Q2 2020 STRATA Skin Sciences Inc Earnings Call
Greetings and welcome to strata skin Sciences second quarter 2020, <unk> earnings Conference call. At this time, all participants are they listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operators since joining the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host this oneq CACI, let's life science.
Thank you you may begin.
Thank you operator, and good morning, everyone.
Thank you for participating in todays 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 strata skin.
Joining me today will be more killed Chief financial officer at Scott.
Earlier this quarter Strada issued a press release announcing its financial results for second quarter ended June Thirtyth 20 twice.
A copy other release can be found on the Investor Relations page the topics web site.
Before we begin I would like to remind everyone that how much various remarks about future expectations.
Yes, and prospects constitute forward looking statements for purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of lighting <unk> five.
These statements include but are not limited to our plans objectives expectations and pension and other state that who came to words such as best I can say anticipate plan intend believe assume predicts and variations of such words or similar expressions.
That's predict or indicates.
Further events or trends that do not relate to this historic matter.
These statements are based on our first beliefs or expectations are inherently subject to significant no.
Uncertainties and children circumstances, many of which are beyond our control.
Okay, 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 Kurt Cobain Nike pandemic assessing the medical device industry in general.
Given the uncertainties affecting all properties in the medical device industry any or all of the company's forward looking statements may prove to be correct.
Therefore, you should not rely on any such factors are forward looking statements.
In addition, more specific risks and uncertainties stay cool okay are set forth.
In the Companys reports.
<unk> form 10-Q, 10-K filed with the Securities and Exchange Commission.
Got it encourages you to carefully would you consider the disclosures phone then it's FCC filings, which are available at www dot FCC stuck out.
On the company's website.
As a reminder, this conference call is being recorded and will be available for audio rebroadcast of stride as website.
Furthermore, the content of this conference call contains time sensitive information that is accurate only as of the state of the live broadcast August 11 2020.
<unk> 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 Strada.
So that's.
Thank you Monica 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 Corbett 19 on our business and the efforts and progress we're making towards recovery.
To the new more.
In the.
Oh previous communication, we discussed our plans to manage the company through our through the I've known bank and severity of the pandemic and explain the unique characteristic of our recurring business more.
What a partner clinics shutdowns local government restrictions and patient confidence or 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 you know our unique recurring revenue business model. There is nothing tangible for 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 tailwind of patients demand or efforts and the potential of our therapy as an alternative to immunosuppressive treatments.
By the end on the second quarter, well get revenue was down.
As reported we were able to see.
Our proactive approach working.
The measures taken in preserving cash resulted in higher cash cash flows from operation and allowed us to prepare for the relaunch of each individual partner clinic as they were ready to open.
[noise] last quarter, you know our update I stated that the first quarter was the tale of two halves.
Here, the first half with strong trends of double digit growth over 2019, and the second half what's Corbett kids.
Very dear.
In the second quarter, we're again seeing the tale of two house, but in the positive opposite order.
During the second quarter April and May.
There were challenges within within tire states in locked down restrictions set on any electric medical procedure and close closure is all of our partner clinics. However in the second half of the month of me, we began to see a positive trends beginning as areas of the <unk>.
We were starting to open up.
To show, how we monitor or the domestic recurring business I will discuss our gross domestic recurring billings. These are non-GAAP financial measures, which mass will describe in detail later in the cool.
It is a key indicator of our overall revenue for a fourth quarter gross domestic recurring building during the month 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 deeply.
[music].
As a partner clinics were gradually reopening we executed or previously announced patient outreach program leveraging.
Are you know sportscenter to contact thousands of patients on behalf of 200 partner clinics.
At this at this effort continues even through the third quarter, we anticipated to be able to cover the majority of those partners that are interested.
Moreover into July we're seeing 186% expansion of gross domestic recurring billings over June wood to all of our four regions assets or exceeding July 2019 gross billings.
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 all open they will exceed 2019 levels.
This growth was supported only by the effort on our in house pools that are executing patient outreach without any did you see advertisements that.
Since our cost of revenue are primarily fixed increasing recurring sales directly increases our gross margins.
At this level of confidence, we have decided to gradually restarts DTC advertisement.
Effective the first week of August with an anticipation of scaling through the 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 their reset of insurance deductibles at year end.
The timing of the pandemic slowed down the successful launch of our Q4 and Q4 2019 in Q1, Twentytwenty placements and coupled with remains the decisions made in the normal course of business resulted in a net decrease in our domestic install base the come.
