Greetings, and welcome to the STRATA Skin Sciences First Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Matthew Picciano, LifeSci Advisors. Please go ahead..

Thank you, operator, and good morning, everyone. Thank you for participating in today's financial earnings conference call for the company's first quarter ended March 31, 2020. Leading the call today will be Dr. Dolev Rafaeli, President and CEO of STRATA Skin. Joining him today will be Matt Hill, Chief Financial Officer at STRATA.

Earlier this morning, STRATA issued a press release announcing its financial results for its first quarter ended March 31, 2020. A copy of this release can be found on the Investor Relations page of the company's website.

Before we begin, I'd like to remind everyone the comments and various remarks about future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

These statements include, but are not limited to, our plans, objectives, expectations and intentions and other statements that contain the words such as expects, contemplates, anticipate, plan, intend, believes, assumes, predicts and variations of such words or similar expressions that predict or indicate further events or trends that do not relate to this historic matter.

These statements are based on our current beliefs or expectations and inherently subject to significant known and unknown uncertainties and changes in circumstances, many of which are beyond our control. There can be no assurances that our beliefs or expectations will be achieved.

Actual results may differ materially from our beliefs or expectations due to financial, economic, business, competitive market, regulatory and other political factors or global pandemic events, such as the current COVID-19 pandemic affecting the medical device industry in general.

Given the uncertainties affecting the companies in the medical device industry, any or all company's forward-looking statements may prove to be incorrect. Therefore, you should not rely on such factors or any forward-looking statements.

In addition, more specific risks and uncertainties facing the company are set forth in the company's reports on Form 10-Q and 10-K filed with the Securities and Exchange Commission. STRATA encourages you to carefully review and consider disclosures found in SEC filings, which are available at www.sec.gov and on the company's website.

As a reminder, this conference call is being recorded and will be available for audio rebroadcast on STRATA's website. Furthermore, the content of this conference call contains time-sensitive information that is accurate only of the date of the live broadcast, May 12, 2020.

STRATA undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. With that said, I would like to now turn the call over to Dolev Rafaeli, President and CEO of STRATA.

Dolev?.

Thank you, Matt and good morning everyone and welcome to our 2020 first quarter earnings call. We're all very happy to be here. Our first earnings call for the fiscal year 2020. Throughout these difficult times, our number one concern is the health and safety of our employees, patients, partner physicians and their staff.

During this period, we have remained focused on the execution of our strategy, planning for the return to a new normal in managing our business and employees through these unprecedented times and are pleased to share with you today our first quarter 2020 financial and operational results. The first quarter of 2020 was a tale of two half.

While in the first half our revenue was trending at a strong double-digit growth compared to 2019, driven by an increase in the number of patients in treatment, growth in the install base and extended margins. The world today is looks very different.

Starting with San Francisco shelter-in-place order we have seen a rapid succession of states locking down, resulting in a rational and emotional drop in the number of elective procedures conducted and the appetite for continued business expansion decisions.

As we are all aware, this was not impacting STRATA and its business alone, but was rather a global outcome of government reaction to COVID-19. Up to the middle of March, our reimbursement requests were up 117% over the same period in 2019.

While we have been trending upwards in the last two weeks, the six weeks between mid-March and the end of April, reimbursements requests have been approximately 50% of the same period in 2019.

The social distancing and infectious nature of COVID-19, coupled with guidelines that might make changes to the therapy decision as it pertains to patients that are currently treated by or are considered to be treated by systemic and biologic immunosuppressant drugs has caused both doctors and patients are like to reevaluate the selection of therapies.

That trend has the potential of increasing the number of patients treated by XTRAC.

The American Academy of Dermatology has recently published guidelines for providers to follow for patients on biologic therapy during the coronavirus pandemic, which advises that “Dermatologists must delicately balance the risk of immunosuppression with the risk of disease flare requiring urgent intervention.” The AAD advises that when patients are considered for biologics that the and I quote, physicians assess the risk versus benefits before initiating biologic therapy on a case-by-case basis, recognizing anyone may develop serious complications from COVID-19 infection and that's for high-risk patients, physician should consider alternative therapies to biologics.

