STRATA Skin Sciences, Inc. Q1 FY2020 Earnings Call

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

Thank you, operator, and good morning, everyone. Thank you for participating in today's financial earnings conference call for the company's first quarter ended March 31, 2020. Leading the call today will be Dr. Dolev Rafaeli, President and CEO of STRATA Skin. Joining him today will be Matt Hill, Chief Financial Officer at STRATA. Earlier this morning, STRATA issued a press release announcing its financial results for its first quarter ended March 31, 2020. A copy of this release can be found on the Investor Relations page of the company's website. Before we begin, I'd like to remind everyone the comments and various remarks about future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, our plans, objectives, expectations and intentions and other statements that contain the words such as expects, contemplates, anticipates, plans, intends, believes, assumes, predicts and variations of such words or similar expressions that predict or indicate further events or trends that do not relate to this historic matter. These statements are based on our current beliefs or expectations and inherently subject to significant known and unknown uncertainties and changes in circumstances, many of which are beyond our control. There can be no assurances that our beliefs or expectations will be achieved. Actual results may differ materially from our beliefs or expectations due to financial, economic, business, competitive market, regulatory and other political factors or global pandemic events, such as the current COVID-19 pandemic affecting the medical device industry in general. Given the uncertainties affecting the companies in the medical device industry, any or all company’s forward-looking statements may prove to be incorrect. Therefore, you should not rely on such factors or any forward-looking statements. In addition, more specific risks and uncertainties facing the company are set forth in the company's reports on Form 10-Q and 10-K filed with the Securities and Exchange Commission. STRATA encourages you to carefully review and consider disclosures found in SEC filings, which are available at www.sec.gov and on the company's website. As a reminder, this conference call is being recorded and will be available for audio rebroadcast on STRATA's website. Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 12, 2020. STRATA undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. With that said, I would like to now turn the call over to Dolev Rafaeli, President and CEO of STRATA. Dolev?

Thank you, Matt, and good morning everyone and welcome to our 2020 first quarter earnings call. We're all very happy to be here. Our first earnings call for the fiscal year 2020. Throughout these difficult times, our number one concern is the health and safety of our employees, patients, partner physicians and their staff. During this period, we have remained focused on the execution of our strategy, planning for the return to a new normal in managing our business and employees through these unprecedented times and are pleased to share with you today our first quarter 2020 financial and operational results. The first quarter of 2020 was a tale of two halves. While in the first half our revenue was trending at strong double-digit growth compared to 2019, driven by an increase in the number of patients in treatment, growth in the install base and extended margins, the world today looks very different. Starting with the San Francisco shelter-in-place order we have seen a rapid succession of states locking down, resulting in a rational and emotional drop in the number of elective procedures conducted and the appetite for continued business expansion decisions. As we are all aware, this was not impacting STRATA and its business alone but was rather a global outcome of the government reaction to COVID-19. Up to the middle of March, our reimbursement requests were up 117% over the same period in 2019. While we have been trending upwards in the last two weeks, the six weeks between mid-March and the end of April, reimbursement requests have been approximately 50% of the same period in 2019. The social distancing and infectious nature of COVID-19, coupled with guidelines that might change therapy decisions as they pertain to patients that are currently treated by or are considered to be treated by systemic and biologic immunosuppressant drugs, has caused both doctors and patients alike to reevaluate the selection of therapies. That trend has the potential of increasing the number of patients treated by XTRAC. The American Academy of Dermatology has recently published guidelines for providers to follow for patients on biologic therapy during the coronavirus pandemic, which advises that, "Dermatologists must delicately balance the risk of immunosuppression with the risk of disease flare requiring urgent intervention." The AAD advises that when patients are considered for biologics that, and I quote, physicians assess the risk versus benefits before initiating biologic therapy on a case-by-case basis, recognizing anyone may develop serious complications from COVID-19 infection. For high-risk patients, physicians should consider alternative therapies to biologics. In addition, in commentary published in March 2020 written by notable key opinion leaders including Dr. Tina Bhutani of the Department of Dermatology, Psoriasis and Skin Treatment Center at the University of California, San Francisco, it was stated, and I quote, while the decision to treat a psoriasis patient with a biologic is on a patient-by-patient basis, factors favoring biologic discontinuation or reduction in the immunomodulatory regimen if the patient has mild-to-moderate underlying psoriasis. We believe our unique recurring revenue business model, where there is nothing tangible for the physician over which to make a purchase decision and where it takes time for clinics to be open and patients to have the confidence to enter clinics, is where we can leverage our resources, the patient database, in-house call center, reimbursement team and our clinical sales force to accelerate the process. That would benefit our physician partners, our patients, and STRATA. As we have provided in recent updates, individual states across the United States have begun announcing their steps for returning to a new normal. The company is executing on its patient outreach program in which STRATA provides a unique advantage to its partner clinics to quickly rebuild their patient referrals by reengaging patients that were either in treatment or about to enter into treatment before the lockdown. The company, as part of its service to its partners and using its in-house call center and reimbursement team, has started performing outreach services on behalf of these clinics to their patients to bring them back into treatment. As of this week, the company has reached out to over 350 physician partners that are in 31 Phase 1 states and is continuing its efforts.

