STRATA Skin Sciences, Inc. Q2 FY2020 Earnings Call

Greetings, and welcome to STRATA Skin Sciences’ Second 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, 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 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 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.

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 characteristics of our recurring business model. While partner clinics shut down, local government restrictions and patient confidence are not elements we can control, our unique recurring installed base gives us confidence that recovery, coupled with high margins 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 patient 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 operations 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 showed 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, restrictions 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 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 billings during the months of the second quarter showed strong double-digit growth month-over-month as partner clinics were opening and the 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 being able to cover the majority of those partners that are interested. Moreover, into July, we are seeing a 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 with the progress made there and anticipate as these regions become fully open, they will exceed 2019 levels. This growth was supported only by our efforts on our in-house call center, executing patient outreach without any direct-to-consumer advertisement spent. Since our costs of revenue are primarily fixed, an increase in recurring sales directly increases our gross margins. At this level of confidence, we have decided to gradually restart direct-to-consumer advertisements effective the first week of August, with anticipation of scaling through the quarter 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 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 further demonstrates 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, totaling $1.2 million. At this point with the cash on hand and trends of sales, we do not foresee 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 compared to the first quarter and do not anticipate an increase in headcount, temporary or otherwise, until the business dictates. 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 the 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 seeing favorable trends as we adjust to the new normal. We managed our cost structure by saving over $2.4 million in quarterly cash outlay 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 a closer look at our second quarter financials.

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 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 $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 invoiced to 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 the 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 the 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 due to the COVID-19 pandemic, fixed costs, 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 a result of cash conservation efforts and the 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 due to lower legal, accounting, and consulting costs. Other expenses for the second quarter of 2020 were $18,000, compared to $145,000 for the second quarter of 2019, as a result of lower interest expense due to refinancing 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 a quarterly basis. We’re proud that our cost-saving actions during the second quarter reduced our operating expenses by over $1.6 million, in addition to the $800,000 in general and administrative 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 shares, 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. In fact, we continued to pay their benefits during 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, reduced DTC spent, and other discretionary costs. In addition, through our cash collection efforts and reduced deferred revenue, we had positive cash flows from operations of $1.2 million, and we believe we have sufficient cash on hand to continue funding 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, we do know that we will have some headwinds due to lower deferred revenue entering the quarter. However, we’re optimistic as we see monthly increases in our gross domestic monthly recurring billings which we hope will very soon get us 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.