In addition, in commentary published in March, 2020 written by notable KOLs including Dr.

Tina Bhutani of the Department of Dermatology, Psoriasis and Skin treatment Center of the University of California, San Francisco ER that said, and I quote, while the decision to treat a psoriasis patient with a biologic is on a patient-by-patient basis factors favoring biologic discontinuation or reduction in immunomodulatory regimen if the patient has mild-to-moderate underlying psoriasis.

We believe our unique recurring revenue business model where there is nothing tangible for the physician over which to make a purchase decision…..

Ladies and gentlemen, we have temporarily lost connection with the speaker lines. Please continue to hold and the conference will recommence shortly..

Thank you, Rachael. I'll have Dolev speak now. Dolev you can pick up where you left off..

Thank you.

We believe with our unique recurring revenue business model where there is nothing tangible for the physicians over which to make a purchase decision and where it takes for clinics to be open and in-patients and for patients to have the confidence to enter clinics is where we can leverage our resources, the patient database, in-house call center, reimbursement team and our clinical sales force to accelerate the process.

That would benefit our physician partners, our patients and STRATA. As we have provided in recent updates, individual states across the United States have begun announcing their steps of returning to a new normal.

The company is executing on its patient outreach program in which STRATA provides unique advantage to its partner clinics to quickly rebuild their patient referrals by reengaging patients that were either in treatment or about to enter into treatment before the lockdown.

The company as part of its service to its partners and using its in-house call center and reimbursement team has started performing outreach services on behalf of these clinics to their patients to bring them back into treatments. As of this week, the company has reached out over 350 physician partners that are in 31 Phase 1 states and is ….

Matt?.

Yes. I'm here..

You're here, but we dropped the line again..

No, I didn’t..

Okay. Additionally, we have conducted one-on-one online clinical trainings and our clinical team has been delivering clinical webinar with approximately 250 participant’s to-date to continue engage with our physician partners. A leading non-U.S.

market, China, Japan, South Korea and the Middle East have all proceeded the United States from the impact of COVID-19 and were shutdown through most of the first quarter. We are seeing cautious reopening as it pertains to our distributors, managing new and existing customers.

During Q1, we saw expansion of placements in South Korea and recently we’re seeing orders for maintenance parts for South Korea and other regions. We ended the quarter with $8.2 million in unrestricted cash. As of the end of the quarter, we had accounts receivable of $3.2 million and accounts payable of $2.1 million.

We have undertaken cash preservation measures including a leave of absence for certain employees, reduction in discretionary spend and delayed receipts of inventory purchases. Management and the Board of Directors has agreed to deferral payments owed to them.

We expected these steps would save us approximately $3 million per quarter in cash outlay, at that spending level and without additional business generated, we believe that these cash resources would have been sufficient for approximations three quarters.

With the receipt of the Paycheck Protection Program, loan in the third-week of April and the encouraging April sale, and upward trend of reimbursement requests, we believe we have sufficient funding for us to see our way through that next four quarters as we bring our team back to support the reopening of the partner clinics.

In the last two weeks, we have been gradually bringing back many of our employees that were on leave of absence and are leveraging our call center and reimbursement teams as part of our outreach program. Let me know take a look at our business in the first quarter of 2020.

In looking at our important metric until the recurring revenue growth installed base and margins, we have seen growth across the board. All of this is a direct result of the laser focus strategy we put in place in 2019 after the refinancing and changing management.

While our revenue was impacted by COVID-19 primarily internationally, we grew our recurring revenue by 7.3% over the first quarter of 2019, we grew our margins overall by 3.8% and the recurring revenue margins grew by 2.2% despite having lost the momentum in the last three weeks of March, we continued to grow our installed base domestically and internationally.

I would like to now turn the call over to Matt Hill for a review of our first quarter 2020 financial results.

Matt?.

Thank you, Dolev. While 2020 has presented its challenges as we worked with the new normal and we do not yet know the future severity for the duration of COVID-19 pandemic. We're focused on the business and working with our partner clinics to get them back to treating patients.

With respect to the first quarter of 2020, revenues for the first quarter were $6.7 million, a decrease of 10.1% as compared to revenue of $7.5 million for the first quarter of 2019. As a result of our overseas capital equipment business being impacted by the COVID-19 pandemic.