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

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

Thank you. We believe with our unique recurring revenue business model, where there is nothing tangible for the physicians over which to make a purchase decision and where it takes time for clinics to be open and for patients to have the confidence to enter clinics, is where we can leverage our resources, the patient database, in-house call center, reimbursement team and our clinical sales force to accelerate the process. That would benefit our physician partners, our patients, and STRATA. As we have provided in recent updates, individual states across the United States have begun announcing their steps for returning to a new normal. The company is executing on its patient outreach program in which STRATA provides a unique advantage to its partner clinics to quickly rebuild their patient referrals. We have conducted one-on-one online clinical training and our clinical team has been delivering clinical webinars with approximately 250 participants to date to continue engaging with our physician partners. A leading non-U.S. market, including China, Japan, South Korea, and the Middle East, have all proceeded the United States from the impact of COVID-19 and were shut down through most of the first quarter. We are seeing cautious reopening as it pertains to our distributors managing new and existing customers. During Q1, we observed expansion of placements in South Korea and we are also seeing orders for maintenance parts for South Korea and other regions. As of the end of the quarter, we ended with $8.2 million in unrestricted cash. We had accounts receivable of $3.2 million and accounts payable of $2.1 million. We have undertaken cash preservation measures including a leave of absence for certain employees, reduction in discretionary spend and delayed receipts of inventory purchases. Management and the Board of Directors have agreed to defer payments owed to them. We expect these steps would save us approximately $3 million per quarter in cash outlay. At that spending level and without additional business generated, we believe that these cash resources would have been sufficient for approximately three quarters. With the receipt of the Paycheck Protection Program loan in the third week of April and the encouraging April sale and upward trend of reimbursement requests, we believe we have sufficient funding for us to see our way through the next four quarters as we bring our team back to support the reopening of the partner clinics. In the last two weeks, we have been gradually bringing back many of our employees that were on leave of absence and are leveraging our call center and reimbursement teams as part of our outreach program. Let me now take a look at our business in the first quarter of 2020. In looking at our important metric until the recurring revenue growth installed base and margins, we have seen growth across the board. All of this is a direct result of the laser-focused strategy we put in place in 2019 after the refinancing and changing management. While our revenue was impacted by COVID-19, primarily internationally, we grew our recurring revenue by 7.3% over the first quarter of 2019, we grew our margins overall by 3.8%, and the recurring revenue margins grew by 2.2%. Despite having lost momentum in the last three weeks of March, we continued to grow our installed base domestically and internationally. I would like to now turn the call over to Matt Hill for a review of our first quarter 2020 financial results. Matt?