<unk> the company's confidence that the installed base expansion momentum will resume in the in the third quarter.
You know, leading known the 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 and increase the $3.1 million from year end. This is further evidence 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 month for the six month in in a total of $1.2 million at this point with the cash on hand trends of sales, we do not foresee liquidity issues to support our business and Brooks.
Since the middle of me, 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 head count.
For a or otherwise until the until the business dictate.
You know press release, we included information on an independent clinical study conducted in China and published in the journal clinical cosmetic and investigational dermatology. This study joints hundreds of other peer reviewed published studies that endorsed the XTRAC technology.
As the gold standard in excimer excimer laser used in dermatology the study focused on efficiency and efficacy of extra when used for treatment. The Vin like go the key indicator driving the use in China Korea and Japan.
As announced earlier today.
The company, it's chairman and lead Investor entered into a settlement and release agreement with already medical under which the company and already medical agreed to dismissed all pending lawsuits between the parties with prejudice each part D releases opposing parties.
From any and all flames.
Demands and causes of action this brings to enhance over two years of litigation and legal expenses in which the companies position was vindicated with the dismissal and be agreement that the flames by already medical cannot be raised again.
In closing, while we all have been impacted by the corporate 19 pandemic, we created an executed a plan to manage our business and are seeing favorable trends as we manage to eight to the new norm.
We managed to cost we manage our cost structure by saving over $2.4 million in quarterly cash outlay as compared to 2019 this far.
This far exceeds our me expectations of saving $800000 per quarter, which further allowed 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 map Hill, our CFO for a closer look at our second quarter financial matters.
Thank you Dylan.
Revenues for the second quarter up Twentytwenty were $4.0 million, a 47.8% decrease as compared to revenues of $7.7 million for the second quarter of 29 team.
As a result of the shutdowns do the code bid 19 pandemic.
Recurring revenues 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 20 $21.2 million.
A decrease of 34.6% as compared to the $1.9 million for the second quarter 2019.
Good.
The decrease was result of the cobot, 19th endemic and our decision to third quarter 2019 to implement our unique recurring revenue business model in Korea, and the second quarter of 29 team.
We had approximately $600000 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 $126000 from or South Korean installed base.
In a press release. This issued this morning, we provided information on a non-GAAP measurement described as gross domestic recurring billings.
Which represents the amount in boys department clinics when treatment codes are sold to position.
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 cobot 19 pandemic.
To assist in understanding our business and to see what we're saying that our business is growing bubbly.
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 $500000.
For point of reference deferred recurring revenue in and out of each quarter of 29 team.
Was approximately $2 million.
Gross domestic recurring billings for April May June and July 2020 were 466000, 633740, 9000 and $1.4 million respectively.
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 core.
Revenues for the six months ended June 32020 were $10.8 million as compared to revenues of $15.2 million for the six month ended June 30 2090.
Overall gross profit for the second quarter of 2020.
$2.0 million.
Were 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 2020.
It was $1.4 million or 51.2% of revenues as compared to $4.1 million or 70, 370.3% of revenues. The primary reason for the decrease in gross profit for the three months ended June 30 2020.
As compared to the same period in 2019 was the result of lower sales to the cobot 19 pandemic fixed costs in 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 32020.
Was $5.3 million or 62.7% of revenues as compared to $7.6 million or 68.4% of revenues.
Selling and marketing cost for the second quarter, 20, $21.4 million as compared to $3 million for the second quarter.
2019.
This was primarily as a result of lower trade show costs compensation costs and deep direct to consumer advertising costs as a result cash conservation efforts and the impact to covert 19.
General administrative cost for the second quarter 2020.
Were $1.9 million as compared to $2.7 million for the second quarter 2019.
This is as a result of lower legal accounting and consulting costs.
Other expenses for the second quarter of 2020.
Were $18000 compared to $145000 for the second quarter of 2019 as a result of lower interest expense due to the refinancing over long term debt in December 2019.
In may we projected that our cost savings actions would result in saving up to 800000 on on quarterly basis, we're proud that our cost saves actions during the second quarter reduced our opex spend by over $1.6 million. In addition to the $800000 Egina expenses.
Net loss for the second quarter of 2020 was $1.7 million or five cents per basic and diluted common share as compared to the net loss for the second quarter 2019 of $1.1 million or three cents per basic and diluted common share.