Recurring revenues for the first quarter of 2020 were $5.7 million, up 7.3% as compared to $5.3 million for the first quarter of 2019, due to an increase in patient flow to our partner clinics.

Equipment revenue, however, for the first quarter of 2020 were down 1 point or down $1 million or 52.6% as compared to $2.2 million for the first quarter of 2019. Gross profit for the first quarter of 2020 was $4.4 million or 65.4% of revenues as compared to $4.6 million or 61.6% of revenues for the first quarter of 2019.

Gross profit for recurring revenues for the first quarter of 2020 was $3.9 million or 68.4% of revenue compared to $3.5 million or 66.2% of revenue. The increase in gross profit on recurring revenues is a result of lower depreciation on placement.

Selling and marketing costs for the first quarter of 2020 were $3 million, down slightly as compared to $3.1 million for the first quarter of 2019. As a result of lower tradeshow costs, commissions and DTC spend offset by higher personnel costs.

General and administrative costs in the first quarter of 2020 were $2.1 million, a decrease of $0.4 million, compared to $2.5 million for the first quarter of 2019 as a result of legal, audit and accounting costs we had in the first quarter of 2019, when we changed auditors.

Research and development costs were flat at $0.3 million for the first quarter of 2020 and 2019. Other income and expense for the first quarter of 2020 was net zero for the – as compared to an expense of $135,000 in 2019, as a result of our refinancing of our debt at the end of 2019.

Net loss for the first quarter of 2020 was $1 million or $0.3 per basic and diluted common share as compared to a net loss for the first quarter of 2019 of $1.3 million or $0.04 per base and diluted common share. As of March 31, 2020 cash, cash equivalents and restricted cash was $15.6 million, the same as December 31, 2019.

In March of 2022, due to the impact of COVID-19 and in order to conserve cash we put many of our employees on a leave of absence, spending discretionary spending, delayed the payments and payable and believe the receipt of outstanding purchase orders, which we would expect to pay approximately $3 million of cash outlays in quarter.

On April 21, 2020 we received $2 million in proceeds from the small business administration Paycheck Protection Program. We carefully consider eligibility in this program and are satisfied that we are eligible and can demonstrate need for this loan. We never terminated our employee and in fact continued to pay the benefits during their leave.

We have brought many of these employees back to work or following CDC guidelines and have a plan to bring back the balance in phase approaches, states returned to work. As of today including proceeds from the PPP loan, we've just over $10 million in unrestricted cash and cash equivalent.

Even if for the first quarter of 2020 was $0.6 million as compared to $0.4 million for 2019. As of March 31, 2020 we had 33,714,362 shares outstanding. I would like to conclude with saying that we're pleased with the company's performance in the first quarter of 2020. At this time, we cannot predict the impact of the virus we have in the business.

As a company and community we will manage through this new normal. Operator, please open up the call for Q&A..

Thank you. [Operator Instructions] Your first question is from Jeffrey Cohen from Ladenburg Thalmann. Please go ahead..

Hi, good morning. This is actually Destiny on for Jeff, and thank you for taking the questions. My first one is just about how you guys are thinking about accounts that would have been considered combat or systems that you would have been moved.

Are you guys still evaluating those customers and those physician partners, still ready to kind of – when things looks kind of normalize again? Yes, I'll stop with that one and I have a few more..

Good morning, Destiny and thank you for the question. I hope everything is safe with your guys down in Florida. I'll take advantage of your question and speak a little bit about what we do now, and what we were doing up to the – up to the – to the middle of March. Indeed we are evaluating the prospects for accounts coming back in.

We did have some changes happened over the last eight weeks as everybody else has. And we have the opportunity of looking at what's happened in clinics or into clinics when this pandemic took place.

And as I mentioned in my prepared remarks and in updates that we had over the last few weeks, we are in continued contact with our clinics and we see who's open, who's operating and at what level they’re operate, in terms of number of patients and the number of procedures they conduct.

Obviously, there's a big difference between clinics that are open and operating and those that have decided to shutdown and there is at least subjectively there is a difference between the types of ownership and management that own these clinics and decisions they make. We have seen clinics that have completely shutdown.

