Greetings, and welcome to STRATA Skin Sciences’ Second 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, Ms. Monique Kosse with LifeSci Advisors. Thank you. You may begin..

Thank you, operator, and good morning, everyone. Thank you for participating in today’s financial earnings conference call for the company’s second quarter ended June 30, 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 second quarter ended June 30, 2020. A copy of the release can be found on the Investor Relations page of the company’s website.

Before we begin, I would like to remind everyone that 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, anticipates, plan, intend, believe, assume, predict 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 are inherently subject to significant known and unknown uncertainty 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 companies in the medical device industry, any or all of the company’s forward-looking statements may prove to be incorrect. Therefore, you should not rely on any such factors or forward-looking statements.

In addition, more specific risks and uncertainties facing the company are set forth in the company’s reports of the Forms 10-Q and 10-K filed with the Securities and Exchange Commission. STRATA encourages you to carefully review and consider the disclosures found in the 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 as of this date of live broadcast, August 11, 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, I would like to now turn the call over to Dr. Dolev Rafaeli, President and CEO of STRATA.

Dolev?.

Thank you, Monique, and good morning, everyone. And welcome to our second quarter earnings call, where we will provide you with an update on our financials and progress this quarter, along with a review of the impact of COVID-19 on our business and the efforts and progress we’re making towards recovering to the new normal.

In the previous communication, we discussed our plans to manage the company through the unknown length and severity of the pandemic and explained the unique characteristic of our recurring business model.

While partner clinics shutdowns, local government restrictions and patient confidence are not elements we can control, our unique recurring installed base deployed gives us confidence that recovery coupled with high margin and cash flow from operations will return as these restrictions are minimized or reversed.

Also, because in our unique recurring revenue business model there is nothing tangible for the physicians to make a purchase decision, all it takes is for clinics to be open and taking patients and for patients to have confidence to enter clinics.

The speed of recovery will depend on these elements aided by the tailwinds of patients’ demands, our efforts and the potential of our therapy as an alternative to immunosuppressive treatments.

By the end of the second quarter, while GAAP revenue was down as reported, we were able to see our proactive approach working as the measures taken in preserving cash resulted in higher cash flows from operation and allowed us to prepare for the relaunch of each individual partner clinic, as they were ready to open.

Last quarter, in our update, I stated that the first quarter was a tale of two halves, where the first half was strong trends of double digit growth over 2019 and the second half, once COVID hit was very different. In the second quarter, we’re again seeing the tale of two halves, but in the positive opposite order.

During the second quarter, April and May, there were challenges with entire states in lockdown, restriction set on any elective medical procedure and closures of our partner clinics. However, in the second half of the month of May, we began to see positive trends beginning as areas of the country were starting to open up.

To show how we monitor the domestic recurring business, I will discuss our gross domestic recurring billings. These are non-GAAP financial measures, which Matt will describe in detail later in the call. It is a key indicator of our overall revenue for a quarter.

Gross domestic recurring billing during the months of the second quarter showed strong double digit growth month-over-month as partner clinics were opening and inventory of treatment codes from the first quarter had depleted.

As our partner clinics were gradually reopening, we executed our previously announced patient outreach program, leveraging our in-house call center to contact thousands of patients on behalf of 200 partner clinics. As this effort continues into the third quarter, we anticipate to be able to cover the majority of those partners that are interested.

Moreover, into July, we are seeing 186% expansion of gross domestic recurring billing over June with two of our four regions at or exceeding July 2019 gross buildings.

With the West and the Northeast having had longer and deeper pandemic impact, we are very satisfied in the progress made there and anticipate as these regions become fully open, they will exceed 2019 levels. This growth was supported only by the efforts on our in-house call center, executing patient outreach without any DTC advertisement spent.

Since our costs of revenue are primarily fixed, increase in recurring sales directly increases our gross margins.

At this level of confidence, we have decided to gradually restart DTC advertisements effective the first week of August with an anticipation of scaling through the quarter and to be able to support our partner clinics in the fourth quarter, which is traditionally the highest quarter of the year due to the reset of insurance deductibles at the year end.

The timing of the pandemic slowed down the successful launch of our Q4 and – Q4 2019 and Q1 2020 placements and coupled with removal decisions made in the normal course of business resulted in a net decrease in our domestic installed base. The company is confident that the installed base expansion momentum will resume in the third quarter.

In our leading non-U.S. markets, China, Japan, South Korea, and the Middle East, we are seeing similar trends of cautious reopening, purchases and placements. We ended the quarter with $11.2 million of unrestricted cash, an increase of $3.1 million from year end.

