been absurd. So you are really, really running that risk. And then the competitive, the ability for a new product to make them completely obsolete is very real. So I guess that would be a potential low light as well. Yeah, yeah, definitely makes sense. You know, there's the, I guess, not catch 22. you're kind of weighing the two things where all right well if this is a product where they're a

customer-centric company that's good for the business and people have shown that you know amazon's the greatest example of uh companies that focus on their customers usually win their markets in the end and that's great but you have to weigh with this type of business how much value are they going to be able to get back to shareholders because they're really focused on providing a healthcare need to the world and it almost feels you almost feel guilty profiting off of you know people with disabilities yeah not to say oh gosh this sounds about but you're you are literally investing in a non-profit right now because they don't make money producing any profits uh nor have they so it's like they are burning just a ton of money and it feels like

that's why they're in the public markets is to survive and be able to help their customers and helps them raise more yeah and uh it helps them raise money but that's the risk you're taking with something like this it's a micro cap yeah uh and you know the risk reward is high there uh i'll get to my or you have anything i was gonna say maybe i'm underestimating their ability to provide to customers um and kind of scale up because i'm looking at i'm like they got 50 employees right now you're burning 10 million dollars a year on just general and administrative expenses you've overhired so if you don't sort of hit that annual revenue mark you're going to be operating at a loss for a while or you're gonna have to fire a bunch of employees and yeah they

definitely have to that situation that probably got a double revenue to get into the ballpark of breakeven tickets a real good profitability probably triple revenue assuming that all that revenue is pure margin yeah well i said their losses are even probably larger yeah now this is yeah it feels similar a company that we've looked at before that is a bit similar would be a similar scientific who has a single technology piece for the healthcare industry however the difference between my almost products and similar scientific is similar scientific has recurring revenue from licensing the software that goes with it yeah my almost can't do that um it feels almost immoral to me and this is one of the lowlights of the business model is that really like charging a

subscription to access like the software you know like they could technically connect it to the internet and turn it off and on uh which feels very immoral to me for to do that to someone with a disability and they likely won't do that but it's a one-time purchase um you're getting a one-time payment from an insurance provider that's great it's a giant one-time purchase but it feels lumpy yeah it really is it really is a one-time purchase and any way that you try to think of some sort of recurring revenue strategy it does seem immoral yeah that's kind of it's a weird thing about it but i i do think that it looks like there's a lot of room to invest in the technology for you know updated versions that are better so that could be another way for you

know hardware updates uh but it's definitely not going to be able to charge someone on a monthly contract yeah agreed i mean yeah yeah you have anything else uh highlights i mean it's a real healthcare product it's not theoretical uh it's proven and it looks like they should get to break even soon if they follow this pack path but i don't know how much i trust management to get there if they do that's great uh and right now they're acting as a monopoly so really looking for execution there is the competition on the horizon in these high-tech spaces i mean the biggest example for us is someone we like to follow from the investing side is someone called josh wolf from lux capital they invest in high-tech vc things and they're investing in a lot of companies

to disrupt something like miamo make a better version and that's better for society but miamo shareholders it's a lot different than um soda you know there's always people trying to beat you yeah and it's not about your brand it's about the technology uh so that's a low light for me um shared illusion again is a low light overall it's not a business i personally like health care don't like health care um i guess that's really the main thing don't like health care don't like one-time purchase you know companies it naturally sort of falls into my too hard pile and i try i'm trying to sort of expand that circle of competence but it gets dangerous when you pretend you understand something you don't yeah and i don't even know if i want to

into the health care industry i don't know it's just too impacted by government which sucks but it just kind of is or not even government too it's impacted i guess that's the medicare side and the veterans administration is probably government as well but uh the insurance companies kind of it's all up to them as well yeah so there's a lot of counterparts more or less interested definitely less but i'll caveat this wouldn't be surprised if it does well if you're investing in this um i again we don't give out recommendations but it feels like something uh in austin lieberman style who's a friend of the show who is an investor and he takes maybe what you would call higher risk high reward bets and the way he likes to do it is i don't want to

put words in his mouth but how he's described it to us before is spreading out bets so austin if you're listening this feels right up your alley um where something that you know it could definitely be a 10 bagger you could easily see that happening but you have to know going in all right i'm not going to risk a permanent loss of capital with 10 of my portfolio yeah i i agree with that i mean it's hard to look at the current financials and be uh optimistic going forward that's just they've been operating at a loss for a while since they've been public um i i looked at the s1 even the year prior they were not profitable so um i guess that is the concern but if you think management uh is good to their word and they can become operating cash flow positive by 2021 then

if that starts to happen yes this is going to be a much bigger business than a 60 million dollar company um and that is i mean that's the nature of micro caps uh you can have a big winner but obviously and then the current that with risk yeah the current valuation too is a little expensive where people are like well it's expensive because it's a micro cap but i kind of look at it where if it's a micro cap and it's riskier you really should think that compared to an established business with a really strong competitive advantage and economies of scale you'd think it would you know something like miomo should trade at a discount because of the risk embedded into the business so when you look at an ev to sales of nine even though their gross margins

are solid even though they have a giant growth opportunity i mean nothing's proven so yeah that feels a bit expensive to me there were people it feels so normalized now to be like oh well it's below a price to sales of 10 it's not that bad but it's like that price to sales of 10 was expensive two years ago even for these higher more profitable businesses

so but I mean just again if you want a coffee can a few shares that doesn't feel like a bad

idea at all yeah that's true alright that's a good alright that's a good episode thank you all for

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