Net loss for the six months ended June 32020 was $2.7 million or eight cents per basic and diluted share.
That's compared to the net loss for the six months ended June 30, 2019 of $2.4 million or seven cents 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 and proceeds for the small business administrations Paycheck protection program.
As we stated before before we carefully considered our eligibility of this program and are satisfied that were the right tip company for this low.
We have not terminated our please and in fact continued to pay the 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 our operating under a lower cost structure as we've eliminated temporary workers have reduced DTC spend and other discretionary costs.
In addition through our cash collections efforts and reduce deferred revenue.
Positive cash flows from operations of $1.2 million and we believe we had sufficient cash on hand to continue fun the business and its projected growth.
EBITDA.
For the second quarter of 2020 was a negative $177000 as compared to a positive $517000 for the second quarter of 29 team.
EBITDA for the first six months of 2020 was $422000 as compared to $896000, but the same period.
In 2019.
At June Thirtyth 2020, we had 33 million 754909 shares outstanding.
In summary.
We obviously are living and working in an unprecedented times, while we cannot predict when this pandemic.
On business will cease and in Q3, we do know where we will have some headwind due lower deferred revenue entering the quarter.
But we're optimistic as we see monthly increases in our gross domestic domestic monthly recurring billings. The we hope very soon we can get back to the new normal.
With that said I.
I would like to turn the call back over.
To do it.
Thank you, Matt operator lets open the call for human equities.
At this time will be conducting question answer session.
Like to ask a question. Please press star one on your telephone keypad.
Information indicate your line is in the question Q. You May proceed start true if you would like to move your question from the Q.
Vince using speaker equipment, it may be necessary for you to pick up your handset before pressing the star.
One moment.
Questions.
My first question comes from the line ups Raj Collie with Oppenheimer. Sir you May proceed with your question.
Hi, good morning, I suppose.
Turning to let Matt no hope, everyone, a safe and healthy.
Yes, Sir.
So the dolev, thanks for providing a 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 2300 dollar range for Q2 am I am I reasonably correct.
Oh, just one second we're checking yes, but.
Okay.
Yes.
So dolev you know I know last year, one of the key strategic initiatives that you were excited about was implementing well at the start of implementation for recurring business model or U.S. and I know South Korea was the starting point I think certainly hurt Matt.
Say, a number of 126 skied the quarter I just overall, if you just take a step back.
You know, obviously cobot is screwing up a lot of things, but just give us a perspective one.
You know, where we are and how long before.
The recurring thing you, we started getting a better sense a for U.S. adoption 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 we've announced the change of an approach in in South Korea. The first market outside of the U.S. were recurring revenues going to.
Happened the of the way. This is affected is we have a up an agreement with a with our partner in South Korea, which has been our distributor for the past.
14 years for 13 years.
And they have been very successful in creating an installed base in Im South Korea of approximately 300 devices, which is a relative to the size of the a clinical dermatology population and so.
Korea, it's about 50% there'll be a of the number of clinical dermatologists in South Korea.
Without getting into a new to the specific deployment in each each clinic, a number of devices and so on over the past.
Four or five years prior to announcing this or average run rate.
Of sales into into Korea of both new offices as well as replacement devices, because as we've 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 anticipation going into the the implementation of the new business modeling in Korea was that in normal business conditions, we will be able to replace.
The sale of 25 to 30 devices at.
Approximately 50 to $60000 depends on the model were set we're selling but about $1.2 million of of of equipment sales.
And we will be able to replace that with an installed base that will be owned by us.
And we'll pay us overtime in the same ranges as a.
You us device in normal times, not pandemic pays us which is in the range of 30 to $40000 a year.
That's a brought us knowingly to a two too.
I have to take a step of saying, we're not gonna be taking anymore.
Capital equipment sales revenue from South Korea, which comes in at all as a onetime sale with anywhere between 40 and 45% of margin, but we will be taking recurring revenue and which comes in at a at a much higher margin.
We announced the we announced that in July of 2019 debts proceeded with a.
Large amounts of capital equipment that was purchased in the.
In the quarter prior to that because I'm. The distributor was a was still closing up ends of deals that they were negotiating through the first and second quarter of 2019 met gave the specific details of how much that was.
We started the process.
And as we stand now we have we have 17 devices and the we have the installed base of 17 devices in Korea that were placed there over the past.