This is further evident of the efficiency of the steps taken during the second quarter and our success in collecting outstanding receivables with minimal impact in allowances. We had positive cash flow from operations in the quarter and for the six months – for the six months in a total of $1.2 million.

At this point with the cash on hand, trends of sales, we do not foresee a liquidity issues to support our business and growth. Since the middle of May, we have gradually brought back nearly all of our employees on leave of absence.

Overall, we are operating at a lower cost structure as compared to the first quarter and do not anticipate an increase in headcount temporary or otherwise until the business dictate.

In our press release, we included information on an independent clinical study conducted in China and published in the Journal of Clinical, Cosmetic and Investigational Dermatology.

This study joins hundreds of other peer reviewed published studies that endorse the extract technology as the gold standard in excimer laser used in dermatology, the study focused on efficiency and efficacy of extract when used for treatment of vitiligo, the key indicator driving the use in China, Korea and Japan.

As announced earlier today, the company, its Chairman and lead investor entered into a settlement and release agreement with Ra Medical, under which the company and Ra Medical agreed to dismiss all pending lawsuits between the parties with prejudice, each party releases the opposing parties from any and all claims, demands, and causes of action.

This brings to an end over two years of litigation and legal expenses in which the company’s position was vindicated with the dismissal and the agreement that the claims by Ra Medical cannot be raised again.

In closing, while we all have been impacted by the COVID-19 pandemic, we created and executed a plan to manage our business and are see favorable trends as we managed to the new normal. We managed to cost – we managed our cost structure by saving over $2.4 million in quarterly cash outlay as compared to 2019.

This far exceeds our May expectations of saving $800,000 per quarter, which further allows us to preserve our assets. We have engaged our customers and we have maintained the basis of our business, our recurring revenue generating installed base.

I would like to now turn the call over to Matt Hill, our CFO for closer look at our second quarter financials.

Matt?.

Thank you, Dolev. Revenues for the second quarter of 2020 were $4.0 million, a 47.8% decrease as compared to revenues of $7.7 million for the second quarter of 2019, as a result of the shutdowns, due to the COVID-19 pandemic.

Recurring revenues for the second quarter of 2020 were $2.8 million, a 52.1% decrease as compared to $5.8 million for the second quarter of 2019. Equipment revenues for the second quarter of 2020 were $1.2 million, a decrease of 34.6% as compared to the $1.9 million for the second quarter of 2019.

Again, the decrease was a result of the COVID-19 pandemic and our decision in the third quarter of 2019 to implement our unique recurring revenue business model in Korea. In the second quarter of 2019, we had approximately $600,000 in sales of equipment units to Korea, which we did not have in the second quarter of 2020.

The second quarter, however, did include recurring revenue of $126,000 from our South Korean installed base. In our press release issued this morning. We provided information on a non-GAAP measurement described as gross domestic recurring billings, which represents the amount invoice Department of Clinics, when treatment codes are sold to physicians.

It does not include the normal GAAP adjustments, which are deferred revenue from prior quarters recorded as revenue in the current quarter, the deferral of revenue from current quarter recorded as revenue in future quarters and other adjustments such as co-pays and other discounts.

We felt that this was an important disclosure in light of the COVID-19 pandemic to assist in understanding our business and to see what we’re seeing, that our business is growing monthly. We also wanted to provide transparency with respect to deferred revenue.

Since we defer a portion of our GAAP recurring revenue into future quarters, any decrease in deferred revenue can have an impact on future quarters. This is the case here, deferred recurring revenue added to the second quarter of 2020 was $1.5 million as compared to the deferred revenue added to the third quarter of 2020 of only $500,000.

For a point of reference, deferred recurring revenue in and out of each quarter of 2019 was approximately $2 million. Gross domestic recurring billings for April, May, June and July 2020 were $466,000, $633,000, $749,000 and $1.4 million respectively. The total gross domestic recurring billings for the second quarter of 2020 was $1.8 million.

So in July, we’ve nearly matched the gross domestic recurring billings of the entire second quarter. Revenue for six months ended June 30, 2020 were $10.8 million, as compared to revenues of $15.2 million for the six months ended June 30, 2019.

Overall, gross profit for the second quarter of 2020 was $2.0 million or 48.7% of revenues as compared to $4.9 million or 63.6% of revenues for the second quarter of 2019. Gross profit for recurring revenues for the second quarter of 2020 was $1.4 million or 51.2% of revenues as compared to $4.1 million or 70.3% of revenue.

The primary reason for the decrease in gross profits for the three months ended June 30, 2020 as compared to the same period in 2019 was a result of lower sales to the COVID-19 pandemic, fixed cost and manufacturing and lower overall production.

