MYOMO, INC. - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2021

or

For the transition period from                      to                      .

Commission File Number 001-38109 

MYOMO, INC.

(Exact name of Registrant as Specified in its Charter)

(617) 996-9058

Registrant’s Telephone Number, Including Area Code

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes:  ☒    No:  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

At May 1, 2021, the registrant has 5,604,023  shares of common stock, par value $0.0001 per share, outstanding.

Summary of the Material Risks Associated with Our Business

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q constitutes forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negatives of these terms or other comparable terminology.

You should not place undue reliance on forward looking statements. The cautionary statements set forth in this Quarterly Report on Form 10-Q, including in “Risk Factors” and elsewhere, identify important factors which you should consider in evaluating our forward-looking statements. These factors include, among other things:

Although the forward-looking statements in this Quarterly Report on Form 10-Q, are based on our beliefs, assumptions and expectations, taking into account all information currently available to us, we cannot guarantee future transactions, results, performance, achievements or outcomes. No assurance can be made to any investor by anyone that the expectations reflected in our forward-looking statements will be attained, or that deviations from them will not be material and adverse. We undertake no obligation, other than as may be required by law, to re-issue this Quarterly Report on Form 10-Q, or otherwise make public statements updating our forward-looking statements.

TABLE of CONTENTS

Part 1. FINANCIAL INFORMATION

MYOMO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the condensed consolidated financial statements. 

1

MYOMO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

2

MYOMO, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)

3

MYOMO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

4

MYOMO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

5

MYOMO, INC.

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

Note 1 — Description of Business

Myomo Inc. (“Myomo” or the Company”) is a wearable medical robotics company that develops, designs, and produces myoelectric orthotics for people with neuromuscular disorders. The MyoPro ® myoelectric upper limb orthosis product is registered with the U.S. Food and Drug Administration as a Class II medical device. The Company sells its products directly to patients, to orthotics and prosthetics (O&P) providers, the Veterans Health Administration, rehabilitation hospitals, and through distributors. When we provide devices directly to patients and bill their insurance companies directly, we may evaluate, cast and fit the MyoPro devices using our own clinical staff or utilize the clinical consulting services of O&P professionals for which they are paid a fee. The Company was incorporated in the State of Delaware on September 1, 2004 and is headquartered in Boston, Massachusetts.

Liquidity

The company has incurred recurring losses to date and had net losses of approximately $3.0 million and $3.8 million during the three months ended March 31, 2021 and 2020, respectively. Cash used in operating activities was approximately $2.1 million and $2.4 million for the three months ended March 31, 2021 and 2020, respectively.  The Company has historically funded its operations through financing activities, including raising equity and debt capital.

The Company’s operating plans are primarily focused on scaling up its operations, increasing the proportion of patients carrying commercial health insurance with payers that have historically reimbursed for the Company’s products and continued work with the Centers for Medicare and Medicaid Services, or CMS, and their administrative contractors regarding reimbursement of its products. In addition, the Company believes that it has access to capital resources through payment of a license fee associated with the Company’s entry into a joint venture and technology license agreement with Beijing Ryzur Medical Investment Co., Ltd. possible public or private equity offerings, exercises of outstanding warrants, debt financings, or other means.  Debt financing may require the Company to pledge other assets and enter into covenants that could restrict certain business activities or its ability to incur further indebtedness; and may contain other terms that are not favorable to the Company or its stockholders.

During the first quarter of 2021, the Company received approximately $7.3 million from the exercise of outstanding warrants.  Based on the Company’s cash balance of approximately $17.4 million as of March 31, 2021and its expected cash flows, the Company believes that its available cash will fund its operations for at least the next twelve months from the issuance date of these financial statements.

Note 2 — Summary of Significant Accounting Policies

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements and notes are representations of the Company’s management, who are responsible for their integrity and objectivity. These statements have been prepared in accordance with GAAP for interim financial information pursuant to Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) that are considered necessary for a fair presentation of the condensed consolidated financial statements of the Company as of March 31, 2021 and for the three months ended March 31, 2021. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the operating results for the fiscal year ending December 31, 2021, or any other period. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and related disclosures of the Company as of December 31, 2020 and 2019 and for the years then ended, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Myomo Europe GmbH. All significant intercompany balances and transactions are eliminated.

Comprehensive Loss

Comprehensive loss includes all changes in equity during a period, except those resulting from investments by stockholders and distributions to stockholders. The Company's comprehensive loss includes changes in foreign currency translation adjustments. There were no reclassifications out of accumulated other comprehensive loss in the periods ended March 31, 2021 and 2020. 