Your since we started which is a somewhat less than what we anticipate the 25 devices, but considering the up the pandemic.
We're very satisfied with the with the number as these devices were placed overtime. The the revenue per do you bought the revenue generated from these devices is accumulating so for the for the second quarter of 2020, it's a as met pointed out it's a it's a 100 and ER and 26000.
<unk>.
And this number will continue to go up a quarterly as more devices are are placed the.
The agreement.
In South Korea, Unlike the the agreements in a in most of the devices in the U.S. is very similar to what we do we have done in the past in the U.S. with fixed Oh fixed.
Type agreements in the U.S., where the Doctor knows exactly what he is paying and he knows exactly what he is getting so we can we do not on from an accounting perspective, we do not need to be further revenue portions of the revenue because they know exactly what they're getting and they know exactly what their bank.
And the but we also do not.
Dissipate growth in revenue per device in a in South Korea or a reduction in revenue per device in a in South Korea as the is the installed base.
Increases there is variability in the India in them in that market.
Based on the type of device. We installed we we are currently in the market would three three different types of devices.
With at three different price points, but for the sake of of of understanding that market. You can look at the at the average and.
For that matter take a 126000 divided by by 17 and come up with a with a number that is representative of the of the revenue per device.
Got it okay.
Until if last question I'll hop back in queue.
So.
July yield so 1.4 million approximately recurring revenues. So dolev I know, maybe I missed that interims of commentary for Q3 in Q4.
I'm really curious about how Florida is shaping up given the resurgence of co bid what dynamics Youre seeing.
Just kind of at least Directionally help us understand.
Specifically for Q3 in Q4 folks. Thank you for taking my questions.
Thank you source so.
In terms of color.
And we haven't provided updates through the second quarter. So I'll.
Let's move onto some of that information and add some more color.
We manage the business in a in a very.
Local metric analysis. So we know we know exactly what is happening in every one of the regions. We've weve in the middle of May.
We had to the southeast, including Florida, and the Midwest both exceeding.
2019 numbers in growth. So we were in the in the southeast and the Midwest at over 100% of of billing by Oh, the by the middle of May as compared to the middle of May 2019 as you.
Bearishly pointed out to your question about things have transpired in Florida, So I'm going to give up a wider picture on what's happening now across the country.
We are you with our installed base, which is now a smaller than then it was at the end of 2019 and smaller than it was.
At the end of Q1, we are.
In July.
Extremely close to our gross billing in July of 2019, now when you break this down two regions.
Our.
Midwest and southeast regions.
Our running faster than apps or faster than 2019, where the west and the northeast are the two regions struggling within these four regions.
There are specific hot spots.
The in in Florida.
As a whole is doing very well.
The Miami Dade.
County is the one that is lagging behind.
If we work to judge Florida from the rest of the State then Florida is doing very well, but Miami Dade County is let you behind in the northeast the northeast is doing as a whole as we stand now in the middle of August very well other than you.
England actually New York City, which was which was used to be a hubspot is now recovering and the rest of the northeast is has recovered a prior to that but new England, there's still a hotspot.
In the west.
We see.
One lingering hotspot would use the the Pacific northwest.
The rest of the West region.
Is is trimming back two or trending back towards 2019 numbers now as a reminder, this is done with a lower installed base.
Then we had at the end of 2019 and the lower install base than we had to de end of a of Q1 and and it is done without any direct to consumer advertisement we cannot.
Based on the nature of of the pandemic and the government behavior and the individual patient behavior, we find it very hard to predict what will happen.
Next month or next quarter.
So we did not provide guidance, but we did provide specific numbers Oh all through the end of July and and what we see is continued.
Growth in utilization across clinics across all regions other than these identified hot spots that I that identified there is a there is very significant recovery in the recovery takes us without DTC advertisement and at lower installed base.
Two numbers that are at or higher than than 2019 in gross billing.
It's it's very important to point out from a from a perspective of looking at revenues.
From a GAAP perspective that we 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 the chopped off second half of Q1.
And which was about one and a half million and then we walked out of Q2 with.
Just approximately half a million dollars a refund of of deferred revenue. So we are impact because of the deferral is has has shifted we we were we.
If other than GEP reasons, our revenue in Q2 or gross revenue in Q2 is is lower and we we've reported that this way and but that it's 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 in gross billing and in multiple specific territories were exceeding these numbers other than these hot spots, where where there are issues and I pointed out one did.