Overall gross profit for the six months ended June 30, 2020 was $6.4 million, or 59.1% of revenues as compared to $9.5 million or 62.6% of revenues. Gross profit for recurring revenues for the six months ended June 30, 2020 was $5.3 million or 62.7% of revenues as compared to $7.6 million or 68.4% of revenues.

Selling and marketing costs for the second quarter of 2020 were $1.4 million, as compared to $3 million for the second quarter of 2019. This was primarily as a result of lower tradeshow costs, compensation costs, and direct to consumer advertising costs as result of cash conservation efforts and impact of COVID-19.

General and administrative costs for the second quarter of 2020 were $1.9 million, as compared to $2.7 million for the second quarter of 2019. This is as a result of lower legal, accounting and consulting costs.

Other expense for the second quarter of 2020 was $18,000, compared to $145,000 for the second quarter of 2019, as a result of lower interest expense due to refinancing of our long-term debt in December 2019. In May, we projected that our cost savings actions would result in saving up to $800,000 on quarterly basis.

We’re proud that our cost savings actions during the second quarter reduced our OpEx spend by over $1.6 million, in addition to the $800,000 in G&A expenses.

Net loss for the second quarter of 2020 was $1.7 million or $0.05 per basic and diluted common share, as compared to the net loss for the second quarter of 2019 of $1.1 million or $0.03 per basic and diluted common share.

Net loss for the six months ended June 30, 2020 was $2.7 million or $0.08 per basic and diluted share, as compared to the net loss for the six months ended June 30, 2019 of $2.4 million or $0.07 per basic and diluted common share.

At June 30, 2020, cash, cash equivalents and restricted cash was $18.6 million, an increase of $3 million from December 31, 2019. On April 21, 2020, we received $2 million in proceeds from the Small Business Administration’s Paycheck Protection Program.

As we stated before we’ve carefully considered eligibility under this program and are satisfied that we’re the right type of company for this loan. We have not terminated our employees. And in fact, continued to pay their benefits during the leave, their leave of absence.

We brought nearly all of these employees back to work while following CDC guidelines, but we continue to conserve cash and we’re operating under a lower cost structure, as we have eliminated temporary workers, have reduced DTC spent and other discretionary costs.

In addition through our cash collections efforts and reduce deferred revenue, we had positive cash flows from operations of $1.2 million, and we believe we have sufficient cash on hand to continue fund the business and its projected growth.

EBITDA for the second quarter of 2020 was a negative $177,000 as compared to a positive $517,000 for the second quarter of 2019. EBITDA for the first six months of 2020 was $422,000 as compared to $896,000 for the same period in 2019. At June 30, 2020, we had 33,754,909 shares outstanding.

In summary, we obviously are living and working in unprecedented times, and while we cannot predict when this pandemic on business will cease. And in Q3, we do know what we will have some headwinds do lower deferred revenue entering the quarter.

But we’re optimistic as we see monthly increases in our gross domestic monthly recurring billings that we hope very soon we can get back to the new normal. With that said, I would like to turn the call back over to Dolev..

Thank you, Matt. Operator, let’s open the call for Q&A please..

[Operator Instructions] Our first question comes from the line of Suraj Kalia with Oppenheimer. You may proceed with your question..

Good morning, Dolev, Matt. Hope everyone is safe and healthy. So Dolev thanks for providing a lot of metrics. I just wanted to make sure that the revenues per system per quarter, our calculation is – it’s in the approximately $2,300 range for Q2.

Am I reasonably correct?.

Just one second, we’re checking it, but usually….

So Dolev, I know last year, one of the key strategic initiatives that you were excited about was implementing, well, the start of implementation of recurring business model, OUS and I know South Korea was the starting point. I think so I heard Matt say a number of $126,000 in the quarter.

I guess, overall, if you just take a step back, obviously COVID is screwing up a lot of things, but just give us a perspective, where we are and how long before the recurring thing we started getting a better sense of OUS adoption of that kind of a model?.

Okay. So great question. So let me take a step back and provide an overview of what’s happening outside of the U.S. So in July of 2019, we’ve announced the change of an approach in South Korea, as the first market outside of the U.S., where recurring revenue is going to happen.

The way this is affected is we have an agreement with our partner in South Korea, which has been our distributor for the past 14 years or 13 years. And they have been very successful in creating an installed base in South Korea of approximately 300 devices, which is relative to the size of the clinical dermatology population in South Korea.

It’s about 50% of the number of clinical dermatologists in South Korea.

Without getting into the specific deployment in each clinic number of devices and so on, over the past four or five years prior to announcing this, our average run rate of sales into Korea of both new offices, as well as replacement devices, because we have started placing devices more than 10 years ago.