6

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect certain reported amounts and disclosures. These estimates and assumptions are reviewed on an on-going basis and updated as appropriate. Actual results could differ from these estimates. The Company’s significant estimates include the allowance for doubtful accounts, deferred tax valuation allowances and warranty obligations.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist principally of deposit accounts and money market accounts at March 31, 2021 and December 31, 2020.

Cash and cash equivalents are reported in the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows.

Accounts Payable and Other Accrued Expenses:

Revenue Recognition

Revenues under ASC 606 and related amendments (Topic 606) are required to be recognized either at a “point in time” or “over time,” depending on the facts and circumstances of the arrangement, and are evaluated using a five-step model.

The Company recognizes revenue after applying the following five steps:

Revenue is recognized when control of these services is transferred to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

Increasingly, the Company derives its revenue from direct billing.  The Company also derives revenue from the sale of its products to O&P providers in the United States and internationally, the VA and rehabilitation hospitals. Under direct billing, the Company recognizes revenue when all of the following criteria are met:

For revenue derived from certain insurance companies where the Company has demonstrated sufficient payment history, the Company recognizes revenue when it receives a pre-authorization from the insurance company and control passes to the patient upon delivery of the device in an amount the reflects the consideration the Company expects to receive in exchange for the device.  During the fourth quarter of 2020, the Company made such a determination for certain insurers.  These insurers represented approximately 36% of direct billing channel revenue during the three months ended March 31, 2021.

7

Depending on the timing of product deliveries to customers, which is when cost of revenue must be recorded, and when the Company meets the criteria to record revenue, there may be fluctuations in gross margin.  During the three months ended March 31, 2021 and 2020, the Company recognized revenue of approximately $1,131,400 and $389,500, respectively     from O&P providers or third-party payers for which costs related to the completion of the Company’s performance obligations were recorded in a prior period.

For revenues derived from O&P providers, the VA and rehabilitation hospitals, the Company recognizes revenue when control passes to the customer in an amount that reflects the consideration the Company expects to receive in exchange for those services. Revenues may be recognized upon shipment or upon delivery, depending on the terms of the arrangement, provided that persuasive evidence of an arrangement exists, there are no uncertainties regarding customer acceptance and collectability is deemed probable. In certain cases, the Company ships its products to O&P providers pending reimbursement from non-government, third party payers. As a result of this arrangement, elements of the revenue recognition criteria have not been met upon shipment. In this instance, the Company recognizes revenue when the amount is estimable and the Company determines it is probable that payment will be received.  In many cases, the Company is not able to recognize revenue in these situations until payment is received, as then all of the revenue recognition criteria have been met.

The Company has elected to record taxes collected from customers on a net basis and does not include tax amounts in revenue or cost of revenue.

Contract Balances

The timing of revenue recognition may differ from the timing of payment by customers. The Company records a receivable when revenue is recognized prior to payment and there is an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. The Company had approximately $1,500 and $4,000 deferred revenue as of March 31, 2021 and December 31, 2020.

Disaggregated Revenue from Contracts with Customers

The following table presents revenue by major source:

Cost of Revenue

In conjunction with the adoption of ASC 606, there are certain cases in which the Company will expense costs when incurred as required by ASC 340-40-25. In certain cases, the Company ships the MyoPro device to O&P providers, or provides the device directly to patients, pending reimbursement from third-party payers.  Under ASC 340-40-25, this inventory is expensed to cost of revenue as of the date of shipment. Under direct billing, fees paid to O&P providers for services they provide in conjunction with patient evaluations are expensed as incurred as required by ASC 340-40-25, as a cost of obtaining a contract. These costs are recorded as sales and marketing expense. Internal costs incurred and fees paid to O&P providers to cast, fit and deliver the device to patients are expensed to cost of revenue upon delivery to the patient.

Foreign Currency Translation

The functional currency of the Company’s foreign subsidiary, Myomo Europe GmbH, is the Euro during the three months ended March 31, 2021.  Net foreign currency gains and losses during the three months ended March 31, 2021 were immaterial and included in accumulated other comprehensive loss in the condensed consolidated balance sheet.  Transaction foreign exchange gains and losses are included in net loss.  Foreign exchange translation gains and losses from the functional currency, the Euro, to U.S. dollars are captured in other comprehensive loss.  During the three months ended March 31, 2020, the functional currency of Myomo Europe GmbH was the U.S dollar.  Net foreign currency gains and losses during the three months ended March 31, 2020 were immaterial and included in interest (income) expense and other expense, net, in the condensed consolidated statement of operations.   The balance sheet is translated using the spot rate on the day of reporting and the income statement is translated monthly using the average rate for the month.  