I believe you asked about which is the Miami Dade area.
Which we believe will recover but.
But it will take your time and we believe that based on the experience we had in New York City, which was completely shut down during.
During the the second Oh.
Most of the second quarter.
And and other regions like El eight which was which was very severely.
Impacted during though.
Most of the second quarter and now is significantly above 2019 numbers.
Thank you to us.
As a reminder, if you would like to ask a question. Please press star one.
Keypad.
One moment when we pull for questions.
Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. You May proceed with your question.
Hi Dillon.
Good morning, Good morning, Jeff.
So.
Trying to get a better sense of a your two years in their spend is I'm sure three progressed as in Q4, particularly in the due to see areas, it's something that but you should see.
Hello, and gradual approach with somebody would further clinics and how does that show for the back half.
For the year.
So thank you Jeff for the question, let me let me take this 011 part of the time and I will I will ask Matt to Ed's comments of his own a in terms of Fts. We started we were in in Q3, we had oh sorry.
In Q1, we had 126 ft.
This was made of 113 a company employees in 13 temps.
We did not bring back.
Any of the temps.
Which impacted mostly our cause but facility manufacturing and and call Center.
And we did bring back almost all of the of the company employees.
Other than a very small number.
And during the process of coming back.
We had a a.
We had a couple of people did not come back on their own we're now at HM.
Full employee count of 107.
And as a as met 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 would your second question that has to do with DTC and the 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 less.
This 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 up reopened.
[music].
In we started bringing back our employees at the or the second week of May and we had our.
Ah Salesforce and field support team fully.
Back in the second week of June. This was was done gradually as states, we're opening and as we were allowed to bring them back in 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 to be here to report that we heard the only one dealing with these clinics that came to them and 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 have reached out to all of the clinics that.
Our we're in a in an area that was we opened by local government.
At the point of time that we announced this a this initiative there were 350 clinics like that and this is part of our patient outreach.
Press release that we we put out a in the second half of May.
We reached out to 350 clinics at the time.
And we look for the following things to 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 for patients.
Bye.
The time of this call we have already done or what we what we call outreach 1.0 with with approximately 200 of these accounts.
Which represents many many thousands of patients basically the process works like this before we go into the clinic once they're opened their staff and they're ready to offer a treatment we take all of the patients they had in treatments.
We are scheduled for treatment, which means.
We have already worked with them on on getting a insurance benefits.
Verified they have already seen the patient and and diagnose the patient prescribed the patient have consultation with the patient 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 up many many hundreds of other patients.
Already either got the message from us and hold of the clinics themselves or or got the message from the clinics in directly that they can they can get back to.
To be treated this is what drove the depletion of inventory that existed in these clinics at the end of Q1 when day shut down their doors and basically did not to use these treatments and.
Brought them to starts.
Reordering procedures and as you saw it was just under 500000 in April it was.
Almost 800000 in May and ends and so on and so forth.
The.
Once we're done with.
Patient outreach, which will as as Weve covered in our in the prepared remarks will happen through this quarter.
We will.
Needs to continue feeding the pipeline with new patient. So once all of the patients that are that's where into pipeline prior to pandemic hitting the country are back in treatment, we will need to.
Mm fill up the pipeline so we're going to be turning DTC back on we started doing this last week.
In the this was gonna be done in areas, where the clinic is open staffed treating has already gone through outreach one point, though has already gone through outreach to point, all which is we go back to the patients that we could not reach in the first go around and we call them again and.
We know that there they have had very good very successful history of of converting patient and we're reaching out to patients through direct to consumer. So this is going to be done gradually on on targeted zip codes, and we're going to be rebuilding advertisement.
Have you want to conceptualize. This as we have done starting the second half of starting the third quarter of 2018. We've done this slowly gradually started by specific zip codes and expanded throughout the country. So by the end of 2019 was it was a national campaign, but.
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 are fully functional staffed and 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.
Parts of this has to do with a pent up demand for patients that were not treated but seems patients cannot be.
Overtreated there can you can treat them more times than than required this has to do with clinics referring.
A 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 a usage that is that that exceeds 2019, even though we don't have any disease DTC advertising. So it's a it's a kind of up of a blank slate comparison to.
What we had before because in 2019, we did have DTC advertisements.
Basically on the same store 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, John good morning.
Thank you.
Just quickly on the.
Adjustments.