Thank you, Dolev. While 2020 has presented its challenges as we worked with the new normal and we do not yet know the future severity for the duration of the COVID-19 pandemic. We're focused on the business and working with our partner clinics to get them back to treating patients. With respect to the first quarter of 2020, revenues for the first quarter were $6.7 million, a decrease of 10.1% as compared to revenue of $7.5 million for the first quarter of 2019, as a result of our overseas capital equipment business being impacted by the COVID-19 pandemic. Recurring revenues for the first quarter of 2020 were $5.7 million, up 7.3% as compared to $5.3 million for the first quarter of 2019 due to an increase in patient flow to our partner clinics. Equipment revenue, however, for the first quarter of 2020 were down $1 million or 52.6% as compared to $2.2 million for the first quarter of 2019. Gross profit for the first quarter of 2020 was $4.4 million or 65.4% of revenues as compared to $4.6 million or 61.6% of revenues for the first quarter of 2019. Gross profit for recurring revenues for the first quarter of 2020 was $3.9 million or 68.4% of revenue compared to $3.5 million or 66.2% of revenue. The increase in gross profit on recurring revenues is a result of lower depreciation on placements. Selling and marketing costs for the first quarter of 2020 were $3 million, down slightly as compared to $3.1 million for the first quarter of 2019 as a result of lower tradeshow costs, commissions, and direct-to-consumer spend offset by higher personnel costs. General and administrative costs in the first quarter of 2020 were $2.1 million, a decrease of $0.4 million as compared to $2.5 million for the first quarter of 2019 as a result of legal, audit and accounting costs we had in the first quarter of 2019 when we changed auditors. Research and development costs were flat at $0.3 million for the first quarter of 2020 and 2019. Other income and expense for the first quarter of 2020 was net zero as compared to an expense of $135,000 in 2019 due to our refinancing of our debt at the end of 2019. Net loss for the first quarter of 2020 was $1 million or $0.3 per basic and diluted common share as compared to a net loss for the first quarter of 2019 of $1.3 million or $0.04 per basic and diluted common share. As of March 31, 2020, cash, cash equivalents and restricted cash were $15.6 million, the same as December 31, 2019. In March 2020, due to the impact of COVID-19 and in order to conserve cash, we put many of our employees on a leave of absence, reduced discretionary spending, delayed payments and payable, and believe the receipt of outstanding purchase orders, which we would expect to pay approximately $3 million of cash outlays in the quarter. On April 21, 2020, we received $2 million in proceeds from the Small Business Administration Paycheck Protection Program. We carefully considered eligibility in this program and are satisfied that we are eligible and can demonstrate need for this loan. We never terminated our employee and in fact continued to pay their benefits during their leave. We have brought many of these employees back to work following CDC guidelines and have a plan to bring back the balance in a phased approach as states return to work. As of today, including proceeds from the PPP loan, we've just over $10 million in unrestricted cash and cash equivalents. Even if for the first quarter of 2020 was $0.6 million as compared to $0.4 million for 2019. As of March 31, 2020, we had 33,714,362 shares outstanding. I would like to conclude by saying that we're pleased with the company's performance in the first quarter of 2020. At this time, we cannot predict the impact of the virus on the business. As a company and community, we will manage through this new normal. Operator, please open up the call for Q&A.

Thank you. Your first question is from Jeffrey Cohen from Ladenburg Thalmann. Please go ahead.

Hi, good morning. This is actually Destiny on for Jeff, and thank you for taking the questions. My first one is just about how you guys are thinking about accounts that would have been considered combat or systems that you would have moved. Are you guys still evaluating those customers and those physician partners, still ready to kind of – when things look kind of normalize again? Yes, I'll stop with that one and I have a few more.