8

Net Loss per Share

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, plus potentially dilutive common shares. Convertible debt, preferred stock, restricted stock, restricted stock units, stock options and warrants are excluded from the diluted net loss per share calculation when their impact is antidilutive. The Company reported a net loss for the three months ended March 31, 2021 and 2020, and as a result, all potentially dilutive common shares are considered antidilutive for these periods.

Potential common shares issuable consist of the following at:

Recent Accounting Standards

In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740) -- Simplifying the Accounting for Income Taxes.  This ASU modifies certain provisions of ASC 740 to simplify the accounting for income taxes.  The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued.  The Company adopted the new standard on January 1, 2021, and there was no impact on the Company’s consolidated financial statements.

Subsequent Events

The Company evaluated subsequent events through the date the financial statements were issued and determined that there have been no subsequent events that would require recognition in the financial statements or disclosure in the notes to the financial statements.

Note 3 — Inventories

Inventories consist of the following at:

Note 4 — Fair Value of Financial Instruments

The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for measuring fair value, and establishes disclosures about fair value measurements.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

9

The carrying amounts of the Company’s financial instruments such as cash and cash equivalents, restricted cash, accounts receivable and accounts payable, approximate fair value due to the short-term nature of these instruments. Cash equivalents are a money market fund that limits its investments to only short-term U.S. Treasury securities and repurchase agreements related to these securities.

Cash equivalents and derivative liabilities measured at fair value on a recurring basis at March 31, 2021 were as follows:

The following table presents the fair value reconciliation of Level 3 liabilities measured at fair value during the three months ended March 31, 2020:

See Note 5 for further discussion of the debt derivative liability and Note 7 for further discussion of the valuation of the warrant liability.

Note 5 - Debt

On October 22, 2019, the Company entered into a term loan (the “Term Loan”) with Chicago Venture Partners (“CVP”). Under the Term Loan, the Company received gross proceeds of $3.0 million (excluding fees and expenses). Including an original issue discount, the Company repaid CVP $3.3 million. The Term Loan bore interest at a rate of 10% and matured 18 months from the issuance date. Monthly redemptions of up to $300,000 began six months from the inception date, with the actual amount to be determined by CVP.                  

On February 14, 2020, the Company paid 50% of the then outstanding balance of the Term Loan from the proceeds from the Company’s underwritten public offering.  In addition, the Company paid a prepayment penalty of approximately $256,000.  In connection with the partial extinguishment of the debt, the Company recorded a loss on extinguishment of debt of approximately $159,200 during the three months ended March 31, 2020.  

On May 12, 2020, the Company amended the Term Loan (the “Amendment”) to provide for the conversion of outstanding amounts into shares of common stock in satisfaction of its repayment obligations at the Company’s option (as amended, the convertible instrument is referred to herein as the “Note”). The Company concluded that the Note should be accounted for as a modification as a result of not meeting the criteria in the two-step approach defined in ASC 470-20 and the determination that conversion option is non-substantive, as it is at the Company’s option. Pursuant to the terms of the Note, CVP had the right to redeem up to $400,000 of the Borrowings per calendar month for the first three redemptions after the inception date, and $300,000 per calendar month thereafter by submitting a notice to the Company (a “Redemption Notice”). Upon receipt of a Redemption Notice, the Company could, at its election, either (i) pay the amount set forth in the Redemption Notice in cash within seven trading days of Company’s receipt of such Redemption Notice, or (ii) convert the amount set forth in the Redemption Notice into shares of common stock within three trading days of Company’s receipt of such Redemption Notice. CVP’s per share conversion price was 91% of the lowest daily volume weighted average price per share of the common stock on the NYSE American for the ten trading days immediately preceding such conversion. The Company could not make redemptions in shares of common stock and was required to satisfy such redemption in cash within three trading days of receipt of the redemption notice if there was an Equity Conditions Failure (as defined in the Amendment). The Company retained the ability to defer up to three redemptions for up to thirty days as discussed above. In addition, the Company could not issue shares of common stock to CVP if such issuance would cause CVP to beneficially own in excess of 9.99% of the Company’s common stock outstanding on the date of such issuance. The Company was also prohibited from issuing shares of common stock to the extent that such issuance would exceed the amounts described in Section 713 of the NYSE American LLC Company Guide that would require stockholder approval of the Company.

