SmileDirectClub, Inc. (NASDAQ: SDC) Q1 2020 Earnings Call Transcript

SmileDirectClub, Inc. (SDC) Q1 2020 earnings call dated May. 13, 2020

Corporate Participants:

Alison Sternberg — Vice President of Investor Relations

David Katzman — Chief Executive Officer and Chairman

Kyle Wailes — Chief Financial Officer

Analysts:

Robbie Marcus — JPMorgan — Analyst

Jon Block — Stifel — Analyst

Steve Beuchaw — Wolfe Research — Analyst

John Kreger — William Blair — Analyst

Nathan Rich — Goldman Sachs — Analyst

Erin Wright — Credit Suisse — Analyst

Kevin Caliendo — UBS — Analyst

Laura Champine — Loop Capital Markets — Analyst

Glen Santangelo — Guggenheim Partners — Analyst

Presentation:

Operator

Greetings and welcome to SmileDirectClub First Quarter 2020 Earnings Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation, instructions will be given at that time. [Operator Instructions]

It is now my pleasure to introduce your host for today’s call, Alison Sternberg, Vice President, Investor Relations, SmileDirectClub. Thank you. You may begin.

Alison Sternberg — Vice President of Investor Relations

Thank you, operator, good afternoon. Before we begin, let me remind you that this conference call includes forward-looking statements. For additional information on SmileDirectClub, please refer to the company’s SEC filings, including the risk factors described therein.

You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today. I refer you to our Q1 2020 earnings presentation for a description of certain forward-looking statements. We undertake no obligation to update such information, except as required by applicable law.

In this conference call, we will also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained on our website. We also refer you to this presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures.

I am joined on the call today by Chairman and Chief Executive Officer, David Katzman and Chief Financial Officer, Kyle Wailes.

Let me now turn the call over to David.

David Katzman — Chief Executive Officer and Chairman

Thanks, Alison, and good afternoon everyone. I hope that you and your families are well. Thank you for joining us on the call today. I know I speak for the entire SDC team and extending our thoughts and well-wishes to those communities and individuals especially healthcare workers and first responders most deeply impacted by the COVID-19 crisis. Despite a difficult time for the world in a very unique and complex operating environment, the SmileDirectClub team rose to the challenge and achieved strong performance in the first quarter. Our performance in this quarter are more importantly since then validates the strength, durability and flexibility of our business model.

For today’s call, I’d like to first call out some of the notable highlights from the quarter followed by an overview of the trends we’re seeing in our business, and how we’re positioning ourselves to continue to execute against our long-term revenue growth and margin target. Although difficult, I will also try to quantify the impact that COVID had on our business during the first quarter. I will then turn it over to Kyle to walk through our financial results and outlook in more detail.

As a reminder, on March 21st as a result of COVID, we closed our small shops except for the ones we have in Hong Kong and pivoted to an impression Kit Only Business, serving new club members in addition to existing members already in treatment. We temporary closed our manufacturing facilities at March 20th and reopen them on a more limited basis on April 6th, make personal protective equipment mainly face shields on our fleet of 60 3D printers and to service or align our customers. Our Kit Business saw and continues to see robust performance both in the US and abroad, despite an approximately 90% reduction in marketing spend.

Now turning to highlights within the quarter. In Q1, we shipped approximately 123,000 unique aligner orders, up 12% year-over-year at an ASP of $1,770. Adjusted for COVID shutdown, we estimate we would have shipped over 141,000 unique aligner orders, up 29% year-over-year. We achieved $197 million in net revenue, up 11% year-over-year. Adjusted for COVID, we estimate net revenue would have been over $235 million, up 33% year-over-year.

Our SmilePay collections continues to perform very well and is in line, if not better than it has been historically. Adjusted EBITDA was negative $67 million for the quarter, but only negative $5 million in February. We expected similar performance in March without the impact of COVID. As demonstrated in the numbers outlined above prior to the impact of COVID, we were tracking to our full-year revenue and adjusted EBITDA guidance as provided on our fourth quarter call. Since Q1, we have had many great developments, specifically we announced the issuance of the US patent protecting our small shop IP and treatment process from any competitor for 18 years.

We announced a partnership with Anthem and its network of Blue Cross, Blue Shield insurance programs across the US joining Aetna and UnitedHealthcare providing orthodontic coverage on an in-network basis. We formalized our independent clinical advisory board made up of some of the best orthodontists and dentists around the globe, that we’ll report directly to our Board of Directors. This eight member Board will focus on enabling us to continue setting industry standards for clear aligner therapy using a teledentistry model, advise on the sharing and best uses of our clinical data and help our strategies for continuous quality improvement among other thing.

We held our first meeting on May 7th and we’re excited to work with the existing growth. We launched our enhanced teledentistry platform with advanced features including the new updated video chat to improve the clinical experience from members. And lastly, I am pleased to share that we have successfully entered into a new five-year $500 million debt facility with HPS Investment Partners.

Given that our uncertain times in the possibility of a COVID return in the fall, we thought it was prudent to strengthen our cash position, while also minimizing shareholder dilution. This deal accomplishes both of those objectives. The deal provides significant cash, removes the near-term repayment liability with the previous ABS facility, funds our international growth and allows us to continue to optimize our long-term capital market strategy of balancing low cost of funds against the liquidity needs of the business. Additionally, we will continue to consider appropriate ABS manufacturing facilities for our SmilePay program to execute against that strategy.

All of the competitive modes that we often speak of are complete end-to-end vertical integration, our omnichannel approach, captive financing program and our strong brand equity with consumers were truly put to the test since the onslaught of COVID. And their collective strength allowed us to achieve performance above our expectations in spite of a very fluid and rapidly evolving situation.

With few fixed costs in our business, we were able to take decisive action over the course of the quarter including the temporary closure of all of our SmileShops other than those in Hong Kong. The vast majority of our shops around the world are month-to-month leases. A suspension of most of our marketing spend, along with many other cost management measures, and position ourselves to operate cash neutral during this period. As a result, we have had minimal cash burn since the middle of March.

Equally notable, we were able to do this while engaging in multiple initiatives to aid in the fight against COVID-19 including manufacturing and selling at cost more than 50,000 face shields to various organizations and hospitals, joining partners such as HP and WestRock in these efforts, donating medical supplies including latex gloves and masks to our partners at more than 120 CVS locations.

Opening our telehealth platforms to all dentists and orthodontists in the United States and Canada to allow them to communicate with patients remotely and maintain their care. We have had thousands of providers expressed interest in this offering. We donated free PPE to dentists and orthodontists, so they can continue to provide care as needed. Actively seeking organizations that have been deemed essential and need PPE to continue to serve the public. We’ve provided supplies to organizations from the Tennessee Department of Health, to The Hospital for Sick Children in Toronto, and a variety of others. As I’ve cited before, we are fortunate to be able to help those in need at this time in many different ways. We will continue to do everything we can to help alleviate the strain of these unexpected circumstances.