Good morning, Destiny, and thank you for the question. I hope everything is safe with you guys down in Florida. I'll take advantage of your question and speak a little bit about what we do now and what we were doing up to the middle of March. Indeed we are evaluating the prospects for accounts coming back in. We did have some changes happen over the last eight weeks as everybody else has. We have the opportunity to look at what's happened in clinics or into clinics when this pandemic took place. As I mentioned in my prepared remarks and in updates we had over the last few weeks, we are in continued contact with our clinics and we see who's open, who's operating and at what level they’re operating, in terms of number of patients and the number of procedures they conduct. Obviously, there's a big difference between clinics that are open and operating and those that have decided to shut down, and there is, at least subjectively, a difference between the types of ownership and management that own these clinics and the decisions they make. We have seen clinics that have completely shut down, we have clinics that have decided to minimize their operation and extended again, and we’ve seen clinics that have stayed open throughout the entire time period. That allows us to evaluate what would be the right targets to come back. Now, as we all know, most of these decisions in business suspension decisions happened towards the end of quarters. It's a history in medical devices that these patients tend to happen towards the end of the quarter. Most specifically in the first quarter, where in the first few weeks we are very busy resetting our patient benefits with the insurance companies, and only then can we focus on extension. So I can say very controversially that we had more placements in the pipeline winding up for the end of the first quarter than we would have been able to make, but did not take place. From my perspective, this is a good thing, because by not doing them and not just placing the devices out there and having our inventory sit out there without usage because they can't – because they can't do that, they don't have the first patients. They don't have the training in place. We just didn't go ahead and execute the placement. This is evidenced by our inventory, which you'll be able to see the breakdown in the 10-Q, but there are finished goods of inventory that ended up higher than the previous quarter, because we had these units ready to go. And I’m happy that we did not go ahead and execute these for replacement because doing this sometime in the beginning or middle of March and then getting to launch them in July or August would not have been a good thing for us, neither from a financial perspective nor from a business perspective. So I hope I answered the first question. Let's take the next one.

Yes, definitely, okay. That was very clear. So, I'm also curious, based on the guidelines published by the American Academy of Dermatology, have you received any greater interest from physicians? Are you hosting any kind of physician info sessions or training sessions or anything like that? And then beyond that, because we also think that prescribing biologics could be negatively impacted for a longer duration than just the duration of this pandemic.

Great question. The prescription of biologics and systemic drugs that are immunosuppressants, even before the pandemic, took a turn in the last few years, where physicians were prescribing them more and more to patients that were mild-to-moderate in their disease stage, which is not fully supported by the insurance companies in their guidelines. With the pandemic hitting and immunosuppressant drugs affecting or potentially affecting patients' capability of dealing with infection, there was initially a lot of confusion and emotional reaction, which was followed by guidelines specifically put out by the FDA, the American Academy of Dermatology, and the pharma companies themselves, placing the responsibility on the physician to decide the necessity of using a drug that’s going to suppress the immune system of the patient. That was followed by clinical webinars conducted by key opinion leaders and by papers that were published that specifically said physicians should consider whether the continuation of treatment for patients with immunosuppressant drugs is medically necessary in light of the risks out there and in light of their condition. They should reconsider the start of treatment for new patients, most specifically for non-severe patients. We have seen a lot of communication from patients through social media and interest through social media, and we have seen a lot of questions coming from our physician partners from the clinics. During the last six weeks, we have conducted six clinical webinars with our physician partners; we had more than 250 participants, which is one-third of our install base. That's very significant participation live. We've had many others that have followed up and logged in to view the recorded webinars. In the webinars, we cover our guidelines and the American Academy of Dermatology guidelines. So definitely, there is a level of interest and concern about putting mild-to-moderate patients on immunosuppressant drugs. I believe that this concern will persist until and unless COVID-19 is addressed either by medication or vaccination. This concern for immunosuppressed patients will continue, and I think that will put other treatment modalities aside from immunosuppression drugs as a more viable solution, specifically for the mild-to-moderate patients, who make up 90% of the patient population.

Okay. Got it. Yes, that's a really good point, definitely. Okay. So, my last one, and then I'll jump back in the queue, is more related to the patients. I’m wondering if you are able to leverage the patient volumes that you've had from previous quarters, that you've generated from their online platform. Are you able to leverage that and see and get a feel for what patient volume could be following reopening? Or do you then have to maybe reduce it by a third or how to be compliant with social distancing guidelines? And then what – how has the messaging changed? Maybe you could talk about that a little bit. Thank you.