Some of the devices came to the end of their natural life was in the range of 25 to 30 devices per year.

So our dissipation going into the implementation of the new business model in Korea was that in normal business conditions, we will be able to replace the sale of 25 to 30 devices at approximately $50,000 to $60,000, depends on the model, we’re selling, but about $1.2 million of equipment sales.

And we will be able to replace that with installed base that will be owned by us. And we’ll pay us overtime in the same ranges as a U.S. device in normal times, not pandemic, pay us, which is in the range of $32,000 to $40,000 a year.

That’s brought us knowingly to have to take a step of saying we’re not going to be taking any more capital equipment sales revenue from South Korea, which comes in at as a one-time sale with anywhere between 40% and 45% of margin. But we will be taking recurring revenue and which comes in at a much higher margin.

We announced the – we announced that in July of 2019, that’s proceeded with a large amount of capital equipment that was purchased in the quarter prior to that, because the distributor was still closing up and deals that they were negotiating through the first and second quarter of 2019.

Matt gave the specific details of how much that was, and we started the process and as we spend now, we have 17 devices and we have an installed base of 17 devices in Korea that were placed there over the past year, since we started, which is somewhat less than what we anticipate with 25 devices, but considering the pandemic we’re very satisfied with the number.

As these devices were placed over time, the revenue per – the revenue generated from devices is accumulating. So for the second quarter of 2020, as Matt pointed out, it’s $126,000. And this number will continue to go up, quarterly as more devices are placed. The agreements in South Korea, I’d like the agreements in most of the devices in the U.S.

is very similar to what we have done in the past in the U.S., which fixed type agreements in the U.S., where the doctor knows exactly what he’s paying, and he knows exactly what he’s getting.

So we can – we do not on from an accounting perspective, we do not need to defer the revenue – portions of the revenue, because they know exactly what they’re getting and they know exactly what they’re paying.

And, but we also do not anticipate growth in revenue per device in South Korea or a reduction in revenue per device in South Korea, as the installed base increases. There is variability in that market based on the type of device we install. We are currently in the market with three different types of devices with – at three different price points.

But for the sake of understanding that market, you can look at the average. And for that matter, you take $126,000 and divided by 17 and come up with a number that’s representative of the revenue per device..

Got it. Okay. And Dolev, last question, and I’ll hop back in queue. So July, you’ll, so $1.4 million approximately in recurring revenues.

So Dolev maybe I missed it in terms of commentary for Q3 and Q4, I’m really curious about how Florida is shaping up, given the resurgence of COVID, what dynamics are you all seeing just kind of at least directionally help us understand for – specifically for Q3 and Q4? Folks, thank you for taking my questions..

Thank you, Suraj. So in terms of color and we have provided updates through the second quarter, so I’ll let you on to some of that information and add some more color. We managed the business in a very local metric analysis. So we know exactly what is happening in every one of the regions.

We’ve – in the middle of May, we had the Southeast including Florida, and the Midwest both exceeding 2019 numbers in growth. So we were in the Southeast and Midwest at over a 100% of billing by the middle of May – as compared to the middle of May 2019. As you clerkly pointed out in your question, things have transpired in Florida.

So I’m going to keep up a wider picture on what’s happening now across the country. We’ve already installed base, which is now smaller than it was at the end of 2019 and smaller than it was an empty end of Q1. We are in July extremely close to our gross billing in July of 2019.

Now when you break this down to regions, our Midwest and Southeast regions are running faster than at or faster than 2019, where the West and the Northeast are the two regions struggling. Within these four regions, there are specific hotspots. In Florida, Florida as a whole is doing very well. The Miami-Dade county is the one that’s lagging behind.

If we were to judge Florida from the rest of the state, then Florida is doing very well, but Miami-Dade county is lagging behind. In the Northeast, the Northeast is doing as a whole, as we stand now in the middle of August very well. Other than New England. Actually, New York City, which was – used to be a hotspot is now recovering.

And the rest of the Northeast is – has recovered prior to that. But New England is still a hotspot. In the West, we see one lingering hotspot, which is the Pacific Northwest. The rest of the West region is trimming back to or trending back towards 2019 numbers.

Now as a reminder, this is done with a lower installed base than we had at the end of 2019 and the lower installed base than we had at the end of Q1. And it is done without any direct-to-consumer advertisement.

We cannot – based on the nature of the pandemic and the government behavior and the individual patient behavior, we find it very hard to project what will happen next month or next quarter. So we did not provide guidance, but we did provide specific numbers all through the end of July.