Now turning to our current performance, given the uncertain times, we thought it was important to provide a brief snapshot of our performance since the end of Q1. Let me start with SmilePay. SmilePay has been an incredible program for SmallDirectClub over the past five years. It expands access to care make straightening your teeth affordable to almost everyone. The SmilePay members pay $250 upfront, which more than covers our cost of goods sold and then $85 per month over 24 months.

Our delinquency rates through April were flat to March, which was consistent with the prior 12-months. Because we keep a credit card on file, and as a low monthly prepayment, we expect SmilePay to continue to perform well during the downturn in the economy. Our success rates on credit card attempts, which is a proxy for monthly payment has seen no degradation since COVID started. Further since the onset of COVID, we’ve seen only a 1.7% of customers requesting a payment deferral far below the 4% to 5% deferral request that you would see other lenders facing today.

I referenced earlier the robust performance of our impression kit business, despite a significant reduction in marketing spend. This demonstrates that our investments in brand building and marketing efficiency have begun to pay dividends. Specifically from March to April, we saw our cost per sale declined by 60% and as Kyle will elaborate on later, normalized for the impact of COVID — Q1, we saw sales and marketing as a percentage of revenue dropped 600 basis points sequentially quarter-over-quarter.

Additionally, over the past 30 days even though our marketing spend is down approximately 90%, our kit and scan volume was only down approximately 40%. We shipped 10,500 unique aligner orders in April and are expecting to ship 11,000 to 15,000 in May. It is too early to know, but if our impression kit orders over the past 30 days mature out to normal conversion, we would expect that to be closer to 22,000 shipments. We are pleased with this level of demand off of virtually no marketing spend especially during these uncertain economic times.

Additionally, we have seen strong performance within our ancillary product portfolio, largely driven by our partnership with Walmart. This represents a productive acquisition channel for us, while also increasing the lifetime value of our Club Members. These factors set the stage for future deployment of acquisition dollars to support growth, while also driving increasingly strong economic. This is consistent with what we articulated in the past as one of the major levers to drive margin expansion over time and we are pleased with our traction to-date. As we contemplate the timing of re-opening our shops, we remain focused on driving more demand for our existing network and monetizing that demand for a variety of ancillary products in addition to our aligner therapy.

With the strength of our impression kit business and little marketing spend, the strength of our balance sheet and the flexibility of our month-to-month leases on most of our locations, we are in a unique position to ensure demand is there for our small shops before reopening. Another important lever we have discussed is advancement in automating and streamlining our manufacturing and treatment planning operations. We continue to see progress here and we are currently on track for the rollout of second generation automation machines by Q4 of this year.

As referenced on our prior earnings call, this puts us on track for the 200 basis point improvement on cost of goods sold in the back half of this year and equally as important ensures a more seamless customer experience, which is the cornerstone of our business.

Now turning to the regulatory environment, there is no doubt a positive spotlight has been cast in the merits of telehealth during this environment. This is a welcome dialog for us, we’ve always first and foremost been a telehealth business and we are excited to see the growing level of understanding and acceptance of the importance of telehealth, especially for dentistry. We believe there will only be increased consumer and clinical adoption at telehealth model from here and we continue to invest in our proprietary platform and features then innovate against unmet consumer needs and pain points.

As I noted earlier, we now have a new and more robust video chat capability to allow even greater connectivity between the club member and their treating doctor and clinical team. We feel well positioned in our continued efforts to protect the access to care that consumers want and deserve and we are very pleased to see progress been made in support of these efforts. Specifically, the American Association of Dental Boards recently delivered guidelines to State Dental Boards that embraced teledentistry and they access the care and provide.

Additionally, we have started to see state legislatures passing legislation that specifically permits teledentistry in their respective state and rejecting proposed legislation that it sought to conclude this much needed form of remote care. As you can see we are starting to reap the benefits of our continued investment in proactive legal and lobbying efforts, which combined with the climate of ever increasing receptivity and adoption of telehealth, represent very positive momentum toward continued validation of our model and the care provided by our affiliated network of dentists and orthodontists.

We also continued to partner with a broader dental community as teledentistry is becoming more important in their practices and have already launched several initiatives including producing PPE for the dental community for use in any in-office procedures, and no cost providing the use of our teledentistry app to all licensed dentists and orthodontists, so that they can consult remotely with patients, as well as making our at-home impression kit available for their dental patients, who cannot come into the office.

We are continuing to extend our office direct program with our wholesale model to be fully rolled out over time, and there’s more to come. We look forward to continuing to finding new ways to work together with a broader range of clinical partners. Notwithstanding what has been a very disruptive and unusual period for our business, we are overall quite pleased with the performance in the quarter, more importantly, since the quarter. We believe this affirms the flexibility and durability of our business model.

Although the timelines reopen the country is still unknown, as previously stated, the demand for our products and services is strong. We continue to operate in a cash neutral position, we have a strong balance sheet to weather unforeseen circumstances and SmilePay continues to perform well. The fundamentals of our business in our teledentistry platform position us uniquely to continue gaining market share while also driving toward our long-term growth and margin target.

In closing, we remain laser focused on our mission to democratize access to a smile each and every person loves by making it affordable and convenient for everyone. Now more than ever, extending our value proposition that triangulates between convenience, access and cost. One is delivered through a dynamic proprietary and high touch telehealth platform, and is the lowest cost provider in the category, puts us well in the path to capture this massively underserved market.

Before I turn it over to Kyle, I want to personally thank all of our SmileDirectClub team members, who quickly rose to the occasion across all areas of the company to help out with this terrible pandemic by being one of the first companies to redeploy our facilities, to make personal protective equipment, to help out our customers while in the middle of treatment and continue to perform every day to bring access to care to everyone, who deserves a smile they love. I have never worked with a more dedicated and passionate group of people.

Now I’ll turn the call over to Kyle, who will provide a detailed overview of our Q1 results and our financial outlook. Kyle?

Kyle Wailes — Chief Financial Officer

Thank you, David. As David mentioned, we are pleased with our accomplishments over the course of the quarter and since the quarter ended, notwithstanding the challenging environment in which we operate. The [Indecipherable] of our business model is put to the test, as we balance continuing to serve our club members, while forming appropriate levers to manage through the COVID crisis. Even more notably, we believe we are well positioned to emerge from this crisis well capitalized and uniquely positioned to achieve the long-term growth in revenue targets we have previously outlined.

Turning to our results for the quarter. Revenue for the quarter was $197 million, this represents an increase of 11% over the first quarter of 2019. This year-over-year increase was driven primarily by 12% year-over-year increase in a liner shipment, which came in at 122,751. ASP, came in at $1,770 which was relatively flat year-over-year. It is important to highlight that exiting February, we are on track to exceed our revenue targets for the quarter. Prior to the temporary closure of our SmileShops and manufacturing facilities, as a result of the COVID-19 crisis. As David noted without the impact of COVID, we estimate revenue would have been approximately $235 million for the first quarter, up 33% year-over-year.