The Company also agreed to pay to CVP a fee of $105,000 in consideration of the CVP’s agreement to make the Note convertible, which fee was added onto the outstanding balance of the Note.        

10

The note was repaid in full during the three months ended December 31, 2020.      

The provision in the Note that the Company must pay CVP 50% of the outstanding balance of the Note plus a 15% prepayment fee from the net proceeds it receives from an equity offering as discussed above, was determined by the Company to not be clearly and closely related to the host instrument.  Therefore, the Company bifurcated the embedded component from the Note and accounted for it separately as a derivative liability with an offsetting increase in the debt discount.  To determine the fair value of the entire Note, the debt component was separated from the equity payment derivative liability component.  The cash flows of both components were then discounted using fair value assumptions.  The Company recorded a derivative liability and corresponding debt discount of approximately $372,800 at the inception date of the Note.  The Company amortized the debt discount associated with the derivative liability using the effective interest method over the estimated remaining term of the Note.

Interest expense under the Note, including amortization of the debt discount was approximately $318,900 for the three months ended March 31, 2020, of which approximately $166,600 was non-cash interest expense.

Note 6 — Common Stock

On February 13, 2020, the Company completed an underwritten public offering (the “ February 2020 Offering”) in which the Company sold 1,660,000 shares of its common stock at a price of $7.00 per share and 483,000 pre-funded warrants at a price of $6.9999 per share, generating net proceeds (including paid and unpaid offering expenses) of approximately $13,475,500. The pre-funded warrants had a nominal exercise price of $0.0001 per share.  Investors also received 2,143,000 warrants (“Investor Warrants”), each entitling the holder to purchase one share of the Company’s common stock at an exercise price of $7.50 per share. The Investor Warrants expire on February 13, 2025.  The underwriters in the February 2020 Offering were entitled to an over-allotment option to purchase to up to 321,450 shares of common stock at $6.99 per share, and 321,450 Investor Warrants at a price of $0.01 per share. The underwriters exercised their option to purchase the additional Investor Warrants concurrent with the closing of the transaction.  All pre-funded warrants issued in the February 2020 Offering were exercised as of March 31, 2020.  

As part of the February 2020 offering, the Company issued to the underwriters, warrants (the “Underwriter Warrants”) to purchase 214,300 shares of common stock. The Underwriter Warrants have an exercise price $7.00 per share. The Underwriter Warrants expire on February 13, 2025.

The Investor Warrants and Underwriter Warrants are being accounted for as equity.   During the three months ended March 31, 2021 and 2020, 826,700 and 21,500 Investor Warrants were exercised.  During the three months ended March 31, 2021, 162,575 Underwriter Warrants were exercised.   Proceeds received from the exercise of warrants were approximately $7,288,300 and $161,200 during the three months ended March 31, 2021 and 2020, respectively.

During the three months ended March 31, 2021 and 2020, 10 and 16 shares of restricted stock vested.  During the three months ended March 31, 2021 and 2020,  11,397 and 1,033 restricted stock units vested.

Note 7 — Warrants

On February 8, 2019, the Company issued a warrant for the purchase of 12,113 shares of common stock to its February 2019 Offering selling agent (the “February 2019 Warrants”). The February 2019 Warrants are exercisable at any time after August 8, 2019 by the holder at an exercise price of $52.50 per share and have a life of four years. The warrants include a fundamental transaction clause that include transactions that may not require approval by the Company, such as a hostile tender offer. These transactions could require the Company to settle in cash upon exercise. Upon a fundamental transaction, the warrant holder would receive the equivalent securities or alternate considerations just prior to the triggering event by apportioning the exercise price among the equivalent securities. Accordingly, under ASC 815 Derivative and Hedging the warrants were deemed to be a derivative liability and marked-to-market at each reporting period The Company computed the fair value of the derivative liability using the Black-Scholes Option Valuation Model. The Company determined that the Binomial Lattice Model was not materially different to the Black Scholes Option Valuation Model. The derivative liability was written off during the three months ended September 30, 2020

Assumptions utilized in the valuation of the February 2019 Warrant as of March 31, 2020 were as follows:

11

The expected stock price volatility for the Company’s common stock warrant liabilities was determined by a blend of the historical volatilities for industry peers and using an average of those volatilities, combined with the historical volatility of the Company. Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods. The expected term used is the contractual life of the instrument being valued. The expected dividend yield was not considered in the valuation of the common stock liabilities as the Company has never paid, nor has the intention to pay, cash dividends.