And what we see is continued growth in utilization across clinics, across all regions, other than these identified hotspots that I identified. There is very significant recovery and the recovery takes us without DTC advertisement and at lower installed base to numbers that are at or higher than 2019 in gross billing.

It’s very important to point out from a perspective of looking at revenues from a GAAP perspective, that we came into Q1 with approximately $2 million of deferred revenue coming from Q4. We walked out of Q1 with a lower deferred revenue because of the chopped off second half of Q1 and – which was about $1.5 million.

And then we walked out of Q2 with just approximately $0.5 million of deferred revenue. So we are – our impact because of the deferral has shifted. We were – if other than the GAAP reasons, our revenue in Q2 – our gross revenue in Q2 is lower, and we’ve reported that this way. And – but that is going to impact Q3.

However, what we see is as of the end of July that we are trending back to 2019 or very close to 2019 numbers in gross billing. And in multiple specific territories, we’re exceeding these numbers other than these hotspots where there are issues.

And I pointed out one that I believe you asked about, which is the Miami-Dade area, which we believe will recover, but it will take time. And we believe that based on the experience we had in New York City, which was completely shut down during the second – most of the second quarter.

And other regions like L.A., which was very severely impacted during the – most of the second quarter and now is significantly above 2019 numbers. Thank you, Suraj..

[Operator Instructions] Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. You may proceed with your question..

Hi, Dolev and Matt, how are you?.

Good morning, Jeff..

So just trying to get a better sense of your FTEs and your spend is – Q3 progresses in Q4, particularly in the DTC area.

Is it something that you should see a slow and gradual approach with some of your partner clinics? And how does that feel for the back half of the year?.

So thank you, Jeff, for the question. Let me take this one part at a time, and I will ask Matt to add comments of his own. In terms of FTEs, we started – we were – in Q3, we had – sorry, in Q1, we had 126 FTEs this was made of 113 company employees and 13 temps.

We did not bring back any of the temps, which impacted mostly our Carlsbad facility, manufacturing and call center. And we did bring back almost all of the company employees other than a very small number. And during the process of coming back, we had a – we had a couple of people that did not come back on their own.

We are now at a full employee count of 107 and as Matt pointed out, we – and I pointed out in my comments, we do not foresee the current need to expand on that. Now that dovetails with your second question that has to do with DTC and the resources required there.

As you might recall, we have completely shut down direct-to-consumer advertisement in the second half of March, as we saw the pandemic starting to shut down the country.

We did that from both cash preservation reasons as well as knowing that any advertisement we run in March or April, not knowing how long this pandemic is going to last, is going to be either useless or with very little use in our ability to schedule appointments as we do not know when offices are going to reopen.

In – we started bringing back our employees at the second week of May, and we had our sales force and field support team fully back in the second week of June. This was done gradually as states were opening and as we were allowed to bring them back and as clinics were starting to open up.

So our employee base was brought back gradually from the middle of May until the middle of June. At that time, we announced that we’re going to be supporting our clinics in what we call patient outreach.

I’m happy to be here to report that we were the only one’s dealing with these clinics that came to them and offered help and support instead of asking them for purchase orders.

We didn’t have to ask for purchase orders because all we needed to do is get them to work through the inventory they had at the end of Q1 as they open up and then reorder, which is what happened eventually. We reached out to all of the clinics that are or were in an area that was reopened by local government.

At the point of time that we announced this initiative, there were 350 clinics like that, and this is a part of our patient outreach press release that we put out in the second half of May. We reached out to 350 clinics at the time, and we looked for the following things to be in existence.

The clinic needs to be open, it needs to be staffed and they need to be offering treatment. So it’s not enough that the physician says I’m working, but I’m working from home. They needed to be open, staffed and offering treatment for patients.

By the time of this call, we have already done, what we call outreach 1.0, with approximately 200 of these accounts, which represents many, many thousands of patients. Basically, the process works like this, we go to the clinic, once they’re open, they’re staffed and they’re ready to offer treatment.

We take all of the patients they had in treatment or scheduled for treatment, which means we have already worked with them on getting insurance benefits verified they have already seen the patient and diagnose the patient, prescribe the patients, have consultation with the patients, and we reach out to the patients.

We reached out to many, many thousands of patients. We were able to schedule into appointments, many, many hundreds of patients. And we know that many, many hundreds of other patients already either got the message from us and called the clinics themselves, or got the message from the clinics indirectly that they can get back to be treated.

This is what drove the depletion of inventory that existed in these clinics at the end of Q1 when they shut down their doors and basically did not use these treatments. And brought them to start reordering procedures. And as you saw, it was just under 500,000 in April, it was almost 800,000 in May and so on and so forth.