Turning to expenses and margins. Gross margin for the quarter was 70%, a 288 basis point decline versus the prior year. Sequentially, gross margin was down by 326 basis points. These declines were largely driven by cost incurred through the end of March, even though we closed our facilities on March 20th.

For example, we paid our team members through the payroll on April 10th. A great proxy to normalize this is February, as it came in with a gross margin of 74%. We would have expected similar gross margins in March, had it not been for the COVID crisis. Additionally, we continue to focus on streamlining our manufacturing facilities. And as David alluded earlier, we are currently on track for the rollout of second-generation automation machine by Q4 of this year, completing this rollout is a key component of becoming adjusted EBITDA positive.

Marketing and selling expenses came in at $142 million or 72% of net revenue in the quarter, compared to 54% of net revenue in Q1 of 2019. Sequentially, marketing and selling as percentage of revenue was flat. Adjusting for the impact of COVID, marketing and selling expenses as a percentage of revenue would have been approximately 66% of net revenue for the quarter, representing 600 basis point sequential improvement, it was 56% of net revenue in February reporting a 56% estimate for the quarter.

Over the course of Q1, we saw and have continued to see drastic declines in sales and marketing as a percentage of revenue, confirming our belief in the cycle-resistant nature of our business model and planning to increase efficiencies in sales and marketing. General and administrative expenses were $91 million in Q1, compared to $49 million in the prior year period. G&A expenses were down $3.5 million sequentially.

To give more insights of the savings we discussed on our last call, G&A expenses in January were down 2% from December to $32 million, down 4% in February to $31 million, and down another 9% in March to $28 million. Approximately $7 million of that $28 million is non-cash expenses such as stock-based compensation and depreciation and amortization. We plan to continue to stay vigilant with cost control throughout the remainder of the year and beyond. And you can expect to see continued leverage from this line items.

Other expenses include interest of $4 million, taxes of $2 million and other expenses of $5 million, which is mostly non-cash currency gains and losses associated with our foreign entity. All of the above, produces Q1 net loss of $107 million, compared to a $20 million net loss in Q1 of 2019.

Moving to the balance sheet, we ended the fourth quarter with $224 million in cash and cash equivalent. Pro forma for the new debt facility, we have approximately $420 million of cash on the balance sheet after refinancing our prior ABS facility. Cash from operations for the quarter was negative $70 million, which represents a 50% improvement in our cash burn rate quarter-over-quarter.

Cash spent on investing for the first quarter was $28 million, mainly associated with leasehold improvements, capitalized software, and building our manufacturing automation. Cash spent on investing decreased $12 million quarter-over-quarter. Free cash flow for the first quarter defined as cash from operations of cash from investing was negative $99 million, which represents a 46% improvement in our cash burn rate quarter-over-quarter.

Now, turning to SmilePay. In Q1 2020, 66% of our members elected to purchase using SmilePay, which is down from 68% in Q1 2019. This percentage has also helped steady in April and May and we have not seen material increases in SmilePay as a percentage of total purchases to-date. In Q1, we took a conservative approach to implicit price concessions, and increased our reserves by approximately $12 million given the uncertainty of our economic outlook.

Again, as David mentioned, our delinquency rates through April were flat to March, which was consistent with the prior 12 month. Because we keep a credit card on file, and it is a low monthly payment, we expect SmilePay to continue to perform well. Our success rates on credit card attempts, which is a proxy for monthly payments has seen no degradation since COVID started. Further, since that same time, we’ve seen only 1.7% of customers requesting a payment deferral, which is far below the 4% to 5% deferral request you see other lenders facing today.

In closing, as David mentioned the unprecedented events of the past few months have provided a number of learnings about our business. These learnings will allow us to emerge from this crisis even more well-positioned to achieve our long-term revenue growth and margin targets. Although we won’t be providing full-year 2020 guidance until we better understand consumer behavior in the months ahead. We are proud of the accomplishments we have achieved and believe we are well positioned to capture market share in the future.

In particular, on a COVID adjusted basis, Q1 was a strong quarter for revenue growth, and we also saw great improvement in sales and marketing as a percentage of revenue. We are making good progress on manufacturing automation and achieving our goals of fourth quarter of 2020.

As we have stated before, we believe streamlining our cost profile through operational efficiencies, will not only improve our margin profile, but more importantly, provide a consistently superior customer experience that meet their demanding expectation. We have approximately $420 million of cash on our balance sheet, giving us ample liquidity to manage the continuing crisis, or alternatively spend faster in a high growth environment.

And lastly, we have been pleasantly surprised by the level of demand we have seen given minimal marketing spend over the past 60 days. Especially with all of our SmileShops, other than those in Hong Kong being closed. You’ll recall that our SmileShops functions primarily as fulfillment center, not sources of demand generation. Accordingly, during the quarter, we’re able to very quickly pivot to an impression kit only business and continue to serve new and existing club members with minimal disruption. This reinforces the importance of a differentiated omnichannel approach with Kits and SmileShops and positions us well for a future where virtual healthcare will be ever more important and prevalent.

Additionally, this illustrates the strength of our brand in the marketplace and the resilience of our product offer. It provides us the opportunity to test into a leaner SmileShop footprint, which we believe we can achieve with little to no impact of revenue, thereby enhancing the margin profile of our business.

I would also like to reemphasize that our long-term objectives have not changed. We remain laser focused on providing the best Club Member experience supported by strategically positioning ourselves around the world. As we have cited before, we have a great head start in the US, will be over invested to gain market share in a few short years and believe that investment will continue to pay off in referrals, aided awareness and margin expansion in the future. We have already seen this materialize through our performance since COVID, with little marketing spend.

We are the low cost provider with brand presence and no pricing pressure, in an increasingly favorable climate for telehealth. We will continue to make strategic investments in the professional channel, international growth, manufacturing innovation, and in penetrating new demographics to drive controlled growth, but also executing against the profitability goals. We look forward to continuing to update you on progress in days and weeks to come.

Thank you to everyone for joining today. With that, I’ll turn the call back over to the operator for Q&A.

Questions and Answers:

Operator

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan. Please proceed with your question.

Robbie Marcus — JPMorgan — Analyst

Great, and thanks for taking the question. Maybe I’ll start with second quarter and your thoughts on the recovery pathway. You know, David, if I do the math on the number of aligners you laid out for second quarter, I’m coming out to a down 60% year-over-year. Is that the way we should be thinking about it, maybe down a little bit versus the past 60 days? And how are you thinking as you set your base plans for the company with unemployment, where it is, with shops closed about the reopening process, and how you’re thinking about the balance of 2020 realizing you haven’t given formal guidance?

David Katzman — Chief Executive Officer and Chairman

Yes. So as far as being down 60% over last year or quarter-over-quarter, I mean we are in new waters here Robbie. So we’re looking at it as the bottom up build. As things open up, we’re actually testing two markets right now. Our first two shop market DMAs in the US. So that’s really up to the governments and the municipalities. You know, this pandemic highlighted the advantages and convenience of telehealth, which is really important to us.