Our first question comes from Suraj Kalia with Oppenheimer. Please go ahead 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 the recurring business model, OUS and I know South Korea was the starting point. I think 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. In July of 2019, we 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. 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, 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, had been in the range of 25 to 30 devices per year. So our anticipation going into the implementation of the new business model in Korea was that in normal business conditions, we’ll be able to replace the sale of 25 to 30 devices at approximately $50,000 to $60,000, depending on the model we’re selling, but about $1.2 million of equipment sales. We will be able to replace that with an installed base that will be owned by us. It will pay us over time in the same ranges as a U.S. device in normal times, which is in the range of $32,000 to $40,000 a year. That 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 a one-time sale with margin anywhere between 40% and 45%, but we will be taking recurring revenue which comes in at a much higher margin. We announced that in July of 2019. This 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 generated from devices is accumulating. So for the second quarter of 2020, as Matt pointed out, it’s $126,000. This number will continue to go up quarterly as more devices are placed. The agreements in South Korea, like the agreements in most of the devices in the U.S. are very similar to what we have done in the past in the U.S., which are fixed-type agreements where the doctor knows exactly what he’s paying and what he’s getting. So from an accounting perspective, we do not need to defer portions of the revenue, because they know exactly what they’re getting and paying. 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 at three different price points. For the sake of understanding that market, you can look at the average. For that matter, you can take $126,000 and divide it 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, I’ll let you on to some of that information and add some more color. We managed the business through a very local metric analysis. We know exactly what is happening in every one of the regions. In the middle of May, we had the Southeast including Florida, and the Midwest both exceeding 2019 numbers in growth. By the middle of May, we were in the Southeast and Midwest at over 100% of billing compared to the middle of May 2019. As you 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 noted that our installed base is now smaller than 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. When you break this down to regions, our Midwest and Southeast regions are running faster than 2019, whereas 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. However, Miami-Dade County is the one lagging behind. If we were to judge Florida from the rest of the state, then it is performing very well, but Miami-Dade County is lagging. In the Northeast, as we stand now in the middle of August, the entire region is doing well, other than New England. Actually, New York City, which used to be a hotspot, is now recovering. The rest of the Northeast recovered prior to that, but New England remains a hotspot. In the West, we see one lingering hotspot, which is the Pacific Northwest. The rest of the West region is returning toward 2019 numbers. As a reminder, this is being done with a lower installed base than we had at the end of 2019 and a lower installed base than at the end of Q1. This is all occurring without any direct-to-consumer advertisement. 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. Therefore, we did not provide guidance, but we provided specific numbers all through the end of July. What we see is continued growth in utilization across clinics across all regions, apart from the identified hotspots. There is very significant recovery, and this recovery has taken place without any DTC advertisement or a fully open installed base to achieve numbers that are at or exceeding 2019 in gross billing. It is essential to point out from the perspective of looking at revenues from a GAAP perspective, we came into Q1 with approximately $2 million of deferred revenue coming from Q4. We left Q1 with lower deferred revenue due to the chopped-off second half of Q1, which was about $1.5 million. We left Q2 with approximately $0.5 million of deferred revenue. Our impact due to the deferral has shifted. If it were not for GAAP reasons, our revenue in Q2 would have been much higher overall. However, this will impact Q3. What we are seeing is as of the end of July that we are trending back to 2019 or very close to 2019 numbers in gross billing. In several specific territories, we’re exceeding these numbers aside from identified hotspots. I want to point out that Miami-Dade area is expected to recover, but it will take time. We believe that based on our experience in New York City, which was completely shut down during most of the second quarter, and other regions like L.A., which was severely impacted during most of the second quarter but now is significantly above 2019 numbers.

Our next question comes from 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 spend as Q3 progresses into 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?

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, in Q1 we had 126 FTEs; this was made up 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. We did bring back almost all of the company employees, except for a very small number. During the process of coming back, we had a few people who did not return on their own. We are now at a full employee count of 107, and as Matt previously stated, we do not foresee the current need to expand on that. Now that dovetails with your second question that concerns DTC and the resources required there. As you might recall, we 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 for cash preservation reasons as well as knowing that any advertisement run in March or April, without knowing how long the pandemic would last, would be either useless or of very little use in our ability to schedule appointments since we did not know when offices would reopen. We started bringing back our employees in the second week of May, and our sales force and field support team were fully back in the second week of June. This was done gradually as states opened up and we were allowed to bring them back as clinics started to reopen. Our employee base was gradually brought back from mid-May to mid-June. At that time, we announced we would support our clinics in what we refer to as patient outreach. I’m happy to report that we were the only ones dealing with these clinics offering help and support instead of asking for purchase orders. We didn’t need to ask for purchase orders because all we needed was to get them to work through the inventory they had at the end of Q1 when they shut down their doors and did not use these treatments. We contacted all of the clinics that were located in areas that were reopened by local government. At the time we announced this initiative, there were 350 clinics fitting this description. We reached out to 350 clinics, looking for the following requirements: the clinic needed to be open, staffed, and offering treatment. It was not enough that the physician said, “I’m working,” but I’m working from home. They needed to be open, staffed, and treating patients. By the time of this call, we have completed outreach 1.0 with approximately 200 of these accounts, representing many thousands of patients. The process works like this: once the clinic is open, staffed, and ready to offer treatment, we take all the patients they had in treatment or who were scheduled for treatment, having already worked with them on insurance benefit verification, having seen and diagnosed the patient, and prescribed the patients. We reached out to many thousands of patients, successfully scheduling many hundreds of appointments. We know that hundreds of other patients received our message from clinics directly that they could return for treatment. This is what depleted the inventory that existed in these clinics at the end of Q1 when they shut down. It also led to their eventual reordering procedures. We have seen incremental revenue growth from April through July in the pattern of around $500,000 in April, almost $800,000 in May, and so on. Once we conclude patient outreach, which continues throughout the quarter, we will need to continue filling the pipeline with new patients. Therefore, we will turn DTC back on. We started doing this last week in areas where the clinic is open, has staff, is treating, and has gone through outreach 1.0 and 2.0. We are aware that these clinics had a significant history of converting patients, and we will reach out to them through direct-to-consumer channels. This will be done gradually in targeted zip codes, similar to what was done when we began DTC in late 2018, starting in specific zip codes before extending nationally. The outreach has seen clinics running faster than those staffed and treating over 2019. Part of this is due to pent-up demand for patients who were not treated, but since patients can’t be over-treated, you can’t treat them more times than required. This also pertains to clinics referring patients who would otherwise consider other treatment modalities. This is why we see usage that exceeds 2019, even without DTC advertisement. It’s a kind of blank slate comparison since in 2019 we did have DTC advertisement 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?