The Company issued 160,041 warrants to purchase shares of its common stock in its December 2017 public offering (the “Roth 2017 Warrants”), of which 118,696 warrants were outstanding immediately prior to the closing of the Company’s 2020 Offering and 1,191 warrants remain outstanding as of March 31, 2021. These common stock warrants that were issued in the Company’s December 2017 public offering had an original exercise price of $88.50 per share with such exercise price adjustable if we effect a stock split or combination or similar transaction, depending on the relative trading prices before and after the transaction. The Roth 2017 Warrants also have anti-dilution protection in the event that the Company issues equity securities in the future below the then-exercise price of such warrants.  Though the Roth 2017 Warrants contain a price reset provision in the event of a dilutive issuance of the Company’s securities, because the Roth 2017 Warrants can only be settled in shares of common stock, they were recorded as a component of stockholders’ equity at issuance. As a result of the company’s February 2019 Offering, the exercise price of the Roth 2017 Warrants was reset to $42.00 per share, and as a result of the Company’s February 2020 Offering, the exercise price of these warrants was further repriced to $0.0001 per share. Since the exercise price of the Roth 2017 Warrants is the par value of the Company’s stock, these warrants have been included in weighted average shares outstanding as of the closing of the 2020 Offering.

The price reset provision required the Company to compute a deemed dividend on the exercise price reduction of the Roth 2017 Warrants as a result of the February 2020 Offering.  The Company utilized the Black-Scholes valuation model to calculate the fair value of the Roth 2017 Warrants upon the pricing of the February 2020 Offering at the previous and new exercise prices.  The deemed dividends as a result of the February 2020 Offering are as follows:

Because the Company has an accumulated deficit, the dividend was recorded as a component of additional paid-in capital and a deduction from net loss to determine net loss attributable to common stockholders in the statement of operations for the three months ended March 31, 2020.

Assumptions utilized in the valuations of the Roth 2017 Warrant upon the pricing of the February 2020 Offering, were as follows:

Note 8 — Stock Award Plans and Stock-based Compensation

Stock Option Awards

The Company uses the Black-Scholes option pricing model to estimate the grant date fair value of its stock options. There was no income tax benefit recognized in the financial statements for share-based compensation arrangements for the three months ended March 31, 2021 and 2020.  

12

There were 616 stock options granted during the three months ended March 31, 2021.  There were no stock options granted during the three months ended March 31, 2020.  The assumptions underlying the calculation of grant date fair value per share for the three months ended March 31, 2021 are as follows:

The stock price volatility for the Company’s options was determined using a blend of the Company’s historical volatility since its initial public offering in June 2017 and the historical volatilities for industry peers. The risk-free interest rate was derived from U.S. Treasury rates existing on the date of grant for the applicable expected option term. The expected term represents the period of time that options are expected to be outstanding. Because the Company has only very limited historical exercise behavior, it determines the expected life assumption using the simplified method, which is an average of the contractual term of the option and its ordinary vesting period. The expected dividend yield assumption is based on the fact that the Company has never paid, nor has any intention to pay, cash dividends.

As of March 31, 2021, there were 266,031 shares available for issuance under the Myomo, Inc. 2018 Stock Option and Incentive Plan (the “2018 Plan”).  On January 1, 2021, the number of shares reserved and available for issuance under the 2018 Plan increased by 183,726 shares pursuant to a provision in the 2018 Plan that provides that the number of shares of common stock reserved and available for issuance under the 2018 Plan will be cumulatively increased each January 1 by 4% of the number shares of common stock outstanding on the immediately preceding December 31 or such lesser number of shares of common stock determined by management in consultation with members of the Board of Directors, including the compensation committee.  

Awards of restricted stock units may be net share settled upon vesting to cover the required employee statutory withholding taxes and the remaining amount is converted into shares based upon their share-value on the date the award vests. These payments of employee withholding taxes are presented in the statements of cash flows as a financing activity.

Share-Based Compensation Expense

The Company accounts for stock awards to employees and non-employees based upon the fair value of the award on the date of grant. The fair value of that award is then ratably recognized as expense over the period during which the recipient is required to provide services in exchange for that award.

The Company attributes the value of stock-based compensation to operations on the straight-line method such that the expense associated with awards is evenly recognized over the vesting period.

The Company recognized stock-based compensation expense related to the issuance of stock option awards, restricted stock awards and restricted stock units to employees, non-employees and directors in the statements of operations as follows:

As of March 31, 2021, there was approximately $117,500 of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted-average period of 2.03 years.