Well, perfect, I will. So we have been busy for the first few weeks of the pandemic building up what we call the patient outreach program in which we offer a service that frankly nobody else can offer them. Most of them are not equipped with their own resources to handle that is to reach out to their patients that were in treatment prior to COVID-19 as well as patients that were scheduled for first consultations during the time period from early March until whenever this thing ends around the end of May. We had to come up with a methodology internally first before we go to them on what we do with these patients. We have the tools and we have the capability of doing this, we're probably the only ones in the industry that have the capability of doing this, but we also need the other two elements to cooperate. The first of the two elements is the physician and the clinic. The second element is the patient. So we needed to know what will be the state of the physician clinic when we attempt to have them open. By that, I mean would they have sufficient elements? Would they have the front desk person? Would they have the clinician? Would they have the clinician extension via the nurse? Would they have the billing person in place? Some clinics had many employees, most of them were put on leave of absence or terminated. Some of them cannot come back because they don't have school for their children, and some of them would not come back because they’re still afraid. That was the first element. The second element is the patient itself. What are they going to be concerned with? They're going to be concerned emotionally from social distance, concerned rationally about, how tight is the space inside the clinic, and what does it mean to go through a facility and how does that relate to the other pre-existing conditions they may have? We’ve developed scopes that address each one of those patient populations. We have reached out first to a very specific number of clinics in each region to get their feet back on the office and see how they would like to see the patients. Just as a reminder, some of these patients have been out of treatment for two months. Does there need to – does that mean that doctors need to see them again and re-prescribe? Can they go right back into treatment with the nurse without having to see the doctor? What would be the specific guidelines of the treating physician in the specific region, based on the guidelines from the American Academy of Dermatology and the specific patient condition? Once we developed the program, we reached out to partner clinics; at first this was to a small number. In the past 10 weeks, we’ve been reaching out gradually as states have announced their Phase I opening. We have reached out to over 350 clinics in 31 individual states and we gauge their openness. Are they open or not? Physically, are they open? Are they taking patients today? If they are, what are the restrictions they have? And then we collect the specific guidelines for the patients and we apply them to the patient list. We started making calls two weeks ago to clinics and then when we started approaching the patients. The capacity in the clinic is not – is not the concern. The number of extra patients per day is not the limiting factor that would limit the growth of our business and their business. In fact, that's one of the email updates we’ve sent to our physician partners. If they were only seeing ten patients, that would mean that they would generate more cash flow than they would be regenerating from most of their other activities in the clinic. We've spoken to one of our bigger clinics recently, and they had over 100 patients show up in one day on Friday when they opened up. So, there's a lot of pent-up demand, and that’s going to have to be managed individually by the clinics. We are going to be helping them by reaching out to their specific patients relevant for XTRAC, patients who have been treated before or are in the middle of treatment. That approach was very welcomed by our partner physicians. We have a waiting list now for clinics that are giving us their specifics. We are using our in-house resources to bring these patients back. It's a little bit too early to gauge the actual success rate because, as we've noted in our updates, during the last six weeks from the middle of March until the end of April, we had about 60% of the reimbursement requests we had in the equivalent time in 2019. Many of the clinics are open, many of them are receiving extra patients, but the patient census is lower. In April, our revenue was somewhat sub-50%, and we hope that our revenue in May is going to come closer to 50% of its equivalent revenue in 2019. But I believe we will be able to gauge the actual capacity and the ability to care for that pent-up demand towards the end of June. I would also remind you that the 31 states that announced Phase I opening is great news, but we're still waiting on the two biggest regions, the Northeast and the West, where among the two, California has shown signs of opening, and we have specific areas within California that are already open and active. New York's governor also announced the stages for opening, and in some areas, not New York City, but in some areas of New York, we have clinics that are already open and seeing patients.

Okay. Perfect. Thank you.

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

Hey guys. Good morning. Thanks for all the added information and glad to see you're all well. Dolev, I wanted to go back to your comments regarding the AAD recommendations or commentary regarding immunosuppression? And I'm glad to see that you're having all these webinars and making sure people are educated about that. So I wanted to focus on the other end of the equation and specifically what the tone is and how the message is being received by these physicians regarding the messaging around immunosuppression.