I’ll hand this over to Matt to do the accounting GAAP calculation. But in a normalized quarter, the way we defer revenue, in a normalized quarter, we typically recognize 100% of the revenue in the first month. As we move into the second month, we start to defer some of the revenues. So it will be crucial for us to ensure that the deferral in and out is balanced. This is why I highlighted that the Southeast and Midwest regions are already back to 2019 or higher even without DTC. The Northeast and West are making consistent progress. Unless we see setbacks, we should continue to see upward trends.

Okay. So, Shawn, thanks for the question. I think Dolev explained it very well. The key focus is our double-digit growth recorded as we reached our peak in July. We will be watching the deferral ratio closely as we enter August and September.

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 fiscal 2019 fairly matching up over that total period.

Yes, you’re right. If we see overall growth reverting to pre-pandemic levels, we will focus less on the deferral elements because we will see the business returning to normal.

Got it. I appreciate that. Let’s switch to 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 has actually still been growing. So maybe we should just put that aside. But on 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 specifically mentioned that we anticipate seeing an increase in net placements during the third quarter. The explanation for Q2 is two-fold. In the normal course of business, we remove devices. We’ve consistently reported this. Additionally, some placements made in Q4 2019 and Q1 2020 were not launched because clinics were shut down. However, we do expect growth for installed base as we transition into Q3 2020, which will take place across the country in areas that are open and operational.

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?

I’ll provide some insight here. While I can’t present specific metrics yet, we have seen improvements. We see that in several regions, same-store sales exceed those of 2019 even without DTC. Clinics are consciously prioritizing treatments as their patients seek to avoid biologics. We are ensuring our solution communicates its non-immunosuppressant benefits through social media and clinician outreach. We provided numerous webinars that have developed engagement with many clinics beyond current partnerships. While we can’t measure this perfectly just yet, there’s anecdotal feedback suggesting more patients are opting for our treatments over alternatives. Caution is a contributing factor, as patients express an aversion to treatments that may increase their health risks amid the pandemic.

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 cash. Last question from me. Your operating expenses were very, very tight in the quarter, down to $3.6 million. You’re bringing back 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 have a longer tail to them, but offset by the DTC advertising. What are we thinking about in quarterly operating expenses going forward?

I’d ask Matt to start with the answer, and then I’ll add some more comments. Our expenses have been tightly managed and we planned to continue at this lower cost structure than what was seen in the first quarter. We expect to maintain operational efficiency and manage expenses with DTC being a key tool to bring in patients. We will ramp up our DTC expense gradually and closely monitor for necessary adjustments while avoiding excessive cash outflow. For the third quarter, without taking a specific guidance, we aim for resource management to continue our positive cash flow and support future growth.

As you’ve seen in the past, we are committed to controlling our spending even as we bring back DTC advertisements, ensuring we revert progressively and wisely to support our clinic partners efficiently.

And let me add some comments on top of that. In order, without providing guidance for the third quarter, we believe we can manage our resources and continue to show our ability to generate an accretive cash flow from ongoing operations, even if we do not manufacture new products. Revenue growth is essential, but we remain focused on ensuring our cash management aligns with that growth.

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.