13

As of March 31, 2021, there was approximately $3,000 of unrecognized compensation cost related to unvested restricted stock awards that is expected to be recognized over a weighted-average period of 0.37 years.

As of March 31, 2021, there was approximately $972,200 of unrecognized compensation expense related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 2.36 years.

Note 9 — Related Party Transactions

The Company sells its products to an orthotics and prosthetics practice whose ownership includes an individual who is both a shareholder and executive officer of the Company. Sales to this related party are sold at standard list prices. During the three months ended March 31, 2021, approximately $25,900  of revenues were recognized from this related party. There were no revenues recognized during the three months ended March 31, 2020.  There was approximately $25,900 and $44,900 due from this related party as of March 31, 2021 and December 31, 2020, respectively.  

The Company also obtains consulting and fabrication services, reported in cost of goods sold, from the same related party. Charges for these services amounted to approximately $112,900 and $103,500 during the three months ended March 31, 2021 and 2020, respectively,    Included in accounts payable and accrued expenses at March 31, 2021 and December 31, 2020 is approximately $44,100 and $29,600, respectively, due to the related party.

Note 10 — Commitments and Contingencies

Litigation

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising from the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Currently, there is no litigation against the Company.

Operating Leases

The company has a non-cancelable sublease agreement for its corporate headquarters in Boston, MA expiring in 2023, and it has a non-cancelable lease agreement for its office space in Fort Worth, TX expiring in 2025 with early termination available at the company’s discretion in 2023. Termination options were not included in the lease term for the Company’s existing operating leases. Certain arrangements have discounted rent periods or escalating rent payment provisions. Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheets. We recognize rent expense on a straight-line basis over the lease term.

As of March 31, 2021, operating lease assets were approximately 783,800 and operating lease liabilities were approximately $848,600. The maturity of the Company’s operating lease liabilities as of March 31, 2021, are as follows:  

For the three months ended March 31, 2021 and 2020, the total lease cost is comprised of the following amounts:

14

The following summarizes additional information related to operating leases:

Major Customers

At March 31, 2021, one insurance company and their affiliates accounted for approximately 45% of accounts receivable.

Note 11 — Subsequent Events

The Company evaluated subsequent events through the date the financial statements were issued, and determined that, except as disclosed herein, there have been no other subsequent events that would require recognition in the financial statements or disclosure in the notes to the financial statements.

15

The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission filings. The following discussion may contain predictions, estimates, and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors”, “Cautionary Statement Regarding Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q. These risks could cause our actual results to differ materially from any future performance suggested below.

Overview

We are a wearable medical robotics company, specializing in myoelectric braces, or orthotics, for people with neuromuscular disorders. We develop and market the MyoPro product line, which is a myoelectric-controlled upper limb brace, or orthosis. The orthosis is a brace used for the purpose of supporting a patient’s weak or deformed arm to enable and improve functional activities of daily living, (“ADLs”), in the home and community. It is custom constructed by a trained professional during a custom fabrication process for each individual user to meet their specific needs. Our products are designed to help restore function in individuals with neuromuscular conditions due to brachial plexus injury, stroke, traumatic brain injury, spinal cord injury and other neurological disorders.

We utilize digital ads on various platforms to reach patients who are potential candidates for our product. Once the prospective patient contacts us or is referred to us, either our trained clinical staff or a trained O&P provider will evaluate the patient for their suitability as a candidate. Initial evaluations by our trained clinical staff are conducted using telehealth techniques. Prior to obtaining authorizations from commercial insurance companies, the patient’s medical records are collected and reviewed to make sure the device is appropriate for their condition and a prescription is always obtained from a physician. Once these documents are obtained, our patient advocacy team submit a pre-authorization request to the patient’s insurer. If we receive a pre-authorization, we proceed to cast the patient’s arm, then fabricate the MyoPro, and deliver it to the patient. Since we are directly providing the device to the patient and then billing insurance ourselves, we refer to this process as direct billing. We also call on hospitals and O&P practices that provide our products to their patients as well as generate indirect sales through distributors in the United States, Canada, Europe, and Australia. The MyoPro product line has been approved by the Veterans Administration (“VA”) system for impaired veterans, and over forty VA facilities have already ordered devices for their patients

Our myoelectric orthoses have been clinically shown in peer reviewed published research studies to help restore the ability to complete functional tasks by supporting the affected joint and enabling individuals to self-initiate and control movement of their partially paralyzed limbs by using their own muscle signals.