We have clinics that have decided to minimize their operation and then extended again and we’ve seen clinics that have stayed open through the whole time period. That allows us to evaluate what would be the right targets to come back.

Now, as we all know, most of the – most of these decisions in business suspension decisions happened – happened towards the end of quarters. It's a history in medical devices regardless of our unique approach of going with recurring revenue, these are patients tend to happen towards the end of the quarter.

And mostly – most specifically in the first quarter where in the first few weeks of the quarter we are very busy resetting our patient benefits with the insurance companies and only then we can focus on extension.

So I can say very controversially that we had more placements in the pipeline wind up for the end of the first quarter, which were – which would have been either-back or new accounts, but did not take place.

And this from my perspective is a good thing, because by not doing them and not just placing the device out there and having our inventory sit out there without usage, because we can't – because they can't do that. They don't have the first patients. They don't have the training in place. We just didn't go ahead and execute the placement.

That is evidence from our inventory, which you'll be able to see the breakdown in the 10-Q, but there are finished goods of inventory ended up higher than the previous quarter, because we had these units ready to go.

And, and I'm happy that we did not go ahead and execute these for replacement, because doing this sometime in the beginning of March or in the middle of March and then getting to launch them in July or August would not have been a good thing for us, not from a financial perspective, not from a business perspective.

So I hope I answered the first question. Let's take the next one..

Yes, definitely, okay. That was very clear.

So, I'm also curious, based on the guidelines published by the American Academy of Dermatology, have you received any greater interests, some positions? And are you hosting any kind of physician info sessions or training sessions or anything like that, and then beyond that are you – because we also think that prescribing biologics could be negatively impacted for a longer duration than just the duration of this pandemic.

Great question. The prescription of biologics and systemic drugs that are immunosuppressant, even before the pandemic took a turn in the last few years where physicians were prescribing them more and more to patients that were mild-to-moderate in their disease stage, which is not fully supported by the insurance companies in their guidelines.

But that was the trend.

With the pandemic hitting and immunosuppressant drugs affecting or potentially affecting patient's capability of dealing with infection, the – at first there was a lot of confusion and there was a lot of emotional reaction, which was followed by guidelines specifically put out by the FDA, the American Academy of Dermatology, and the pharma companies themselves putting the responsibility of deciding the necessity of using a drug that's going to suppress the immune system of the patient on the physician.

And then that was followed by clinical webinars conducted by key opinion leaders and by – and papers that were published that specifically said physicians should consider whether the continuation of treatments of patients with immunosuppression drugs is medically necessary in light of the risks out there and in light of their condition and should reconsider the start of treatment for new patients, most specifically for non-severe patients.

We have seen a lot of a lot of communication from patients through social media and interest through social media, and we have seen a lot of questions coming from our physician partners from the clinics.

During the last six weeks, we have conducted six clinical webinars with our physician partners; we had more than 250 participants, which is one-third of our install base. That's a very significant participation, live. We've had many, many others that have followed up and logged in to look at the recorded webinars.

And in the webinars, we cover our guidelines and the, the American Academy of Dermatology guidelines. So definitely there is a – there is – we talked about the necessity of putting mild-to-moderate patients on immunosuppressant drugs.

That will – that will not go away in the short period of time and, because I think until and that’s my personal opinion until COVID-19 is put into an end by either having a medication for treat it or a vaccination to immune us from that, that would be a concern by the physician.

But once COVID-19 is gone, there's going to be the risk of having the next wave of virus that would affect immunosuppressed patients more.

And I think that would put things in perspective and could be the other treatment modalities other than immunosuppression drugs as a more viable solution specifically for the mild-to-moderate patients, which are 90% of the patient population..

Okay. Got it. Yes, that's a really good point, definitely. Okay. So, my last one and then I'll jump back in the queue. Is more related to the patients, I’m wondering are you able to kind of leverage the patient volumes that you've had from previous quarters? That you've kind of generated from their online platform.