The – once we are done with patient outreach, which will, as we’ve covered in our – in the prepared remarks, will happen through this quarter, we will need to continue feeding the pipeline with new patients.

So once all of the patients that were in the pipeline prior to pandemic hitting the country are back in treatment, we will need to fill up the pipeline. So we’re going to be turning DTC back on. We started doing this last week.

And this is going to be done in areas where the clinic is open, staffed, treating has already gone through outreach 1.0 has already gone through outreach 2.0, which is we go back to the patients that we could not reach in the first go round, and we call them again.

And we know that they have had very good, very successful history of converting patients, and we’re reaching out to patients through direct-to-consumers. So this is going to be done gradually on targeted zip codes. And we’re going to be rebuilding advertisement.

If you want to conceptualize this, as we have done starting the second half of – starting the third quarter of 2018, we have done this slowly, gradually started by specific zip codes and extended throughout the country.

So by the end of 2019, it was a national campaign, but when we started in the third quarter of 2018, it was done on specific zip code. This is at first only done with accounts that have gone through Outreach 1.0, Outreach 2.0 and a fully functional staff and treating.

What we have seen from the outreach is that the clinics are running faster than those that are staffed and running and treating, are running faster than they were running in 2019. Part of this has to do with pent-up demand for patients that were not treated, but since patients cannot be over treated, you can’t treat them more times than required.

This has to do with clinics referring patients that they had in the clinic that were otherwise before pandemic considered for or treated by other modalities. And this is why we – we believe this is why in certain regions of the country, we see usage that exceeds 2019, even though we don’t have any DTC advertisement.

So it’s a kind of a blank slate comparison to what we had before, because in 2019, we did have DTC advertisements, basically on the same installed base in these regions..

Super. Thanks for taking the questions..

Perfect. Thank you..

Our next question comes from the line of Shawn Boyd with Next Mark Capital. You may proceed with your question..

Good morning.

Can you hear me okay?.

Yes, Shawn. Good morning..

Thank you. Just very quickly on the adjustment. So I appreciate the metrics on the gross domestic recurring billings. If I am understanding this correctly, the adjustment on deferred revenues added about $1 million in recurring revenue in Q2. You can’t count on that every quarter.

And so you’re kind of warning us or you’ve indicated that we should be cautious about that going forward.

Can you just help us roughly with what – should that be kind of neutral this quarter? Should it be perhaps a small deficit? Can you just help us a little bit on what we should think about as we go into Q3?.

So I’ll hand this over to Matt to do the accounting GAAP calculation. But in a normalize quarter, the way we defer revenue, in the normalized quarter, so 2019 is that we are amortizing out revenue as it comes over the cancellation term of the agreement we have with the customer.

And these cancellation terms are mostly – not mostly are either 30 days or 60 days. They used to be 60 days, now they’re 30 days. So the amortizing of revenue is over 60 days. So essentially in a normalized quarter, 100% of the revenue in the first month is going to be counted.

And then the first day of the second month, we’re going to be taking off one over 60 of that revenue and deferring it out. On the second day it’s going to be two over 60 of that revenue that comes in that day. And on the last day of the second month, we’re going to be taking off half the revenue.

Having said that, in a normalized year like 2019, we had approximately $2 million coming in, we had approximately $2 million coming out. And what you saw in GAAP revenue was the almost equivalent or almost equal to the gross billing.

In a quarter like Q1, where we entered the quarter with $2 million, we exited the quarter with $1.5 million, and we exited with $1.5 million, because the second half of March – the last two weeks of March had almost no revenue, because everybody stole down and did not know what to do.

We had a difference between deferred in and deferred out of about $0.5 million favoring Q1. In the second quarter, we had $1.5 million coming in, about $0.5 million coming out, and we had about $1 million as you pointed out that favors the second quarter.

In order to get back to a normalized quarter, we not only need to bring the revenue back to – and when I say normalized quarter, I mean, 100% of 2019.

We not only need to bring the gross domestic billing to be at the same level as 2019, but we also need to fill up the deferral coming in and coming out, so that they will be equal or that the deferral coming in is going to be higher than the deferral coming out, which is what we have in Q1.

Matt’s going to take it from here from an accounting perspective..

Okay. So, Shawn thanks for the question. I think Dolev explained it very well. I think the issue we have is going – is looking forward. What we are seeing is we’re seeing double-digit – we saw double-digit growth from the point where we bottomed out in April and then going up in May and then going up in June and going up 186% in July.