So you’d have to say, there aren’t too many people over the last 60 days that haven’t heard of or have been exposed, not to telehealth. This will help with more consumers, who will entertain our platform versus traditional brick-and-mortar doctor [Phonetic] offices that would have in the past. It’s also going to provide a better regulatory environment with the states as we continue to push our model, teledentistry legislation in all 50 states. Going forward, we are going to make a big push for that, then take advantage of the situation. Our Kits business has been really reinvigorated. It was less than 10% of our total business, the shops dominated with over 400 shops. What we’re looking at as we do this bottom up of build now and rebuild the company, we’re looking for that chip business with people wanting to stay at home, be safe and stay at home, that’s going to be a stronger percentage of the overall business, which means we may not have to have quite the shop footprint that we used to have and we’re going to be able to leverage the shops more with higher utilization, which ultimately decrease expenses in the P&L.

So from a profitability standpoint, and that’s the number one mantra here, it is small direct club is controlled growth with profitability. We’re going to build this from the bottom up whatever the marketplace will give us and demand we’ll take, we’ll continue to open up these shops and test them, but we remain very confident that we can grow this to the levels that the marketplace will accept at a profitable base.

Robbie Marcus — JPMorgan — Analyst

Okay. Then one, just if you could confirm the math is correct and the delta versus what you’ve seen versus the past 60 days. And then Kyle, if you could walk us through how we think about cash flow and balance sheet dynamics here as you still have a healthy amount of SmilePay revenue coming through each month even though sales are going to be down. How should we think about the balance sheet, the cash flow dynamics, and just if you could draw on your thoughts on your liquidity here after the new deal announced? Thanks.

Kyle Wailes — Chief Financial Officer

Yes, happy to. So to answer your first question. So if you look at April as an example, as we’ve talked about, we shipped about 10,500 unique aligner orders in April. Obviously we are close through the first week, right. So we are closed from March 20 through the end of the first week in April. Even as we started to ramp back up, we had to put new health and safety measures in place to ensure the health and safety of our team members. And so it took us a couple of week to ramp back up to get some more of a normal state as well. If you look at what we’re expecting for May as we called out is in the range of 11,000 to 15,000, but if you look at actual demand and again, our marketing spend is down about 90% from where it was before. Our demand overall being only down about 40%. And so off of that on a normalized basis with normal conversion and it’s too early to know ultimately how these — how the Kits convert out to, but that will be closer to about 22,000 shipments on a monthly basis. And so that’s how we think about run rate right now with normal conversion and again that’s what marketing spend being very, very little. And I think what, what that highlights, as David said is really the omnichannel presence and the strength of our teledentistry platform.

If you move over to cash flow, obviously, we announced the refinancing of the JPM facility if you look at that on a pro forma basis. It leaves us with about $120 million of cash on the balance sheet. So it gives us more than enough liquidity to both manage, one, any downside with COVID if this goes on for an extended period of time, or if there is a resurgence in the fall. Or alternatively, a more of a growth mode. As you know with SmilePay the quicker we grow, there is a cash burn associated with that. We feel that 2020 [Phonetic] gives us sufficient liquidity to manage really both sides of that and believe that we’re in a great position overall. As we thought about that cash facility or the debt facility in the refinancing overall, as I mentioned, those were two of the priorities associated with that, but it does a variety of other things for us as well, Ravi.

So the current facility that we had and a prior facility was coming due later this year this new deal is a five-year term that we could finance after one year, it’s got an 85% advance rate, which is much higher than where we were before, which was closer to 50% advance rate that we’re actually getting on those receivables. Now this funds both our domestic and our international growth or receivables were the prior facility only funded the domestic receivables and obviously enhances the overall liquidity. But the number one priority that we had was to minimize equity dilution. We’re big believers in the long term equity of this company and the conviction we have around that. So we really want to focus around minimizing that dilution. And we believe this facility accomplishes all those goals. So lots of cash on the balance sheet, we’re in a good position especially given that our current cash burn is effectively neutral.

Robbie Marcus — JPMorgan — Analyst

Great, thanks a lot.

Operator

Our next question is from Jon Block with Stifel. Please proceed with your question.

Jon Block — Stifel — Analyst

Thanks guys. Good afternoon. Kyle, just in your last comments it seems like you’re going to run close to cash flow neutral the near term, but how is your marketing spend plans changed longer term, call it due to the learnings on S&M yield if you would during the COVID shutdown. It seems like you might not reopen I think in the slides that 418 shops as of the end of the first quarter is it fair to think that you don’t reopen them all, when the lights come back on, as you think about optimizing the footprint? And then I just got a follow up.

Kyle Wailes — Chief Financial Officer

Yes, so I think what with this has proven Jon is really the variability and flexibility of our model. So as we talked about demand has been strong with very little marketing spend. Effectively all of our shops are closed outside of Hong Kong. And they’re all on month to month leases or almost all of them, so we can be very flexible there and as we see demand come back we can, we can ramp those shops up again, but it goes back to what we have said before and we’ve always said, the shops themselves don’t drive demand, we’ve got an omnichannel presence, we’re driving demand through aided awareness, through referrals, through our marketing spend and people are going to the website and choosing if they want to order, an impression kit or if they want to book a scan at one of our SmileShops.

And I think what this has really proven is that the power of the teledentistry platform that we have we can be much more effective with the kit business and with the reduced shop count than we have historically it’s always been part of our plan, as we’ve talked about the leverage that shop count really be more profitable by driving the utilization up in the shops that we’ve built. And I think what we’ve learned as a result of this as well on the marketing side, we can be much more efficient than we’ve been historically. You can see that in the numbers. February was 56% of revenue as I mentioned on the call. If you look at it on a COVID adjusted basis, we are 66% in the quarter or down about 600 basis points quarter-over-quarter. So it’s really all of those together Jon, as we think about the future, but again it goes back to, we think we have the opportunity based on these learnings to be much more efficient.

Jon Block — Stifel — Analyst

Okay. So maybe I’ll ask a follow-up to that one. And then just tag on the second question, I guess the follow-up is, if the kit business is doing well and you might not need all 418 longer-term, what does I’d say if anything about the partnership with CVS and Walgreens, are those altered in any way longer term? And then the follow-up or the second question, sorry Kyle, just the ASPs came in better than we thought. I think your initial guidance for 2020 sort of had an implied ASP, give or take, around 17.30, I think it was 17.70 and change for the quarter. So what accounts for the better than expected ASPs and does that trend continue, call it throughout the balance of 2020? Thanks guys.

Kyle Wailes — Chief Financial Officer

Yes, so ASP was 17.25 is what we had put out on the last call. Obviously came in better than that for the quarter, we have put a big focus around reducing discounts and price decreases. I think if you look at the market overall. As we’ve talked about in the past, we’re the low cost provider in the space, with the best unit economics. And so we’re trying to be more disciplined around how we think about offering our price discounts both in Q1, but also in the future as well.