So I appreciate the metrics on the gross domestic recurring billings.
If I am I understanding this correctly adjustment on deferred revenues added about a million.
Revenue.
In Q2.
You can count on that every quarter.
Yeah.
Good morning.
We should be cautious about that going forward can you just help us roughly with what.
Should that be.
Neutral this quarter should be.
The small deficit can you just help us a little bit on what we should think about.
Q3.
So I'll hand, this over to map to do the the.
Accounting, Jeff calculation, but.
In a normalized quarter and the way we defer revenue in the normalized quarter to 2019 is that we we are.
Amortizing out revenue as it comes over the of the cancellation term of the agreement we have with the customer and these cancellation terms are mostly.
But not mostly are either 30 days were 60 days they used to be 60 days now there are 30 days.
So the 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 all off one over 60 of that revenue and deferring it out.
On the second day, it's going to be to over 60 of that revenue that comes in that they and on the last day of the second month, we're going to be taking off half the revenue.
Having said that in a in a normalized.
Year like like 2019, we had approximately $2 million coming in.
We had approximately $2 billion 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 one and a half million and we exited would one and a half because the second half of March the second the last two weeks of March had.
Almost no revenue because everybody still down and did not do not know what to do.
We had we had a difference between deferred in and deferred out of about half a million.
Favoring a Q1 in the second quarter.
We had one and a half million coming in about half a million coming out and we had about a million dollars as you pointed out that favors the second quarter.
In order to get back to a normalized quarter, we not only need to.
Brink, the revenue back to and when I say normalized quarter, I mean, 100% of 2019.
Well not only need to bring the the gross domestic billing to be at the same level as 2019, but we also need to to fill up the the.
Deferral coming in and coming out so that they will be equal or that the deferral coming in is gonna be higher than the deferral coming out which is what we had in Q1.
That is going to take it from here from an accounting perspective, okay. So Sean.
Thanks for the question.
I think the love explained it very.
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 at 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 months historical increases are indicative of future results.
We're going to be watching this very closely we watch that amount every day. So beginning in August will start to defer the revenue.
And then and continued to further revenue in September.
Does that.
Give you color around how to.
Take a look at that and how to model that.
Yes.
I think that helps and I think maybe the key is that this is a quarter to quarter.
Issue.
Actually wash itself out.
Toward the end of the year right, so that going back to what does that says about the fiscal 2019 fairly matching up.
Over that 12 month period.
So so yes, you're right and if we indeed, then I'm going to build on your question and Swatches 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 two 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 Endo and the west are doing.
Good progress towards getting back to 2019.
And unless we see we see drawbacks because of the because of either stay behavior or 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 the these inventories are being depleted and and they're being refurbished faster and.
And at that point in time, we will be able to talk about actual growth over the previous year quarters and someone.
Got it I appreciate.
Let's push the placements.
Obviously very difficult quarter antisense were down in Q2, but what should we think about in terms of domestic.
Our national actually still growing so maybe we should just put that aside but on the domestic placements.
Should we expect to see.
This quarter how quickly we start.
Okay.
In my prepared remarks, I did specifically say that we anticipate seeing.
The second quarter via the growth in net placements.
Picking up in indices in the third quarter.
The explanation of what happened in the in the second quarter.
It has to do with two things one well 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 put in at the end of Q4 2009 team and.
Some of the placements put in in Q1, Twentytwenty, we're just not launched because of because the clinics were shut down so we.
We we had to account for that.
But we do see that Q3 growth installed base is the momentum into growth in store base is going to resume in Q3 of of 2020.
And this will happen in across the country in areas that are open and are back to business.
As you pointed out there's no need to mentioned the non U.S. because it's a it's continuing growth.
Got it got it okay.
Last thing for me.
We've talked in the past.
On a different dynamics now.
Covered world in that Youre treatment doesn't suppress the immune system like the biologics Ken.
Is there any change in your advertising campaign, perhaps how Youre call center is reaching out to the.
You just patient base is there anything there that's changing perhaps is driving this higher year over year utilization that you are starting to see.
Thanks.
I'm I'm going I'm going to.
I'm going to try to answer through color, it's not going to be specific metric because we cannot yet measure it and I'll explain why not.
The the.
Subjective answer is yes, we 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 him more patients.
Which.
Effectively translates to the clinic as decided consciously to conduct more treatments, even though we're not the one sending them more patients.
And now what we can see is and we have direct access to that is that the number of of new patients being.