Are you able to kind of leverage that and see and get a feel for what patient volume could be, following reopening or do you – and then when you've figured that out, you also have to maybe reduce it by a third or how to be compliant with social distancing guidelines? And then what – how has the messaging changed? Maybe you could talk about that a little bit.

Thank you..

Well, perfect, I will. So we have been busy for the first few weeks of the pandemic, building up what we call the patient outreach program in which we – we come up to our partners and offers in a service that frankly nobody else can offer them. And most of them are not equipped to with their own resources to handle.

And that is to reach out to their – patients that are, where in treatments prior to COVID-19, patients that were considered to be in treatment or to be considered to be prescribed to be in treatment prior to COVID-19 as well as patients that were scheduled for first consultation during the time period from the beginning of March until, whenever this thing is going to end at the ends of May.

We had to come up with a methodology internally first before we go to them on what do we do with these patients. We have the tools and we have the capability of doing this. We're probably the only ones in the industry that have the capability of doing this, but we also need the other two elements to cooperate.

The first of the two elements is the physician and the clinic. And the second element is the patient. So we needed to know what will be the state of the physician clinic, when we are attempting to have them to be open.

And by that I mean would they have sufficient elements? Would they have the flood desk person or they have the clinician? Would they have the clinician extension via the nurse? Would they have the billing person at please? Granted some clinics had many, many employees and most of them were put on leave of absence or terminated.

Some of them cannot come back because they don't have school for their children. Some of them would not come back, because they’re still afraid. And, so that was the first element. The second element is the patient itself.

What are they going to be concerned with? They're going to be concerned emotionally from social distance as you can say concerned rationality from, how tight is the space inside the clinic, and what does it mean to go through a facility and how does that relate to the other conditions – pre-existing conditions as they can.

And we’ve developed scopes that are addressing each one of those patient populations. And we have reached out first to very specific clinics in each one of the regions to get their feet back on the office, see how would they like to see the patients? Just as a reminder, some of these patients have been out of treatment for two months.

Do they need to – does that, is there a need for the doctors to see them again and re-prescribe, is there – can they go right back into treatment with the nurse, without having to see the Doctor.

What would be the specific guidelines of the treating physician in the specific region, based on the guidelines they have from the American Academy of Dermatology and the specific patient condition. Once we have developed the program, we reached out to partner clinics, at first this was a – to a small number.

And in the last 10 weeks, we’ve been reaching out gradually as its stated – announced their Phase I opening. We were reaching out to over 350 clinics in 31 individual states and we gauge their openness, so are they open or not? Physically, are they open? Are they taking patients today? And if they do at, what are the restrictions they have.

And then we take from them, the specific guidelines for the patient and we applied them to the patients list. So we started making calls two weeks ago to two clinics and then when we started approaching the patient. The capacity in the clinic is not – is not the concern.

Because the number of extra patients per day is not – is not the limiting factor that would limit the growth of our business and their business. Actually if – and that's one of the email updates we’ve sent to our physician partners.

If they would be seeing a very small number of patients only 10 patients that would mean that they would generate probably from our procedure – more cash flow then they would be regenerating from most of their other activities in the clinic.

But the limiting factor would be, the number of – of overall patients that are going to be seen coming into the clinic. We are – give a little bit color, we've just spoken to one of our bigger players, bigger clinics yesterday and they had – they had over 100 patients show-up in one day on Friday, when they opened up.

So it's – there's a lot of pent-up demand and that's going to be – that’s going to have to be managed individually by the clinics.

We are going to be helping them by reaching out to their specific – to the specific patient that are relevant or extract, before that were treated before, that are in the middle of treatment or that were considered to be – to be treated. That, that approach was very welcomed by our partner physicians.

We have a waiting list now for clinics that are giving us their specifics. And we are using our in-house resources to bring these patients back.

It's little bit too early to gauge the actual success rate because as we've noted in our updates, April the last six weeks, sorry, the six weeks from the middle of March until the end of April, we had about 60% of the reimbursement requests we have in the equivalent time in 2019, which means that many of the clinics are open, many of them are receiving extra patients, but the patient census is lower.

In the month of April, our revenue was somewhat sub-50%, and we hope that our revenue in May is going to come closer to 50% of its equivalent revenue in 2019. But I think that we will be able to – I believe we will be able to gauge the actual capacity and the ability to take care of that pent up demand towards the end of June.