In terms of the CVS and the Walgreens relationship, it’s still an important part of the model overall. As we’ve talked about all along, if you look at the small shop footprint it is a point of destination. Right. The shops are not driving demand and so we want to be in the right locations within cities that are convenient for people to get to, once they book an appointment and the retail partners play an important role in that.

Jon Block — Stifel — Analyst

Thank you, guys.

Operator

Our next question comes from Steve Beuchaw with Wolfe Research. Please proceed with your question.

Steve Beuchaw — Wolfe Research — Analyst

Hi, and thanks for the time here. I wonder if you could speak a little bit to some of the operational steps that you’re taking to drive demand in an environment where the stores are not open. Given the duration of the company and your e-commerce platform and your historical ad spend, have a pretty sizable database of potential customers. Can you talk about how you’re leveraging that database to try to mine the well, if you will, as you have a pretty good sense who potential customers are? And then I do have a follow-up.

David Katzman — Chief Executive Officer and Chairman

Excuse me, Steve. I’ll take that one. So that’s basically after we turned off the marketing, roughly 90% Facebook, Snapchat, TV was completely turned off. What we did was we started after several weeks of getting stabilized and reopening our [Technical Issues] reaching out to our customer base, we have millions and millions of leads and emails. And so what we found was that customers who normally would not have transacted by way of an impression kit, it was the perfect solution for stay at home environment. And so that kit business like Kyle said really all we have is two shops in Hong Kong, so the vast majority of our Kits and scans are the Kits, and that is only down about 40%. So we’re still maintaining 60% of that business.

We’ve always talked about, it’s a long lead cycle. People have to have a reason to jump off and enjoying the — and become a member of SmileDirectClub. And so what we saw was even during this crisis, people are sitting home, they’re are very interested. We now — and one of the things we had to do, we have to build up our kit intake business, we were doing far less than we’re doing today, and we didn’t have the labor, we didn’t have the models to bring that kit business through the gauntlet. And so we’ve built that up over the last four weeks. We’re now starting to ramp up marketing for the first time. We’re back on Facebook, we’re actually going to be launching TV on Friday with a kit type business. So we’ll see where it goes, but as a lot of other e-commerce companies have seen during this crisis, their models have flourished for the stay at home customer and we think the same.

We think that we can get that — at least in this environment now as people start to come out of their homes and start to get back into the community, the shops will serve their purpose. But what we feel — what we’re seeing is that the footprint doesn’t have to be as large that we can get more utilization of these shops, get business that was less than 10%, we have it modeled out to be almost 30% or higher going forward. So that becomes a more profitable business for us less costly than the shops. So it’s still an omnichannel approach, but I think we will be the beneficiary of this stay at home, be safe environment that we’re in.

Steve Beuchaw — Wolfe Research — Analyst

Much appreciated. The second thing I wanted to ask about is somewhat related, and it has to do with the lead up to entering treatment with SmileDirect. So — and it varies a little bit from place to place, but there are requirements for folks to get imaging, requirements for folks to get checkups. Normally really not that big a challenge, but with practices closed down, I wondered is this something you want to try to enable, is this something you might need to enable via the stores to give people easy access to checkups or imaging to make sure that they meet all the protocols in an environment where so many dental practices are — have been closed for a while and it’s a little unclear how they’ll go about opening? Thanks so much.

David Katzman — Chief Executive Officer and Chairman

Yes, well. Our whole business was built on the fact that you can do this through telehealth platform. So we have requirements that our customers upload photos, 60 days, 90 day photo check-ins. They don’t have to go to a shop, as matter of fact, we — I said another surprise was the fact that people, who wanted to do a mid-course correction or refinement at the end of treatment, we offer those free of charge. If they’re not satisfied, they want a little tweak, it is not uncommon in the clear aligner business to do that, we thought that they would possibly wait for our shop to open, people would start the journey to the shop, once they find out the shop was closed, but what we found was that people were — had no problem having to send them impression kit at home to get their new scan and get their MCC refinement. So that was another a pleasant surprise.

So it’s probably not necessary and what we have done as we’ve doubled down on our platform, as we said on the call, we just launched a really robust video chat capability that really just — we’ve always had the teledentistry tools to service our customers at home. But this new video chat, some of the features that it had, it allows the dentist or the dental team to take control of the customer’s phone and they can then zoom in into the mouth and work all the different tools of the phone, including turning on the flashlight. They can annotate right on the screen. They can record the call and the session and go over with the customer after the fact. So really powerful, I would call it the gold standard for robust telehealth platform and so that’s something that we just recently launched. I think it’s really going to help a lot of these customers, who don’t want to go back into a SmileShop and want to continue to have treatment from the comfort of their home.

Steve Beuchaw — Wolfe Research — Analyst

Very cool, very cool. Thank you for the time here.

David Katzman — Chief Executive Officer and Chairman

Yes.

Operator

Our next question comes from John Kreger with William Blair. Please proceed with your question.

John Kreger — William Blair — Analyst

Hi, thanks very much. David, can you just talk a little bit more about the vision of the operating model, once we’re beyond the crisis? It sounds like you’re thinking about fewer SmileShops and also it seems like you’re talking more about, kind of, stronger explicit relationships with providers? How do you envision that versus let’s say where the company was a year ago? And I guess, the related question is as you come out of the crisis, should we be thinking about cash burn, kind of, ramping again? Or do you think you can, kind of, hold that sort of cash neutral or better operating position? Thanks.

David Katzman — Chief Executive Officer and Chairman

Yes. So as far as the pillars and our initiatives that we set out at the end of last year for 2020, those still remain the same, international expansion, expansion into the teen market. which once again, we think this plays well for us, that enhances that ability to get into the teen market, and then continued innovation and R&D spend there which got some really cool things coming out. So nothing has changed there, international is continuing on, it’s really a factor of the COVID situation, which was to be launched in Singapore in June. We’ve got Austria in the works, Germany, which we have just launched, we had to shutdown, it is going to be reopening in the next couple of weeks. So we’ve got four, five countries that will be opening up over the next couple of months as the stay at home orders are lifted, so we’re excited about that.

As far as partnerships go, we just announced another partnership with Anthem. So we continue to penetrate the insurance market with our in-network solution, which we’re really excited about. And from that standpoint, it doesn’t change, I think what’s changed coming out of this is telehealth is a household word now. And so, people want it — I think a lot of people experienced that for the first time, that used it, both in teledentistry and telehealth. So that the wins are [Indecipherable] here, which we were facing a lot of headwinds both regulatory and from the dental communities in our teledentistry platform. So I think that has really helped open up and a lot of people are looking at this platform, who otherwise wouldn’t have used it.

So that along with the kit business, which allows us to control some expenses and the sales and marketing side being the sales side, which is primarily the shops. If we can leverage more of these — the slots and get better utilization, it will — that expense comes right out of the P&L. I can tell you that we’re hyper, hyper-focused on profitability. We’ve got great unit economics. We absolutely should be profitable and we’re building the models, and the good thing is that we can grow into it as demand is there and we can take that demand in the marketplace, with states open up, we can build from there. So it gave us the ability — I mean even before COVID, we had set our sights on being profitable by the end of the year and that’s what we told you guys in the last call. We feel even more confident about it now, we’re in a cash neutral position.