Now with respect to those gross billings, net of other adjustments such as co-pays and other discounts, we would recognize 100% of July’s. Now we’re hopeful that July and the previous month’s historical increases are indicative of future results, but we’re going to be watching this very closely. We watch that amount every day.

So beginning in August, we’ll start to defer the revenue. And then continue to defer the revenue in September.

Does that give you some color around how to take a look at that and how to model that?.

Yes. No, I think that helps. And I think maybe the key is that this is a quarter-to-quarter issue that will essentially wash itself out as we move toward the end of the year, right? So going back to what Dolev said about the fiscal 2019 fairly matching up over that total period..

So yes, you’re right. And if we, indeed, and I’m going to build on your question and Suraj’s question before, once all territories show 100% or higher to 2019 on average, then we’re not going to be concerned with the deferral in and out because that’s gap but we will know that the business is back to normal.

This is why I highlighted that the Southeast as a region and the Midwest as a region, are now already back to 2019 or higher even without DTC, the Northeast and the West are doing good progress towards getting back to 2019. And unless we see drawback because of either state behavior or secondary waves in certain places.

We should be trending up as we have April, May, June, July. We should continue to see the trend up because these inventories are being depleted, and they’re being refurbished faster and at that point in time, we will be able to talk about actual growth over the previous year quarters and so on..

Got it. I appreciate that. Let’s switch the placements, if I could. Obviously, a very difficult quarter and placements were down in Q2, but what should we think about in terms of both domestic and – well, international is actually still growing. So maybe we should just put that aside.

But on the domestic placements, should we expect to see that back up this quarter? Or how quickly do you think we start to see those coming back?.

In my prepared remarks, I did specifically say that we anticipate seeing the second quarter – the growth in net placements picking up in the third quarter. The explanation of what happened in the second quarter, has to do with two things. One, in the normal course of business, we removed devices.

We have put out a press release at the end of 2019 that outlines every single quarter, how many were put in and how many were taken out. And we take out in a normal course of business.

In addition to that, the some of the placements put in at the end of Q4 2019 and some of the placements put in, in Q1 2020, were just not launched because the clinics were shut down. So we had to account for that. But we do see that Q3 growth in installed base is – the momentum in the growth in installed base is going to resume in Q3 of 2020.

And this will happen in – across the country in areas that are open and are back to business. And as you pointed out, there’s no need to mention the non-U.S. because it’s continuing and growing..

Got it. Got it. Okay. Last thing from me. We’ve talked in the past of a kind of different dynamic now in COVID world and that your treatment doesn’t suppress the immune system like the biologics can. Is there any change in your advertising campaign or perhaps in how your call center is reaching out to the existing patient base.

Is there anything there that’s changing that perhaps is driving this higher kind of year-over-year utilization that you are starting to see in some of these partner clinics? Or is that….

I’m going to try to answer true color. It’s not going to be a specific metric because we cannot yet measure it, and I’ll explain why not. The subjective answer is yes. What we see is that in multiple territories, we see same-store sales being higher than 2019 even without DTC.

So even without us pushing in more patients, which effectively translates to the clinic has decided consciously to conduct more treatments, even though we are not the ones sending them more patients.

And now what we can see is, and we have direct access to that, is that the number of new patients being recruited by the clinic did not substantially grow beyond what it was in 2019. So the subjective assumption is that they are diverting more patients to extract versus making a clinical decision to put them on something else.

Now what we have done is our social media advertisement and our – all the other outreach we have, which we’re still conducting, and we have been conducting through the second quarter, emphasizes that our solution is not immunosuppressant. This is done both two patients when we speak to them. And as well as to the clinicians.

We have conducted by now, and I’ve provided some updates through the second quarter, but we have provided by now dozens of webinars where we discussed our procedure. We had hundreds well in excess of the number of clinics we have. So it’s – by now it’s a – if people are showing up for the second and third time.

Hundreds of clinicians show up to discuss best practices and treatment through webinars. We have – while providing the outreach, we have reminded clinicians that this is a superior treatment because of the lack of immunosuppressant effects that it had.

And we have seen more and more feedback from patients and from clinics, saying that patients are coming in and saying, I just don’t want to be on biologics. I’m afraid of it. Since the pandemic did not go away, and it doesn’t seem like it will go away in the next month, maybe quarters.

The people that want to get back to new normal and visit their physician would like to be treated with something that does not increase their risk. So we see that on social media interaction when they respond to our advertising. We see that when they call our call center, we see that through clinicians calling us.

We are – surprisingly, for the first time in many, many years that I’ve been involved with this business, we do not see pushback from clinicians. They do not have discussions with us on the benefits of the other solutions. They understand why this is better. And this might explain the better than 2019 performance in certain territories.