Our technology was originally developed at MIT in collaboration with medical experts affiliated with Harvard Medical School. Myomo was incorporated in 2004 and completed licensing of its technology from MIT in 2006.

Other historical milestones include:

16

Recent Developments

China Joint Venture

On January 21, 2021, we entered into a definitive agreement with Beijing Ryzur Medical Investment Co., Ltd. (“Ryzur Medical”), a medical device manufacturer based in Beijing, to form a joint venture (the “JV”) to manufacture and sell our current and future products in greater China, including Hong Kong, Macau and Taiwan (the “JV Agreement”).

Majority ownership in the JV, to be named Jiangxi Myomo Medical Assistive Appliance Co., Ltd., will be held by Ryzur Medical and Chinaleaf Capital Management Co., Ltd., a private fund based in Shanghai that invests in growth opportunities in new technologies. We will own a minimum 19.9% stake in the JV. Ryzur Medical and its partners have committed to invest a minimum of $8 million and up to $20 million in the JV over five years. The establishment of the JV is subject to governmental filings and approvals in China.

As of March 31, 2021, the JV company has not yet been established. Once established, the JV Agreement contemplates that we and JV will enter into a ten-year agreement to license our intellectual property and purchase MyoPro Control System units from us (the “Technology License Agreement”). Under the Technology License Agreement, we will be entitled to receive an upfront license fee of $2.5 million. Pursuant to the JV Agreement, the JV has agreed to an escalating purchase commitment for a minimum of $10.75 million in MyoPro Control System Units during the next ten years, subject to receipt of regulatory approvals necessary to permit sales of the product in the greater China territory.  Payment of the license fee and transfer of technology requires the completion of certain milestones by the parties to the JV Agreement, which are expected to be completed before the end of 2021. In addition, the JV Agreement contemplates that we and the JV will enter into a trademark license agreement to license of certain of the Company’s trademarks (the “Trademark License Agreement”).

Results of Operations

We have been growing revenues while incurring net losses and negative cash flows from operations since inception and anticipate this to continue as we focus our efforts on continuing to expand our sales and marketing efforts to expand into new geographic markets, invest in development of our MyoPro products, and the funding of clinical research studies to support our reimbursement efforts.

The following table sets forth our revenue, cost of revenue, gross profit and gross margin for each of the periods presented.

17

Revenues

We derive revenue primarily from providing devices directly to patients and billing insurance companies directly. We also sell our products to O&P providers, to the VA, to rehabilitation hospitals, and through distributors. Though we increasingly provide devices directly to patients, we sometimes utilize the clinical services of O&P providers for which they are paid a fee.

We expect that our revenues will continue to grow, primarily as a result of our increased direct-to-patient marketing efforts, while continuing our selling and marketing efforts through O&P channel providers, both domestically and internationally.

Total revenues increased by approximately $1,300,000 or 132% for the three months ended March 31, 2021 as compared to the same period in 2020. The revenue increase for the three months ended March 31, 2021 was driven by both a higher average selling price, and higher revenue units.  

Gross margin

Cost of revenue consists of direct costs for the manufacturing and fabrication and delivery of our products, fixed costs, such for our quality and fulfillment organizations, changes in inventory reserves, warranty costs and royalties associated with licensed technologies.

Gross margin was 73% and 68% for the three months ended March 31, 2021 and 2020, respectively. The increase in gross margin was driven by increased average selling price as well as a higher amount of revenues recorded in the first quarter of 2021 where corresponding cost of revenues were recorded in a prior period.  

Operating expenses

The following table sets forth our operating expenses for each of the periods presented.

Research and development

Research and development (“R&D”) expenses consist of costs for our R&D personnel, including salaries, benefits, bonuses and stock-based compensation, product development costs, and the cost of certain third-party contractors and travel expense. R&D costs are expensed as they are incurred. We intend to continue to develop additional products and enhance our existing products and expect R&D costs to continue to increase on an annual basis, despite the delay in the launch of our pediatric device, which we refer to as MyoPal, due to the impact of COVID-19.

R&D expenses increased by approximately $19,000, or 4% during the three months ended March 31, 2021 as compared to the same period in 2020. The increase was driven primarily by higher payroll and stock compensation costs offset by lower product development costs.  

Selling, general and administrative

Selling expenses consist of costs for our field clinical staff, clinical training organization, and marketing personnel, including salaries, benefits, bonuses, stock-based compensation and sales commissions, costs of digital advertising, marketing and promotional events, clinical studies, corporate communications, product marketing and travel expenses. Variable compensation for personnel engaged in sales and marketing activities is generally earned and recorded as expense when the product is delivered. We expect sales and marketing expenses to increase as we expand our sales and marketing efforts.