The only burn that really should happen going forward is if the business grows even faster than we have planned, because the burn comes from the SmilePay. If it we were EBITDA positive, which we plan on being this year and there is no cash burn from that. There is capex, which is about $100 million a year and then there is the SmilePay. So growing the business as long as EBITDA positive at a more rapid rate and bringing more cash is not a bad thing, because there’s financing — lots of financing out there to support that SmilePay program. Do you want to add anything Kyle?

Kyle Wailes — Chief Financial Officer

Yes, I think you said it, well. I think in the near-term, as David said, our marketing expense is very low. We’ve got almost no SmileShop expense and about 55% of our team is furloughed. And so we’re in a very good spot to manage our cash well, and because the model is so flexible, we can ramp up slowly, test different cities and then spend into that. If certain geographies performed well and we’re growing and converting well, then we’ll spend more and grow into that. But we are not going to have a risk of opening everything up way too soon and having a large cash burn associated with that.

As David said, as we get back to growth volumes like we’ve talked about before, and where we thought we would be in Q4 than the longer-term targets that we put out there being 20% to 30% plus per year, there is a cash burn associated with SmilePay. But from an EBITDA less capex perspective, profitable near future and the burn associated with SmilePay by 2022 would go away when we get EBITDA to a high enough point that where cash flow positive even associated with that. So, yes, I think the main takeaway and COVID really proved this out, the models are incredibly flexible. We’ve been able to be in a cash neutral state with a good level of demand and almost no marketing spend and we will ramp that up slowly to make sure that we’re preserving overall liquidity that we have as a business. And make sure that demand is there before we continue to spend into that.

John Kreger — William Blair — Analyst

That’s helpful. Thank you.

Operator

Our next question comes from Nathan Rich with Goldman Sachs. Please proceed with your question.

Nathan Rich — Goldman Sachs — Analyst

Hi, good afternoon and thanks for the question. If you can maybe talk about what the conversion rate and kind of time to purchase look like for the kit business historically relative to the SmileShop? And have you seen any change in that conversion in the past 60 days without the marketing spend there?

David Katzman — Chief Executive Officer and Chairman

Yes, good question. So we don’t give specific conversion numbers, but I can tell you that as we look at some of the key metrics that we look at are kit return rates that’s number one. We ship out the Kits, there is a certain percentage of people that don’t even return them. What we’re seeing is that is up over call it the last six months. The kit return rate is higher. Think you can rationalize that by saying people are at home. They’ve got a lot of time on their hands. I think we sort of expected that. What happens when someone orders a kit today, we actually ship it out overnight because they’re hot, they want to get this thing done and there’s always a reason when they come home from work, I can’t do it, tonight I can’t do it, takes about 20 minutes, 30 minutes.

And so when we start calling them to get these Kits back, there’s always these excuses I just haven’t had the time. So kit return rates are up. We got bottleneck for pretty much, some of the return of kit in the past because it was a pretty steady state business is less than 10% of our volume. We could turn these Kits around within a few days, get a treatment plan to the customer and get the kit and get the aligners ordered within a matter of couple of weeks. We are backed up over a month right now because of the onslaught that we had and we had to hire up, we have to train the special software that is required to go through a lot of steps to get that person the treatment plan.

We’re now finally getting through the WIP. There’s a huge amount of WIP down in Costa Rica. Our plant in Antioch, Tennessee is ready, it is fired up. And the orders literally in the last three, four days have really started to accelerate. So from a kit return rate it’s up, acceptance rates are about the same, there an acceptance rate metric that we go through. There is a certain number of, people just can’t get the kit right and we send them out a retake kit, we’re still doing that. And then the conversion off of that once they pass through that gauntlet, they are accepted, they have a good impression, that metric is about the same, it’s almost identical to where it was in the past. Same amount of SmilePay, same amount of full pay, all that — people don’t go through this whole process not to buy. So once they come through the conversions are pretty high, they get through the acceptance rates.

Nathan Rich — Goldman Sachs — Analyst

Okay, great. And then David, did I hear you say that you still expect to be EBITDA positive by the end of the year? And if so, could you maybe just talk through the different factors. Obviously a lot of uncertainty, but just how you kind of manage bringing back on the sales and marketing spend and the time difference between when you make that spend and when you start to see purchases ramp up?

David Katzman — Chief Executive Officer and Chairman

I’m going to let Kyle, CFO take that question on. But Yes, we feel — we feel confident before COVID, coming out of this, we feel even more so because we’re leveraging our shops, better. We definitely going to get more utilization of these shops because we are getting more kit business. And our marketing as we started to get better leverage out of that even in Q1 before COVID, we feel that coming out of this, we can target a 45% type number between sales and marketing, which really is a big factor in getting to EBITDA. The unit economics of selling — gross margins are terrific. We have a really good ASP. There is no pricing pressure, and you’ve got — and you start out with a really high gross margin. Now it’s a matter of controlling the rest of the P&L, I’ll let Kyle address some of that.

Kyle Wailes — Chief Financial Officer

Yes, so I mentioned this before as well. So we shipped, like I said 10,500 in April, somewhere between 11,000 and 15,000 in May. And if you look at normalized conversion, we would expect the current run rate to be around 22,000 shipments in a 30-day period. That 22,000 is somewhere around $40 million, $41 million in revenue. We can certainly be profitable at that level, right and I think the right balance there is making sure we’re not sacrificing long-term growth at the expense of that and so it goes back to what we said before it’s controlled growth driving up the profitability. And if we look at the near future and we end up in an environment where COVID could go on for a very extended period of time and because of that it would put a potential ceiling on what the growth could be. We could be profitable off of the levels of revenue that we are seeing today.

What we’re planning for as the business ramps back up, we think the right level of sort of balancing that growth versus profitability is about $65 million in monthly revenue. When that happens, I think it’s still to be determined based on how the world reopens, but we think that’s the right level to balance our growth versus profitability and obviously that sooner than where we have been historically, right. You can look at what we did in revenue last year not being profitable and that’s all a result of the changes we’ve made in the business from Q4 till now, starting with cost of goods sold, but also the economies of scale we’re getting out of G&A and the efficiencies we’re seeing in sales and marketing as well, but again it’s about balancing sort of that controlled growth of profitability. We think the right metric is around 65, but if that’s at a point that’s too far out in the future because of COVID we can easily pivot as demonstrated and be profitable centering that.

Nathan Rich — Goldman Sachs — Analyst

Thanks for the questions.

Operator

Our next question comes from Erin Wright with Credit Suisse. Please proceed with your question.

Erin Wright — Credit Suisse — Analyst

Thanks. You mentioned limited change in the delinquency rate since COVID or more recently. How confident are you that that is sustainable in this sort of environment?