Thank you, Jo, and good morning. The messaging isn’t ours. We have adopted the messaging coming from the physician group community, and in their own guidelines we have taken the concern they have with their patients. We have prepared our comeback advertisements in the tone that we have a solution that does not suppress the immune system. The patients themselves are confused. They're looking for guidance and would like to have a solution that's good for them clinically while not putting them at risk, as some of the other solutions might. That messaging hasn't started yet; in the last few weeks we were very active in engaging physicians and clinics to provide them with the clinical guidance on how to use our solution safely and share the guidelines coming from the American Academy of Dermatology and other sources. Some of the physicians are not completely in tune with the latest updates and they were focused on their day-to-day work, and suddenly this happens, and they need to get updated. Concerns from both physicians and patients are widespread; you can see this on social media and in the webinars run by KOLs, voicing deep concerns. They don’t have answers; there's no definitive answer about the safety profile of individual drugs, only assumptions. There is a definite knowledge that our solution is safe and effective, and in the clinic, we can see patients in and out without more exposure than any other in-clinic visit would cause, it's very simple to disinfect the surfaces of the tip of the device, and besides that, it's a normal in-and-out for a patient. Staying at home for eight weeks with different diets, no exercise, and stress does not help patients with autoimmune disease conditions, increasing instances of the disease. There's more anxiety from the patient population and interest from the physician population, and we're in the process of combining the two and working toward the outcome that we believe more patients will be seen in clinics as they gradually open.

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

We have three groups of employees. We have employees in the factory, we have employees in the field, and we have back office employees on the East Coast. The factory was shut down only for a few days until the shelter-in-place guidelines from the state of California and the County of San Diego were clarified. What we have done in terms of keeping employees at home was that almost all of our field team and almost all of our patient-facing team, both the call center and the reimbursement team, have been at home for a few weeks. Just a small number of them either as they were in states that were never shut down or if the core volume or business volume justified it for the call center and reimbursement side, stayed at work. At the highest point, just over 80% of the employees were on leave or furlough. We've started bringing them back as we see business reopening, even before the PPP loan was approved. We’ve brought back the relevant people anytime we observed a region open up and have increased capacity in the call center and reimbursement team as this occurred. We anticipate that by the end of May, we will have almost all of our employees back to work, in line with the reopening of the states. The employees are coming back, and they are focused on bringing these clinics back. We see a growing demand for training, field service, and support as these clinics, even if they were open at a much lower volume in the past eight weeks, are now seeing more patients and need more assistance.

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

Good morning, Dolev, Matt. This is Suraj, sorry my other line was busy. So I'm calling in through Mike's line. I hope everyone is safe. Dolev, thank you for providing a lot of information and specifically the cash preservation that you highlighted about three to four quarters. What is that predicated on in terms of the top line outlook? How have you all done the breakeven or worst case, most likely case scenario, how you all thinking through that?

I'll answer one half of the question and then Matt can jump in. The determination of three quarters to four quarters was predicated on the business we had at the beginning of April, which was a very low level of business mostly coming from leftovers of the international business that we were providing at the beginning of April. We had to analyze the worst-case scenario from a financial perspective or what's the sustainability of the business, as well as how much can we cut down on expenses and create a longer runway. We issued an update at that time stating we had cut back on all of our discretionary spend and delayed all our inventory purchases that we knew were not needed because there weren't going to be any placements towards the end of March and in early April. When we implemented furloughs, the assumption was that we would be reopening only when it was clear reopening would happen. At the lowest point, with most employees on furlough and the lowest revenue coming in, we calculated that we had on hand $8 million in unrestricted cash. We had about a $1 million difference between accounts receivable and accounts payable. Additionally, knowing our cash outlays based on the prior quarter's rate, we calculated our runway to be approximately three quarters. Once we applied for the PPP loan and the SBA Disaster Recovery loan, we knew that obtaining any of those two would extend our runway for an additional quarter without additional business rebound. So, since then, we've observed some rebound in business and received the PPP loan approval, which based on the initial business level gives us a four-quarter runway. I hope I gave you the broad picture. Matt, if you want to jump in and provide more color on the numbers.