I would also remind that the 31 states that announced Phase I opening is great news, but we're still waiting on the two biggest regions, the Northeast and the West where among the two, California showed signs of opening and we have specific areas within California that are already open, active, the clinics are active and they’re seeing patients.

And New York just yesterday, Cuomo, the Governor of New York announced the stages for opening and in some areas not New York City, but in some areas of New York, we have clinics that are already open and seeing patients..

Okay. Perfect. Thank you..

You are welcome..

Thank you. Your next question comes from Jo Pantginis from H.C. Wainwright. Please go ahead..

Hey guys. Good morning. Thanks for all the added information and glad to see you're all well. Dolev, I wanted to go back to your comments regarding the AAD recommendations or commentary regarding immunosuppression? And I'm glad to see that, you're having all these webinars and making sure people are educated about that.

So I wanted to focus on the other end of the equation and specifically what the tone is and how the message is being received by these physicians regarding the messaging around immunosuppression?.

Thank you, Jo, and good morning. The messaging isn’t ours. We have adopted the messaging coming from the physician group community, and in their own guidelines we have taken the concern they have with their patients. And we have prepared or comeback advertisements in the tone of, we have a solution that does not surprise the immune system.

So that's the messaging to the patients. The patients themselves are confused. They're looking for guidance and they would like to have a solution that's good for them clinically, but not, not putting them at risk as some of the other solutions might.

So that is ready, but that did not start yet, here the last few weeks we were very active engaging physicians and clinics in giving them the clinical guidance on how to use our solution safely and providing them with the guidelines coming from the American Academy of Dermatology and other sources.

Because as you might appreciate, some of the physicians are not – not fully in tuned with the latest and greatest in terms of clinical updates. They were managing their business and very focused on their day-to-day work and suddenly this happens, and they need to get update.

The concerns coming from both physicians and patients is across the board, you can see this on social media, you can see this through the webinars that are run by KOL, voicing deep concerns, they don’t have answers, there is no answer about the safety profile of individual drugs, there are assumptions.

And there is a definite knowledge that our solution is safe and effective.

There is also the knowledge that we can – in the clinic we can see the patient in and out without more exposure than any other in-clinic visit would cause, it's very simple to disinfect the surfaces of the – tip of the of the device and besides that it's normal in and outs for a patient.

Obviously staying at home for eight weeks and with different diets, no exercise and stress does not help patients that have ultra immune disease conditions like psoriasis and vitiligo that actually gets more, they actually get higher instances of the disease.

And so there's more anxiety from the patient population, there is more interest from the physician population and we're now in the process of combining the two and bringing them to the outcome which is there's going to be we believe more patients in the clinics as these clinics open up gradually obviously, we hope that soon enough the Northeast and the West will come to the Phase 1 opening to add these from now..

That's helpful. Thank you.

And then tied to that, with regards to your comment on bringing back employees in a scaled fashion, the ones that you have brought back now, are these the ones that are going to be directly involved in delivering that message?.

We have three groups of employees. We have employees in the factory, we have employees in the field and we have back office employees in the east coasts. The factory was shut down only for a few days until the shelter-in-place guidelines from the state of California and the County of San Diego were clarified.

What we have done in terms of keeping employees at home was that, almost all of our field team and almost all of our patients facing team, both the call center and the reimbursement team have been at home for a few weeks and only a small number of them, either as they were in states that were never shut down or if the core volume or the business volume justified on the call center and the reimbursement side stayed at work.

At the highest point, we were – just over 80% of the employees were not – were not in the company they were in leave of absence or furlough. We've started bringing them back and we saw the business reopening even before the PPP loan was approved.

And we’ve brought back the relevant people any time we saw a region open up and we've increased the capacity in the call center and the reimbursement team as this was happening. We anticipate that by the end of May, we will have almost all of our employees, put in the middle of March.

So normal sets of employees back at work that is in line with the reopening of the states. The employees are coming back, and they are focused on bringing these clinics back. We see a growing demand for training. We see a growing demand for field service.