Kyle Wailes — Chief Financial Officer

Yes, that’s right Erin. So the — if you look at SmilePay overall, we feel very good about the performance that we’ve seen both in Q1, but also since COVID started in call it middle of March. As mentioned on the call, about 6% of our members overall purchase using SmilePay, that’s down from about 68% in the prior year period. In Q1, it’s pretty flat as well to where we were in the fourth quarter of last year and it’s been flat in April and it was flat in May. We haven’t seen a lot of changes with that. We talked about this on the call as well, but because we keep a card on file and it is a low monthly payment, we do expect it to continue to perform well, we haven’t seen changes in write-offs or delinquency rates over the past couple of months, either.

And I think the best leading indicator that we have is the overall success rates that we have on credit card authorization and that’s really a proxy for monthly payments. So we have the card on file, we try to card every month. We’ve seen no change in the performance of that, if anything, it’s actually slightly better than we posted a page to the earnings presentation on our website as well, where you will see those stats and that’s the best leading indicator that we have. So given that, and it’s been almost two months now, we haven’t seen a change in the off rate performance. We continue to feel good about that performance overall.

I think another good indicator is the overall deferral request. So we’ve had about 1.7% of customers, so they can actually call in and ask to extend their payment for 30 days. For us that’s been about 1.7%. We think that the industry norms that other lenders have seen have been closer to 4% to 5% overall as well. So we’re performing well there, but obviously the best leading indicator is going to be that credit card authorizations and that continues to be on par with where it’s been historically.

Nathan Rich — Goldman Sachs — Analyst

Okay, got it. That’s helpful. And then on the retail strategy with Walmart. I guess what sort of traction, are you seeing with that relationship, how material is that for you at the moment from a financial perspective? Thanks.

David Katzman — Chief Executive Officer and Chairman

Yes, I’ll take that one Kyle. So overall, the new product portfolio is driving incremental growth for us, it’s clearly in the revenue line, it’s not material compared to what our aligner business is at $750 million. Although it’s growing and at some point in time, it will be. All the products are strong, but the fact is, it’s really outperforming expectations and it’s the number one growth contributor to total whitening sales in US is our whitening product. It exceeded our expectations, I think it exceeded Walmart expectation. Walmart has been a great partner. It was the right choice to launch our products. We are, — we recently just add added the drug channel with our partnership with CVS.

They added 3,000 doors and took on our product lines and we’re talking to other retailers as well that we’re in negotiations with for the back half of this year and then into the resets for Q1. The main, what we want of these retail products for was one brand building and other another channels for brand building and we all know the volumes of traffic that goes through a Walmart store. But we also saw from our own sales on our website that when someone brought whitening first, that that led into aligner sale. We have — we have metrics on that and what we’ve done with all these products. If you buy one from Walmart and now CVS, inside the box, we have a little coupon and every single product that introduces you to the SmileDirectClub and invite you to come buy kit or book a scan, it will give you a little discount on the aligner sale.

And so we’re now starting to attract that, they out in the wild for the last couple of months and we’re seeing good conversion on that. So we believe that over time they will drive a certain amount of aligner revenue to us, besides being good revenue and profitable. It’s — the actual retail sales are profitable. They bring down our overall margins. Our aligner margins themselves are up over 80%. Overall, we’re into the mid-to-upper 70s, but that’s dragged down by some of that retail margin, but it’s still profitable to us.

Erin Wright — Credit Suisse — Analyst

Okay, great. Thank you.

Operator

Our next question comes from Kevin Caliendo with UBS. Please proceed with your question.

Kevin Caliendo — UBS — Analyst

Thanks. Thanks for taking my call. Can we talk a little bit more about the SSP facility, the interest rates on it? Any covenants or default triggers that are on it? And will it be formally filed, will we get to see that, like we did with the previous bank line?

Kyle Wailes — Chief Financial Officer

Yes. Hey Kevin, this is Kyle. I can take that. So it will be filed — it will be filed with the 10-Q by Friday of this week. The rates on the facility itself. So as we said, our main focus as we looked at this facility was to make sure that we minimize equity dilution overall. With $420 million of cash on the balance sheet, as I said before, it gives us protection to manage the downside risk with COVID or in more of a growth mode as well. So we wanted to make sure we are maximizing flexibility associated with that. So it’s a five-year deal. We can refinance it after one year, there is an 85% advance rate on the receivables both domestic and international as well. Rates are L plus $750 in cash, $325 in pick and then there’s 1% of inference instance associated with the deal as well.

Kevin Caliendo — UBS — Analyst

Okay, that’s great. That’s helpful. You talked about maximizing the stores here in the US. But I believe the international expansion was expected to be 100 stores. Has that changed in any way, shape or form and can you talk about sort of the outlook for that? How we should think about modeling store growth internationally and sort of what countries you’re focused on besides Hong Kong and England?

Kyle Wailes — Chief Financial Officer

Yes, look, I think overall, similar to the US, it’s very much in sort of flux right now, right, every country around the world have sort of different rules and even within those countries cities have different rules for what the reopening timeline looks like. We are still pushing forward with countries later this year. We’ve got six to eight that are on the road map, we haven’t disclosed publicly what those countries are, and what the timing of those are. I would say just given COVID, it’s about half of where it was initially overall, and that’s a function of just what operationally what we can roll out in the back half of the year with the thing that we have today. So still a very important component to the growth strategy. And as you think about sort of shops versus Kits, it’s a very same similar strategy to what we have here in the US, as well and in North America between Kits and Scans.

David Katzman — Chief Executive Officer and Chairman

Yes, It’s David, I’ll just add that the same reception — the really strong reception to our Kits business as we’ve seen in every single country Australia, Canada, UK exceptional kit business going on in the UK, Ireland. There are a couple of countries I announced earlier in the call that we can pay back, because they’re opening up four weeks and there is some backing up in Q4 that we’re not prepared to mention right now, but we’re getting ready to the launch those as well. So Singapore will be opening in June. We’ve got Spain is opening end of June, beginning of July. We got Australia — not Australia, Austria, opening up it’s adjunct or we call it a spoke of Germany, Germany being the hub. And then Germany is going to — Germany, which is a huge market, bigger than the UK.

We had one shop open and then we have shut down very quickly. It was ready for COVID. So that’s going to reopen shortly. So you had mentioned and the question was 100 shops, and that was 100 shops. I think we’re kind of targeting 100 million of revenue coming out of those international markets. Now like Kyle said, that will probably be down a little bit, but the kit business is still strong in those markets. There’s still a large percentage of the population that want to transact this way from the pricing that we have and the convenience factor that get applies wherever we go.

Kevin Caliendo — UBS — Analyst

Thanks so much.

David Katzman — Chief Executive Officer and Chairman

Yes.

Operator

Our next question comes from Laura Champine with Loop Capital Markets. Please proceed with your question.

Laura Champine — Loop Capital Markets — Analyst

Thanks for taking it. So, you commented that you’re back on Facebook. You’ve got TV coming, how quickly would you ramp back your marketing spend and what sign post would you be looking for to make those decisions?