No, Dolev, you've covered exactly our methodology for evaluating the projected cash. In addition, with the PPP loan, we currently have over $10 million in unrestricted cash available to us, and with the business starting to rebound, we're watching key indicators and office openings across states. I think you've covered everything Dolev, thank you.

Suraj, let me add one more thing. Domestically, we have almost 1,000 different clients with 822 individual clinics and other clients buying from us on the capital equipment side and for services. When we assessed our accounts receivable entering or exiting Q1, we had to audit them and consider the collectability. We ended up collecting more than we anticipated, mainly because the clinics we work with are smaller in scope. If these clinics want to continue doing business, they would end up having to pay that. So overall, there was no need to extend further credit terms to our customers; everyone that goes back into business generally pays on time or slightly after. I hope that answered your question.

Got it. Dolev, a couple of quick follow-ups, and I'll hop back in queue. So our understanding of the acquisition cost per patient is roughly in the $200 range. If you can just – if your kaleidoscope right now in terms of what's going on in the market, when things hopefully return to normal, where do you see acquisition costs per patient going, let's say in the rest of the calendar year? And also if you can just kind of give us, I'm not asking for guidance, but just some delta, even last year ago let's say you pulled through 25,000 patients through DTC, where do you see roughly things lining up based on what you're seeing in the different markets? I'm not asking for possession, I'm just asking on a relative basis, how do you see it? Any color will be great. Gentlemen, stay safe. Thank you for taking my questions.

Thank you, Suraj. I'll try; it’s honestly a question out of my kaleidoscope and not out of any business book. What we know is that we have shut down all of our advertisements after the second week of March. The patients that came in as new in March were almost not capable of being placed into first consultation appointments, whether because we placed them into appointments that never happened or because by the time we got to take them into appointments, the clinics were shut down or shelter-in-place was the regulation. In order to turn back on our ads, we would need the market to be active, our markets to be active. We have 357 clinics in 31 states, and each of these operates differently, so that wouldn’t happen. The actual spending on advertisements will not happen before these clinics are back in business and cleaning up some of their backlog of patients. Hypothetically, if the market rebalances by summer and evidence no second wave of COVID-19, we would be able to turn the advertisement back on in Q3 and run it through the middle of Q4, which traditionally we shut off just before Thanksgiving, because the last few weeks of the year are not meaningful for us. From a patient acquisition perspective, conditions have changed; I explained the emotional shifts for patients and physicians regarding biologics and systemic drugs, which we believe increases interest levels, decreases acquisition costs, and increases the conversion of patients into appointments. On the one hand, there is the situation of having around 30 million unemployed people, affecting the 15% unemployment rate, impacting medical insurance coverage. On the other hand, our major competition in the space, immunosuppressive drugs, have calmed down their advertisements, resulting in less competing messaging in our space. We are not yet in a place to measure these three large effects on what's happening; we will be able to do so as soon as we start opening up regions that benefit us because we only advertise locally and don't advertise nationally. If Florida opens up and we can start focusing on local advertising there, we’ll have clearer data. At this point, I do not know where our acquisition costs will lie; we need to observe if they go up or down. As a reference, I remind you that we contribute 15% to 20% of new patients in treatment; specifically, out of 23,000 new patients considered for treatment, we contributed about 4,000. The bigger effect on what's likely to happen in the second half of the year is contingent upon two major factors: when and how the Northeast and the West open, and whether or not there will be a second wave. These two critical factors will define our trajectory, and if there is no second wave and these regions open up, we expect our individual clinics in areas that are already open to reach 2019 levels of operations by early June.

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

Thank you, operator, and thank you everyone for joining us today. I apologize for what happened on the caller line through the call. We look forward to updating you again in our next quarterly call. Thank you.

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