We see a growing demand for support, all these clinics, even if they were open at a much lower volume through the last eight weeks are now seeing more patients and they need more support..

Got it. Got it. Thanks for all that and stay well guys..

Thank you..

Thank you. Your next question comes from Mike Ott from Oppenheimer. Please go ahead..

Good morning, Suraj..

Good morning, Dolev, Matt. This is Suraj, sorry my other line was busy. So I'm calling in through Mike's line. I hope everyone is safe.

So, Dolev, thank you for providing a lot of information and specifically, the cash preservation that you guys highlighted about three quarters – three or four quarters, what is that predicated on in terms of the top line outlook? How have you all done the – should I say breakeven or worst case, most likely case scenario, how you all thinking through that?.

The cash, I’ll answer one half of the question and then Matt is going to jump in.

But the determination of three quarters and the four quarters of one way was predicated on the business we had at the beginning of April, which was very low level of business mostly coming from leftovers of the international business that we were providing at the beginning of April.

And the beginning signs of what's happening in the U.S., we had to analyze the worst case scenario of both from a financial perspective or what's the sustainability of the business as well as from how much can we cut down on expenses and create a longer runway.

And we've put out an update at that point in time saying that we have cut back on all of our discretionary spend, we have delayed all of our inventory purchases that we knew were not needed because there was not going to be any placements towards the end of March and in the beginning of April and we didn't know how long that's going to last.

And we have furloughs and for reasons and when we have done this, the assumption was that we're going to be furloughing as areas closed, we're going to be reopening only when we know reopening happens.

So at the lowest point of employees being for employment and the lowest point of revenue coming in and knowing what our cash outlays should've been for inventory and discretionary spend, the calculation was that we had on hand 8 million of unrestricted cash.

We had about 1million difference between accounts receivable and accounts payable and we had the cash outlay run rate of the previous quarter, which was Q4, to calculate – or to base our calculation based on, and that these assumptions if you take the cash out weight and how much we had on the hand with assuming very minimal business coming in, that gives us a runway of three quarters.

Then we have applied for the PPP loan and for the SBA Disaster Recovery loan and we knew that if we get any one of the two that's going to give us approximately another quarter of runway without having any parts of the business rebound, since then we had parts of the business rebound on the one hand and we have the PPP loan approved, which at this point in time based on the business at the beginning of the business of April gives us about a four quarter runway and I hope I gave you the broad picture.

Matt, if you want jump in and provide some more color on the numbers..

No, Dolev, I will give a couple of things. I think you've covered exactly our methodology for evaluating the projected cash.

In addition that we have what the PPP loan are having right now over $10 million unrestricted cash available to us that with the business, starting to pick again as well while we're watching them, key indicators and office opening, and states opening. I think you've covered everything, Dolev, thank you..

Suraj, let me add one more thing. We have – domestically we have almost a 1,000 different clients with 822 individual clinics and other clients that are buying from us on the capital equipment side and then the service for that.

When we looked at our accounts receivable entering or exiting Q1 we had to put them, ask them internally the collectability of that accounts receivable and we had to look at our accounts payable and assume what can be – what's could be delay and the balance the two operating, we ended up not delaying too much and we ended up collecting more than we anticipated, mostly because the clinics that we are working with, the individual amount of clinic is very small of an open amount and also because if they want to continue doing business, then they would end up having to pay that.

So overall there was no need to extend further credit terms to our customers, everyone that goes back to business that actually opens up the door, ends up paying on time or slightly after the time..

Got it. Dolev, a couple of quick follow-ups and I'll hop back in queue. So our understanding of the acquisition cost per patient is roughly in the $200 per range.

If you can just – if your kaleidoscope right now in terms of what's going on in the market, when things will hopefully return to normal, where do you see acquisition costs per patient going, let's say in the rest of the calendar year.

And also if you can just kind of give us, I'm not asking for guidance, but just some delta, even last year ago let's say you pulled through 25,000 patients through DTC, where do you see roughly things lining up based on what you're seeing in the different markets? I'm not asking for possession, I'm just asking relative basis, how do you see it? Any color will be great.

Gentlemen, stay safe. And thank you for taking my questions..