David Katzman — Chief Executive Officer and Chairman

Yes. So we’re excited about it. We’ve been — we’re a marketing company and marketing driven company, and we’ve been off-the-air and have been off digital for what almost two months now. So we weren’t going to go out to spend money until we got that funnel that I called — that I talked about on the Kits side, were there we have readied it for the good customer experience, we’ve reduced the timeline. So we’re going to spend slowly and we’re going to have a very disciplined CAC, that we’re targeting and we’re not going to go above that CAC.

Right now we are — I mean as we started ramping up this weekend in Facebook and Instagram we are so far below that. So we have a lot of runway. And keep in mind what we have is base of business. We’re doing 60% of what we were doing, 60% of the Kits and Scans we were doing with no shops and no market. So we feel really good in this environment that we can be a lot like these other e-commerce companies that took advantage of this opportunity for stay at home, not that we are ready to ramp up that kit business. We’ll see, I mean we’re starting a fraction of what we were on TV starts on Friday, but we’re very optimistic that there’s a lot of runway that we can get this business up and running but without having to leave your home, without having the shop open.

Laura Champine — Loop Capital Markets — Analyst

Okay. And I get that the Kits and Scans were down 40% over the last 60 days. But did you see any spike or any choppiness as those stimulus checks came through?

David Katzman — Chief Executive Officer and Chairman

Yes. Well, a lot of people asked us that, and I definitely wasn’t the stimulus checks, because the minute we started to see our running, see our emails and our text, our existing millions of customers in the database, these customers were buying well before the stimulus checks were actually out there. So we haven’t seen any — we haven’t seen any drop-off at all for that. So I don’t think it was a stimulus check driven environment, which I know some other companies have seen that spike and then go down. So there could be some factor of that in there, but I don’t think it’s a majority of what our kit sales have been.

Laura Champine — Loop Capital Markets — Analyst

Got it. Thank you.

Operator

Our next question comes from Glen Santangelo with Guggenheim Partners. Please proceed with your question.

Glen Santangelo — Guggenheim Partners — Analyst

Yes. Hey, David. Thanks for taking the question. I hate to make you repeat this, but I just wanted to follow up on some of the April, May commentary. It kind of sounds like the business was trending about 40,000 units per quarter and now it seems like in April, you were at 10,000, and May, it seems like you’re somewhere in the low double-digit range. So, maybe down 60% to 75%. But just sort of reconcile that, you said the kit business has been about 10% of your overall business and now that’s down about 40%. Could you just sort of plug the hole because I’m operating under the assumption that all of the 418 SmileShops with the exception of Hong Kong are closed. And so where is the extra demand coming from and what do you think is driving that?

David Katzman — Chief Executive Officer and Chairman

Yes, I’ll answer a little bit there. But I’ll let Kyle who is the numbers guy kind of share. But I think we’re mixing apples and oranges. So the numbers you’re talking about 11,000 or 15,000, those are aligner shipments, okay. And those were delay, we shut the plant down for a couple of weeks, we got reopened as an essential service. So we started ramping that back up. We’re down 40 — so Kits and scans is how we go to market, the customer can choose to either buy a kit or book a scan in order to purchase aligners, 90% of those customers would choose to go to a shop. It was convenient, it was free, we have one around the corner. 10% of those would start out by buying a kit.

Now regarding our shops, other than two in Hong Kong. So for the most part, they’re all shut down. The only way to transact with us is to buy a kit, it’s $49 for the kit, we ship it to the home. And what we’ve seen is with no marketing spend, if the total was a 1,000, 900 of them — customers started out in the shop and 100 Kits. We’re now doing 600, doing 60% of what we were doing with no marketing spend, virtually no marketing spend, and that’s all coming, so you ask question, where is that coming from?

As we’ve talked about in the past, this is a very long lead cycle. We’ve got millions, we got 5 million, 6 million people coming to our website every month, that’s down a little bit, down quite, because we’re now out there drumming up new business and marketing, we’re going back to the database. But these customers are coming from six months ago, a year ago, four months ago, they’re coming back in now. They’re sitting at home and they’re buying our kit. So there is all this kit business that went out, I mean huge numbers, have gone out, they are coming back in and we got backed up in processing them, in taking them. You’ve got a term, you’ve got to sculpt them, you’ve got to bite set them, it’s a very complicated process. And so we got backed up in the tune of almost four weeks and so we got people trained. Those are now starting to flush through literally this week and a little bit last week and this week, and that’s why we decided to turn on the marketing because there’s light at the end of of tunnel we’re caught up. So those will turn into aligner sales coming up in the future.

Listen, I mean there’s a scenario this environment of COVID was extended through the rest of the year, actually someone just mentioned before this call and if it’s true or not, that California may be shutdown for August. But in this environment, just the kit business stays robust. We can start to get back to some of those numbers. We’re down 40% in kit business, but profitability wise we’re up, because we’re not spending any of that marketing dollars, bringing it in without the added dollars. Kyle, do you want to add anything to that?

Kyle Wailes — Chief Financial Officer

Yes, I think you said it well, David. So if you look at Q1, $197 million, adjusted for COVID, which we effectively shift for 87% of the month. And so, if you adjust for that 87% and take the impact of the reserves, because we are pretty conservative with how we thought about our price concession reserves, just given the unknown of COVID. The two of those together will take you to $235 million, which is up about 33% year-over-year. The 10,500, that shipments in April and again that we didn’t open until the end of the first week. It takes a couple of weeks to get back to normal within that as well.

If you look at sort of where we are currently over the past week, that would imply 11,000 to 15,000 shipments for the month and if you look at actual demand based on orders, it implies about 22,000 shipments overall. That 22,000, if you look at the $235 that I’d outlined is effectively half of where we were before approximately.

David Katzman — Chief Executive Officer and Chairman

Does that makes sense and answer your question, Glen.

Glen Santangelo — Guggenheim Partners — Analyst

Very much. One, just quick follow-up, you had a number of announcements this quarter on the insurance side. Could you just maybe flesh that out a little bit what these agreements maybe look like? And I kind of curious, when we get the question all the time can small direct goes — apply for any type of insurance reimbursement. Do you do any studies out maybe what percentage of your club members are getting some relief on the insurance side, and on average, how much that might be of the ASP price?

Kyle Wailes — Chief Financial Officer

Yes, I can pick that one. It’s Kyle. So it’s still a small percentage of the orders. Overall, both for in network or out of network. If you look at the partnerships that we’ve announced with the first united and then now Anthem as well as we’ve talked about in the past that’s a much longer-term strategy where the goal there is a partner with those payors and really drive adoption through self-insured employers, which we think long-term will not only help growth that will help with overall efficiency of acquisition costs as well because now you’ve got obviously people with insurance that get the product at a much reduced price.

And so that’s the intent of those relationships. We will continue to roll out more in the future. We’re always talking with other patients and the goal was to continue to announce those. So I would not expect that to have a near-term big impact. It does have a small impact, but it’s much more about a longer-term growth strategy in years to come now.

Glen Santangelo — Guggenheim Partners — Analyst

Okay, thank you.

Operator

[Operator Closing Remarks]