But as I said, we do not have objective metrics yet because objective metrics will be those that say that a physician that had 100 patients sent for verification of benefits resulted with X patients being treated previously and now the number is higher than X. And we need some time to pass for us to be able to see that number.

This will be better visible by us or better viewed by us in the first quarter of 2021 when clinics point out the patients that they would like to renew and reset benefits for with the insurance companies. So that will show us how many more patients stayed with them through the pandemic and grew their patient base.

We do see that through insurance benefit requests coming in now. And that number keeps increasing. But as I said, these are all subjective measures. And I – the only objective measure we have right now is that multiple regions are trending above 2019. And without DTC, the only driver out there is the fear from the alternative treatment..

Got it. I appreciate that color. And the recovery is wonderful to see as is the tight management on the operation and the subsequent build in the cash. Last question from me. Your operating expenses were very, very tight in the quarter, down to $3.6 million. You’re bringing back the DTC advertising, so I would have to think that comes up.

Help us as to what we should think about at this point with some of the cost saves that I think are going to be have a longer tale to them, but offset by the DTC advertising.

What are we thinking about in quarterly operating expenses going forward?.

I will ask Matt to start with the answer, and then I will jump in with some comments..

Okay. So as you’ve seen in the past. But let’s start with the quarter. So we’ve – we’re now operating at a lower cost structure than we were in the first quarter, and we’re going to continue to operate that way.

Obviously, when you look back at 2019, on the general and administrative expenses, in particular, we had a lot of consulting, accounting and legal expenses. We don’t foresee those on a go-forward basis. With respect to now looking forward with DTC and sales and marketing, we’re committed to the headcount that we have.

And as you know us and you know Dolev and you know how we operate this business, particularly with DTC, is that we utilize DTC as a key tool in order to bring our partner clinics patients then we see a halo effect of additional patients that they recognize that can be treated with the extract, and we are very laser-focused in managing those costs.

So our team reviews our expenses as it pertains to DTC on a daily, weekly, monthly basis to ensure that we’re getting the patients, the leads, all the leads, the patients and the patients into treatment. That we expect based on the amount of spend that we’re managing to.

So I want to make sure that you’re clear that we – while we’re increasing DTC spend, starting last week. We’re going to do it, as Dolev described in his prepared remarks, we’re going to do it in a way that it’s after version 1.0 in patient outreach, after version 2.0 in patient outreach that we know that the offices are open.

We know the offices are staffed, and we know the offices are going to put those patients into extract..

And now let me add some comments on top of that. In order, without providing guidance for the third quarter. In order for the company to continue with the history of managing our resources and being able to show that we’re operating at an accretive cash flow from operation.

Whether positive cash flow like we had in the first and second quarter of 2020 and prior to that or even at the breakeven cash flow. What needs to happen is we need to be able to control our resources. Now since we don’t need to manufacture new things in order to bring our business back, the – that is not going to be a drag on the use of cash.

We – what the use of cash is going to be mostly driven by is the growth in margins and that’s going to happen automatically with the growth in revenue. And as Matt pointed out, July alone had almost the revenue for the full quarter. So we need to grow in revenue, but that additional recurring revenue adds a lot in margin – in gross margin.

And we need to make sure that the balance between payables and receivables stay favorable in terms of cash flow. And we have said, coming into the second quarter that we believe we can manage the balance between payables and receivables.

And exiting the second quarter, we have shown that we have no problem in collecting receivables, and we have no problem controlling the payables. So now circling all the way back to your question, I did say that edging DTC is going to be done gradually.

The first quarter – the third quarter of 2018, which was the first quarter for us to do DTC after I came back. We did about $50,000 of DTC. That’s insignificant for the size of the business even today. And that gradually ramped up to about $500,000 a quarter at the end of 2019.

We do not have any intention of jumping to $500,000 in the first day, only because in most of the regions, we are still not able to turn it back on because some of the clinics are not open and they’re restricted. We are going to be doing this gradually. So it’s going to be higher than 50,000, and it’s going to be significantly lower than $500,000.

It will not impact our ability to generate an accretive cash flow from operation. And that’s why we’re very much convinced that the resources we have are going to be sufficient for both operation and growth regardless of what August and September are going to bring about in the third quarter..

Got it. That’s helpful color and good luck on continuing the recovery, gentlemen. Thank you..

Thank you..

Thanks a lot, Shawn..

Ladies and gentlemen, this concludes today’s question-and-answer session. I would like to turn the call back over to Dr. Rafaeli for closing remarks.

Thank you, operator, and thank you, everyone, for joining us today. We look forward to updating you again on our next quarterly call. Thank you..

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day..