Being recruited by the clinic did not.
So substantially grow beyond what it was in 2019, so deal subjective assumption is that their diverting more patients to extract versus making a just a clinical decision to put them on on something else now what we have done.
One is our.
Social media.
Advertisement and our old all the other out which we have we which were which were still conducting than we have been conducting through the second quarter emphasizes that our solution is not immune suppressant. This is done both to 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 discuss our procedure we had.
Hundreds well in excess of or the number of clinics, we have so its but by now it's a if people are showing up for a second and third time.
Hundreds of clinicians show up.
To to discuss best practices in treatment through Webinars, we have.
While providing the outreach we have reminded commissions that this is a superior.
Treatment because of the lack of immuno suppressant effects that it has 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 a.
Pandemic did not go away.
And it doesn't seem like it will go away in the next month maybe quarters.
The or the people that want to get back to normal and.
Visit their their physician, we'd like to be treated with something that does not increase there the risk. So we see that on on social media interaction when they respond to our advertising we see that when they call our call center, we see that through finishes 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 from clinicians. They do not they do not have discussions with us on the benefits of the other solutions. They they understand why this is better and.
And this might explain the.
Better than 2019 performance in certain territories.
But but as I said, we do not have objective metrics, yet because objective metrics would be those that say that a the physician that had 100 patients.
Centsfour verification of benefits.
Resulted with.
X patients being treated previously and now the numbers higher the next and we need some time to pass for us to be able to see that number this will be.
Better view.
Better visible by us or better view 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 insurance companies. So that would show us how many more patient stayed with them through the pandemic in and and grew their patient base, we do see that through insurance benefit requests coming in.
Now and and that number keeps increasing.
But as I said these are all subjective measures and I I will do you. All your 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.
He is wonderful to see.
The.
Sure.
The operation.
Gosh.
Last question for me.
Your operating expenses were very very tight in the quarter down to 3.6 million.
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.
Cost saves that.
Have a longer tail to them offset by the DTC advertising.
<unk>.
I I will ask Matt to start with the answer and then I will jump in with some costs. Okay. So as you've seen in the past.
Well, let's start with the core 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.
29, obviously when you look back at 2019 of the general administrative expenses in particular, we've 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 head count that we have.
And as you know us and you know do 11, you know how we operate this business, particularly with DTC is that we utilize DTC as a key tool in order to bring our.
Our partner clinics patients than we see a halo effect of additional patients that they recognize that there can be treated with the XTRAC.
And we are very laser focused in managing those costs.
So our team reviews, our expenses as well as it pertains to DC DTC on a daily weekly monthly basis to ensure that we're getting the patients the leaves well the leaves the patients.
And the patients into treatment that we expect based on the amount to spend we're managing too.
So.
Yeah, I want to make sure that you're clear that we while we're increasing DTC DTC spend starting last week, we're gonna do it as Dilip described in his prepared remarks, we're going to do it in a way that is after version 1.0 in a patient outreach after version 2.0 and patient outreach that we know that the offices.
As are open we know the offices are staffed and we know the offices are going to put those patients into XTRAC.
And now let me, 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 the history of managing our resources and being able to show that we're operating at at a an accretive.
Cash from operation.
Whether a positive cash flow like we had in the first and second quarter of 2020 and prior to that or at a 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 on the use of cash.
We what would 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 has met 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.
Stays favorable in terms of cash flow.
And we have said coming into the second 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 adding that DTC is going to be done gradually the first quarter or the third quarter of 2018, which was the first quarter for us to do you see after I came back we did about $50000.
Of DTC, that's insignificant for the size of the of the business, even today and that gradually ramped up to about $500000 a quarter.
At the end of 2019, we do not have any intention of jumping to 500000 those 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 and there are restricted we are going to be doing this gradually so it's going to be.
Higher than 50000, and it's getting to be significantly lower than 500000, it will not impact our ability to to generate an accretive cash flow from operation and that's why we were very.
Much convinced that the resources, we have are gonna be sufficient for both operation and growth regardless of what August and September are going to bring about in the third quarter.
Got it.
Color and good luck.
Thank you.
Okay excellent Sean.
Ladies and gentlemen, this concludes todays.
Question answer session I would like to turn the call back over to Dr., our filings 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 cool. Thank you.
This concludes today's conference you may disconnect your lines Hi, Thank you for your participation have a great.
[music].