General and administrative expenses consist primarily of costs for administrative, reimbursement, and finance personnel, including salaries, benefits, bonuses and stock-based compensation, professional fees associated with legal matters, consulting expenses, costs for pursuing insurance reimbursements for our products and costs required to comply with the regulatory requirements of the SEC, as well as costs associated with accounting systems, insurance premiums and other corporate expenses. We expect that general and administrative expenses will increase as we pursue an increased number of insurance reimbursements and seek expanded payer coverage for our products and add administrative and accounting support for our growing business.

Selling, general and administrative expenses increased by approximately $514,800, or 14%, during the three months ended March 31, 2021, as compared to the same period in 2020. The increase was primarily due to higher payroll costs, particularly in support of our reimbursement efforts and higher advertising, franchise tax, and insurance costs, which were partially offset by lower travel expenses as a result of cost reductions from implementing telehealth techniques for patient evaluations.  

18

Other expenses (income)

The following table sets forth our interest (income) expense and other expense, net for each of the periods presented.

During 2020, the Term Loan was extinguished and the derivative liabilities were written down to $0 resulting in no related expenses in 2021.

Income tax expense

Income tax expense recorded during the three months ended March 31, 2021 and 2020 represents the provision for income taxes for our wholly-owned subsidiary, Myomo Europe GmbH, which was established on January 30, 2020.

Adjusted EBITDA

We believe that the presentation of Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional information about our financial results. Adjusted EBITDA is an important supplemental measure used by our board of directors and management to evaluate our operating performance from period-to-period on a consistent basis and as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations.

We define Adjusted EBITDA as earnings before interest and other income (expense), taxes, depreciation and amortization adjusted for, stock- based compensation and the impact of the fair value revaluation of our derivative liabilities and other unusual items.

Adjusted EBITDA is not in accordance with, or an alternative to, measures prepared in accordance with U.S. GAAP. In addition, this non-GAAP measure is not based on any comprehensive set of accounting rules or principles. As a non-GAAP measure, Adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with U.S. GAAP. In particular:

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures including net income (loss) and our financial results presented in accordance with U.S. GAAP.

19

The following table provides a reconciliation of net loss to Adjusted EBITDA for each of the periods indicated:

Liquidity and Capital Resources

Liquidity

We measure our liquidity in a number of ways, including the following:

We had working capital and stockholders’ equity of approximately $15.8 million and $16.1 million, respectively, at March 31, 2021. We used approximately $2.1 million in cash for operating activities during the three months ended March 31, 2021.  We have historically funded our operations through financing activities, including raising equity and debt capital.  In February 2020, we completed a follow-on offering of our common stock, generating net proceeds of approximately $13.5 million. The purpose of this offering was to provide additional capital to allow us to execute on our strategy to achieve cash flow breakeven.  This funding, in addition to funding of $5.0 million received under our ATM facility during 2020 and $7.3 million received from the exercise of warrants during the first quarter of 2021 is helping us to sustain our operations.  Based upon our expected cash flows, we believe that our available cash will fund our operations for at least the next twelve months from the issuance date of this Quarterly Report on Form 10-Q.

Our operating plans are primarily focused on scaling up our operations, increasing the proportion of patients covered by commercial health insurance companies which reimburse for the MyoPro and continued work with CMS and their administrative contractors regarding reimbursement of our products. Our success is dependent upon reimbursement of our products by insurance companies and government-controlled health care plans such as Medicare and Medicaid, which if not achieved, could prevent our revenues from growing to the level necessary to achieve cash flow breakeven.    If public health restrictions on travel and patient interaction are broadly reinstated in 2021 due to the inability to control the COVID-19 pandemic through vaccinations, that will have an adverse effect on our business and it is likely that we will need to raise additional capital to sustain our operations. We believe that we have access to capital resources through possible public or private equity offerings, exercises of outstanding warrants, debt financings, and through payment of the technology license fee associated with our JV in China, or other means; however, we may be unable to raise sufficient additional capital when we need it or raise capital on favorable terms. During the three months ended March 31, 2021, approximately 999,400 shares were issued for the exercise of warrants, which generated proceeds of $7.3 million.  Further, additional debt financing may require us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further indebtedness and may contain other terms that are not favorable to our stockholders or us.

Cash Flows