Thank you, Suraj. I'll try, it's honestly a question out of my kaleidoscope and not out of any business book. What we know is that we have shut down all of our advertisements after the second week of March.

And the patients that came in as new in March, we were almost not capable to place into first consultation appointments whether because we placed them into appointments and better for than never happened or because by the time we get to take them into an appointment, the clinic were shut down or shelter-in-place was the situation.

In order to turn back advertisement, we would need the market to be active, our markets to be active. And as I pointed out, we have 357 clinics in 31 states, each one of the states, each one of the counties operates differently, so that would not happen.

So the actual spend on advertisement would not happen before these clinics are back in business and are cleaning up some of the backlog of patients that they had that were in treatment and were scheduled for consultation and then so on and so forth.

It just doesn't make sense from our perspective, because we can't even schedule them into an appointment before the clinic is open. And if we schedule them into an appointment, I would let the first schedule patient with in-treatment before we get a new patient.

Hypothetically, if the market rebalances by the summer and there is no second wave of COVID-19, then we will be able to turn the advertisement back on in Q3 and run it through the middle of Q4, which traditionally we shut it off out just before Thanksgiving, because the last few weeks of the year are meaningless for us, that's from in-perspective.

From a patient acquisition perspective, there has been some change in the markets, I went through the emotional change for patients and phyisicans regarding biologics and systemic drugs, which we believe increase the interest levels, decrease the acquisition costs of the user and increase the conversion of the patient into an appointment.

On the one hand there is the situation of having, as of last week 30 million people are unemployed and how much does that affect the 15% unemployment, how much does that affect the medical insurance coverage? How many of them are going to be back at work towards the first quarter and be covered through medical insurance and whether they're under COBRA or they have continued coverage of their benefits like our employees had.

So that might affect the clinic traffic negatively. So we have the positive effect on patients being more interested, physicians being more prone to convert the negative effect of how many patients are in the available markets covered by private payers or the government.

And we also have the fact that our major competition on the pension, which is the immunosuppression drugs have calmed down their advertisements, so there's less of a competing messaging going in our space.

We are not yet in a place to measure these three very big effects on what's happening, we will be able to do that as soon as we start opening up a with an area that benefit us, we can advertise locally. We don't advertise nationally.

So hypothetically as Florida opens up – reopens up businesses back to normal and we can start doing things in just in Florida. We don't need to do this in other places.

And at that point, we'll know whether our acquisition costs – overall acquisition cost went down or went up and to have some kind of an internal guideline and guidance in regards to the number of patients we anticipate to put into treatment.

Having said all of that, I just want to remind you that, we contribute – at any given year we contribute 15% to 20% of the new patients in treatment specifically for 2019 out of 23,000 new patients, 22,000 new patients that were considered for treatment by the physician. We contributed about 4,000, so that's the direct appointments that we set.

So the bigger effect on what's going to happen in the second half of the year without providing guidance is going to be two things. One, when and how the Northeast and the West are going to open. And, two whether there's going to be a second wave.

These are the two most critical factors, because if there is no second wave then the Northeast and West are opening. We do anticipate that on an apple-to-apple comparison, same store comparison we will be able to get to 2019 levels by the beginning of June.

So if we take individual clinics in areas that are open now, we will be able to get to the 2019 level of operation or higher by the end of the second quarter. And having said that, I don't know how many clinics are going to be. I don’t know how many states are going to be open.

As a reference to that, just a few weeks ago we published an update on our business and at that point in time, the Midwest and Southeast were still almost fully open and, the Midwest and the Southeast were operating at – as a region they were operating at about 100% of 2019 and the difference was not individual clinic productivity.

It was clinics that were shut down. It was areas in the Midwest, in areas in the Southeast that were shut down, where the Northeast and the West were at that point in time almost completely closed. So I hope I answered the question, Suraj..

Thank you. [Operator Instructions] Thank you. We have reached the end of the question-and-answer session. And now I would like to turn the call back to Dr. Dolev Rafaeli for closing remarks..

Thank you operator and thank you everyone for joining us today. Apologize for what happened on the callers line through the call. And we look-forward to updating you again in our next quarterly call. Thank you..

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation..