Quotient Limited
Q3 2019 Earnings Call Transcript

Published: 31 Jan 2019

[Operator:]

Greetings and welcome to the Quotient Limited Third Quarter Fiscal Year 2019 Financial Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Christopher Lindop, Chief Financial Officer of Quotient Limited. Thank you, sir. You may now begin.

[Christopher Lindop:]

Thank you, Rob. Good morning everyone and welcome to Quotient’s earnings conference call for our third fiscal quarter ended December 31, 2018. Joining me today is Franz Walt, Chief Executive Officer of Quotient. Today’s conference call is being broadcast live through an audio webcast and a replay of the conference call will be available later today at www.quotientbd.com. During this call, Quotient will be making forward-looking statements, including guidance and projections as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in Quotient’s filings with the U.S. Securities and Exchange Commission as well as in this morning’s release. The forward-looking statements include guidance and projections provided during this call are valid only as of today’s date, January 31, 2019 and Quotient assumes no obligation to publicly update these forward-looking statements. With that, I would like to turn the call over to Quotient’s Chief Executive Officer, Franz Walt.

[Franz Walt:]

Thanks, Chris. So this quarter represents the third in my tenure as the CEO of Quotient. It’s really unbelievable how fast these nine months went by, we were very busy and I believe also very proactive as a team and delivered on all milestones. MosaiQ is by now largely [indiscernible] and we’re today also in the best financial situation in the existence of the company. It’s a new and compelling approach to testing and I believe when I joined and continue to believe to-date that MosaiQ will earn its place in clinical diagnostics. For me the question is not this, but rather when we will have to breakthrough. For this reason we focused on a program of operational and stable opened execution over the last nine months that would possibly take a funding strategy which was built during the year and concluded decisively in December. Let me quickly recap the key events over the last month. The first quarter involved focusing and representation to ensure our success with the initial IH microarray verification and validation in April, which then paved the way for successful field trials in June which unlocked access to $36 million of additional debt funding. The success in turn led by end of July to the exercise of $48 million worth of outstanding warrants. In quarter two the team built on this achievement to successfully complete three critical facility audits by our regulators enabling all variation manufacturing at our new ARC facility in Scotland and MosaiQ microarray manufacturing in Switzerland. We also completed the steps required to CE marked MosaiQ instrument and the work required to support the CE marked submission for our first IH microarray by the end of the quarter. We also took the opportunity during December to end to the question what other areas in diagnostics might benefit for MosaiQ to enable flexible and cost effective disease screen. As I expected this has turned out to be a very attractive technology for immunoassays and molecular diagnostic disease testing. You can argue that whenever you want to do multiple tests and what we call disease panel especially those tests need to be done on different modalities like immunoassays tests and [indiscernible] MDx test. You would have a workflow and list of cost advantage if it can be done with one single technology. One way of saying that is that we believe our property multiplexing microarray technology allows for multiple tests across different modalities and has the potential to transform transfusion diagnostics and beyond in a much larger laboratory diagnostic market. Examples could be specific panels for allergy, out immune disease, infectious disease, women’s health or transplant medicine amongst others. Fundamentally two ways to approach this longer term opportunity either through organic development or through partnership matching out partners existing diagnostic markets with MosaiQ elegant platform capability. In the third quarter we moved to the development phase of our first serological disease screening microarray to closure. The critical aspect prior to commencing our field trial was the verification and validation phase which we completed publishing the study with very good performance data in late November. That’s by the way a proved point that MosaiQ works for immunoassay testing. We also took the opportunity in December to advance our financing strategy to definitely deal with the funding overhang which was impacting the company. First, by restricting our senior debt to better align our scheduled repayments with the anticipated commercial ramp up of MosaiQ and secondly by raising almost $65 million net of expenses to the sale of ordinary share in a secondary [indiscernible]. In a turbulent market the level of interest in our company by investors was encouraging. And I came out of that fundraising with a profound personal commitment to justify the confidence that our investors demonstrated in both our strategy and in this management team’s ability to execute. So after three quarters we’ve completed two or three things, we need to start consolidation. The manufacturing site for MosaiQ is now ISO 13458 certified, in addition we’ve the MosaiQ instrument CE marked. The CE marking of the initial IH microarray is the last missing piece. In the past we’ve told you that we assume up to six a few times, this might be tight as recently we’ve begun to hear from our network in the industry that at very few times are tending to be a bit longer than in the past this is due to an increased workflow of the notified bodies as they work with other companies to transition their product to the new European medical device regulation. Of course as a brand new product MosaiQ is already designed to comply with this regulation. So therefore, we remain confident to be able to start conversation before end of the first half of calendar year 2019 as previously communicated. In parallel, we’ve also advanced our menu expansion plans including preparing to move our expanded IH microarray into a verification and validation phase. This is the last step in development before commencing the microarrays US and European field trials. So recent development date upon this expanded antigen microarray which we shared in our press release earlier today gives me great confidence in the outcome of the next steps in both its development and ultimately with regulatory phase. This expanded IH microarray is designed to deliver significant customer value to simplification, standardization and automation and is expected to replace the initial IH microarray which will be used with the European hyper care launch plant later this year. This expanded version can not only automate but is already automated to-date but in addition replaces a lot of manual work and this adds significant value to the customer operation. Automated expansion initiatives include the European field trail of our first SDS microarray which has commenced. I could not be proud of how the team has stepped up and executed with remarkable discipline in the first nine months of the fiscal year 2019. They have demonstrated not only their unparalleled expertise in the area of microarray enabled diagnostic but also their ability to come together as a team and to focus and confidently overcoming challenges to achieve their set goals. We have also moved forward with our plan to independently demonstrate the feasibility of our molecular disease testing platform. As we have communicated in our near term goals included the development of an industrial design for our noble sample amplification modules which we plan to put it in the hands of a third party leadership for further study and evaluation later this year. This will permit us to publish independent clinic results using our innovative low cost multiplexing approach to molecular disease training also later this year. So moving forward we continue to anticipate the following milestones within the next six months. Once the field trial phase of the initial SDS microarray is complete we can move to the CE Mark and later FDA submission. We plan to successfully delivery V&V data for our expanded IH microarray in the first half of 2019. We plan to have 24 tests that's including tests for antigen typing antibody detection and reverse grouping on this expanded version. With this menu expansion MosaiQ will have to find a compelling alternative to the current combination of high throughput devices with limited menus and moderate throughput or manual technique used today. So importantly, it will permit more comprehensive antigen typing to be carried out efficiently, affordably and routinely on every donated unit of blood. During this period we also hope to have positive news on our initial IH CE Mark submission which when we receive will permit us to place devices and commence our soft launch of competing in tenders for device placements and evaluation later this year as we advance our expanded microarray menu for both antigen identification and the initial serological disease cleaning microarray. So with that let me handover the call to Chris Lindop, our CFO. Chris?

[Christopher Lindop:]

Thank you, Franz. I am happy to report that third quarter product sales were $6.7 million, an increase of 15% from last year's third quarter and exceeding our original guidance range of $6 million to $6.5 million. In the first nine months total revenue was $20.9 million, an increase of 12% from $18.6 million in the first nine months of last fiscal year. The increase in total revenue is attributable to both OEM customers and to direct and distributor sales. In the prior year’s first nine months total revenue included other revenue of $600,000 earned from the approval for sale in the U.S. of certain rare anti-syrup developed for our largest OEM customer which did not recur in the current year. In the quarter OEM sales of $4.7 million grew 23% year-over-year and represented 70% of product sales while direct customer and distributor sales of $2 million increased 10% year-over-year and represented 30% of product sales. Product sales from standing orders in the quarter were 67% versus 76% last year. And for the first nine months of the fiscal year OEM sales grew 17% and direct sales grew 18%. Shifts in the timing of red cell reagent ordering can cause quarter to quarter variability year-over-year which tend to average out over longer comparative periods. Gross profit on product sales was $2.5 million and it declined from $3.3 million last year. In the quarter gross margin was adversely impacted by incremental costs of approximately $1.4 million of which $320,000 represents rent due in cash under the sale leaseback of the core real estate assets of our Allan-Robb Campus and $615,000 represents other non-cash expenses associated with bringing the Allan-Robb Campus online. The company also incurred $100,000 of duplicate facility costs in the third quarter related to its existing manufacturing site. As a result, gross margin on product sales was 37.7% compared to 58.9% last year. As we've observed in the past the relocation to the Allan-Robb Campus is an investment in future growth and efficiency opportunities. In the short-term gross margins will be impacted by the higher cost base of this facility offset in part by contracted price increases. The transition of manufacturing to the ARC was successfully completed during January as planned. We would like to congratulate the team on the ground in Scotland for this remarkable achievement. In the third quarter, the operating loss was $19 million compared to $17.7 million last year. Operating expenses increased $900,000 from last year to $21.6 million. The majority of the increase relates to the general and administrative expenses and includes greater personnel related costs, incremental costs arising from the move to and validation of the Allan-Robb Campus as well as the funding of external initiatives for our improved communications and strategic expansion. Stock compensation expense was $1.1 million in the third quarter compared with $1 million in the same quarter last year. In the third quarter, net other expense was $7.2 million compared with $3.2 million in the same quarter last year. Net other expense consists of $5.7 million of interest expense, $900,000 of fees in relation to the debt restructure and $600,000 of foreign exchange loss arising from the revaluation of monetary assets and liabilities denominated in foreign currencies. Interest expense payable curtain in cash of $3.6 million increased $1.1 million over the prior year as a result of incremental borrowings at the end of the first quarter. Accrued non-cash interest expense related to an estimated future royalty payable to the note holders also increased as a result of incremental future royalties under the senior note facility following the June note issuance. Overall, our net loss for the quarter was $26.3 million or $0.46 per ordinary share. Moving to the balance sheet, following a funding through an underwritten public offering of 10,615,385 ordinary shares at a price of $6.50 available cash and other short-term investments were $107.7 million on December 31. The net proceeds to the company from this offering was approximately $64.5 million and at the end of the quarter senior notes outstanding were $112.8 million net of an offsetting long term cash reserve account of $7.2 million. Also during the third quarter we entered into a supplemental indenture to modify the terms of our previously issued senior notes which had the effect of extending the maturity date of the senior notes till April 15, 2024. Revised the principal amortization schedule to delay by two years the initial redemption of the senior notes, which is now set to commence on April 15, 2021. It provides the periods and redemption prices related to an optional redemption of the senior notes by the company and obtained permission to issue an additional $25 million aggregate principal amount of senior notes following our European CE Marking of the initial MosaiQ IH micro-array. In consideration for these modifications we agreed to pay a one-time consent fee of $3.9 million and agreed to increase the aggregate amount of the royalty right from 2% to 3%. On December 31, accounts receivable totaled $2.4 million and inventory totaled $15.3 million. Capital expenditures totaled $1.4 million in the third quarter. Now moving to guidance, we are increasing previously provided guidance ranges for product revenue which is now between $27.6 million and $27.8 million. Our estimated offering loss is $75 million to $78 million and includes increased investments in our planned development goals. Estimated offering losses are estimated to include approximately $18 million of non-cash expense such as depreciation, amortization and stock compensation. Capital expenditures are still expected to be between $4 million and $5 million for the full fiscal year. Other revenue estimates include $450,000 of product development revenue that is contingent upon the achievement of regulatory submissions for certain products under development. As such the receipt of these milestone payments involves risks and uncertainties. For our fiscal fourth-quarter we expect product sales in the range of $6.8 million to $7 million compared with $6.1 million in the fourth quarter of fiscal 2018. With that let me turn the call back to Franz.

[Franz Walt:]

Thank you very much Chris. So as we think about our plans for the next four quarters of building on the successful completion of our MosaiQ manufacturing system and device approvals it's now all about the validation and approval of our planned menu expansion. This will start with initial IH microarray approval which when received will permit us to begin commercialization activities in Europe later this year. We plan to follow up with the CE market later FDA submission for our first SDS microarray. So near-term expansion plans also includes our expanded IH microarray for which recent development data which we share today supports our plans to move to U.S. field trials in the first half of 2019 and to use data from our U.S. field trial in combination with a bridging study to facilitate a submission for EU CE mark in the second half of 2019. The combination of an expanded IH microarray together with the initial SDS microarray will give us the very attractive menu we need to succeed by the end of this financial year. In addition, as mentioned earlier we will continue to advance our molecular disease cleaning capabilities sharing independently derived evaluation data later this year. So in summary we made a lot of progress delivered on all the milestones under our control in the last three quarters and have solid plans in place to execute going forward. Let me repeat once more that we have designed MosaiQ so that it allows for multiple tests across different modalities and we believe it has the potential to transform transfusion diagnostics and beyond. Last but not least, our balance sheet and cash position is now better aligned with our anticipated MosaiQ ramp up. With that I'd like to thank all our employees and partners for a tremendous contribution towards the continued success of Quotient. I will now ask the operator to begin the Q&A session please.

[Operator:]

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Brandon Couillard with Jeffries. Please proceed with your question.

[Brandon Couillard:]

Thanks, good morning.

[Franz Walt:]

Good morning, Brandon.

[Brandon Couillard:]

First with the extended data that you presented this morning looked pretty clean on the surface. Anything unusual that should sort of identifies you go through this internal process and just kind of walk us through the timing of when you think you might have the early data ready to present?

[Franz Walt:]

So for the expanded, I think what we communicated is that the field trial will start first half in 2019 and the plan has been subsequently soon after we have the date and everything evaluated for CE Mark and then for FDA approval. So, field trials first half 2019.

[Brandon Couillard:]

With respect to molecular, has anything changed in terms of your view of the feasibility? Can you help us with what you're looking at in terms of some of the proved points together the viability of molecular in there?

[Christopher Lindop:]

I think everything we have seen is that it really works on the bench. All the data are extremely good. So, we are pretty confident and of course we would like to have now an external validation. That's why we gave it to a third party conducting a clinical trial and we assume some with 2019 we will be able to show you the results which is in a validation that it works all molecular disease screening. Our impression is a little bit that we started out immune-hematology and actually for microarrays, printing, red blood cells, seems to be a more difficult task than straightforward clinical chemistry like in serological disease screening like immunoassay testing and molecular disease training. So, it's going very well and I think also the ability on our capability, we've the microarrays is improving as we go along. And one example I can throw here in this individual spot performance improve significantly. So, for IH1, we were really limited to one set of analysis partly for older spots. With the IH2 and beyond, we have the ability to apply individual end-specific analysis partly to each spot giving us more flexibility to adjust the performance of the individual test. But this is part of our learning and continuous improvements from IH1. So, we started out, we've very good results, that's why we went towards CE Mark submission but it looks like as we go along over the months, we learn more about the technology and it's just improving, getting better. And very confident it's molecular and SDS to answer your question.

[Brandon Couillard:]

Okay, thanks. Two for Chris. Just to update on your cash burn outlook, we're going forward here and could you elaborate a little bit on the expanded operating loss for the year?

[Christopher Lindop:]

Well, we're still in the range but at sort of the high-end of the range. If you take the non-cash expenses, our operating burn is sort of averaging our outlook for the full-year is averaging at the high-end of the $4 million to $5 million range. I think that's where we're going to settle down for the foreseeable future and probably just a little under five and a little over five. Obviously we have that service but that's limited to interest and that because of the refined reduction terms of the senior notes takes us well out into 2020 by in our current planning.

[Brandon Couillard:]

Okay, thank you.

[Operator:]

Thank you. The next question is from the line of Josh Jennings with Cowen & Company. Please proceed with your questions.

[Josh Jennings:]

Hi, good morning gentlemen. Congrats on some nice continuing this progress.

[Franz Walt:]

Thank you Josh and good morning.

[Josh Jennings:]

Well, let's start off your comments on the CE Mark process, I mean it sounds like you're just reiterating I think what's out there in public domain and notified bodies have a bigger work due to the medical device regulations. Maybe times are a bit longer. Is there anything else you can share I mean in terms of your dialogue with a notified body, have there been any -- I just wanted to -- you reiterated the timeline.

[Franz Walt:]

Yes, absolutely. So, maybe if at also I'm not familiar with the topic, just a quick explanation. Maybe some of you know that maybe out of it and who does not. For the European Council approved in March and European Parliament in April 2017, new regulations for the industry. So, the purpose is to increase medical device safety and effectiveness in the EU market. But is also a kind of a response to technical as well as scientific developments that are quickly shaping the medical device industry. So, that's all good and fine and this new rule will apply starting May 26th, 2020 for MDR. MDR is an abbreviation for Medical Device Regulation. This was not a regulation before, this was a directive. And then in May 26, 2022 for its two years later for IVDR, which stands for In Vitro Diagnostic Regulation. That was also a directive and it's not changing to a regulation. As a result of this change is the notified bodies have an additional workload during this transition period. And this is due to the performance of early audits for other medical device companies helping them to move their existing products to the new regulation. Then on top of this what we hear is they have to change their own internal process is to spell which altogether seems to slow down the review process. So, us personally we are in intense dialogue with the notified body and there's just no bad news whatsoever. They are asking for additional information. It's an good. So, we are pretty confident and of course we would like to have now an external validation. That's why we gave it to a third party conducting a clinical trial and we assume some with 2019 we will be able to show you the results which is in a validation that it works all molecular disease screening. Our impression is a little bit that we started out immune-hematology and actually for microarrays, printing, red blood cells, seems to be a more difficult task than straightforward clinical chemistry like in serological disease screening like immunoassay testing and molecular disease training. So, it's going very well and I think also the ability on our capability, we've the microarrays is improving as we go along. And one example I can throw here in this individual spot performance improve significantly. So, for IH1, we were really limited to one set of analysis partly for older spots. With the IH2 and beyond, we have the ability to apply individual end-specific analysis partly to each spot giving us more flexibility to adjust the performance of the individual test. But this is part of our learning and continuous improvements from IH1. So, we started out, we've very good results, that's why we went towards CE Mark submission but it looks like as we go along over the months, we learn more about the technology and it's just improving, getting better. And very confident it's molecular and SDS to answer your question.

[Brandon Couillard:]

Okay, thanks. Two for Chris. Just to update on your cash burn outlook, we're going forward here and could you elaborate a little bit on the expanded operating loss for the year?

[Christopher Lindop:]

Well, we're still in the range but at sort of the high-end of the range. If you take the non-cash expenses, our operating burn is sort of averaging our outlook for the full-year is averaging at the high-end of the $4 million to $5 million range. I think that's where we're going to settle down for the foreseeable future and probably just a little under five and a little over five. Obviously we have that service but that's limited to interest and that because of the refined reduction terms of the senior notes takes us well out into 2020 by in our current planning.

[Brandon Couillard:]

Okay, thank you.

[Operator:]

Thank you. The next question is from the line of Josh Jennings with Cowen & Company. Please proceed with your questions.

[Josh Jennings:]

Hi, good morning gentlemen. Congrats on some nice continuing this progress.

[Franz Walt:]

Thank you Josh and good morning.

[Josh Jennings:]

Well, let's start off your comments on the CE Mark process, I mean it sounds like you're just reiterating I think what's out there in public domain and notified bodies have a bigger work due to the medical device regulations. Maybe times are a bit longer. Is there anything else you can share I mean in terms of your dialogue with a notified body, have there been any -- I just wanted to -- you reiterated the timeline.

[Franz Walt:]

Yes, absolutely. So, maybe if at also I'm not familiar with the topic, just a quick explanation. Maybe some of you know that maybe out of it and who does not. For the European Council approved in March and European Parliament in April 2017, new regulations for the industry. So, the purpose is to increase medical device safety and effectiveness in the EU market. But is also a kind of a response to technical as well as scientific developments that are quickly shaping the medical device industry. So, that's all good and fine and this new rule will apply starting May 26th, 2020 for MDR. MDR is an abbreviation for Medical Device Regulation. This was not a regulation before, this was a directive. And then in May 26, 2022 for its two years later for IVDR, which stands for In Vitro Diagnostic Regulation. That was also a directive and it's not changing to a regulation. As a result of this change is the notified bodies have an additional workload during this transition period. And this is due to the performance of early audits for other medical device companies helping them to move their existing products to the new regulation. Then on top of this what we hear is they have to change their own internal process is to spell which altogether seems to slow down the review process. So, us personally we are in intense dialogue with the notified body and there's just no bad news whatsoever. They are asking for additional information. It's an extremely constructive process but we hear and we hear from our peers in the industry that historically it was a good assumption six months, that might be a little bit tight now as it might take a little bit longer because of the extra workload but we don’t know whether it takes longer. Yes, we assume six months, maybe we get there but for us better it's a couple of weeks earlier or later doesn't change anything and we are pretty confident that we get the CE Mark.

[Josh Jennings:]

Thanks for that. And just expand on Brandon's question about the antigen typing panel menu. It looks like you brought into the fore some antigens from the Kell, Duffy, Kidd, MNS and Lewis families. Is that as we understand that's a robust menu that you're going to move forward with IH 2, but as you look out in the future, does that menu continue to expand or how should be thinking about other of the more rare families. Are they necessary or for the ultimate.

[Franz Walt:]

I think right now that's the menu we are shooting for. And just bear in mind that today automated whether it's a fast or a slow automation, it's roughly twelfth test. Everything beyond the twelfth test is done manually. Very lengthy tedious manual work. So, we've 24. We have a significant advantage over everything out there. But there also diminishing returns. If you go more, more, there a type of a taste and nobody uses it or once in a million, it doesn't make sense anymore to make this product development. So, you do maybe an additional manual test. But what we can say with confidence, it will replace the vast majority of manual testing needs. And it's also increasing the safety of the blood product because by definition each time, everything is comprehensively characterized and not only like in the past if you suspect additional testing is needed and yes maybe an oversight as so. I think it's a better product and it's also a much safe product. So, with respect to the price release, we are only showing there the antigen typing menu which is 20 antibodies but it represents 22 tests. Then we have also deliver scoping and antibody detection. That represents two more test, that's how it comes up to 24.

[Josh Jennings:]

Sensational, that's helpful. And just on the STS Field trials, you guys have moved forward with. Just wanted to be clear. You instituted field trials in the U.S. is that what I heard and any update?

[Franz Walt:]

No, in Europe.

[Josh Jennings:]

In Europe, I'm sorry, okay, I missed that. Okay.

[Christopher Lindop:]

U.S. cancelled. I mean that's also with the IH 2. For the STS, we do now the field trial in Europe; we started and they did field trial in Europe. And then once we have the data, we move from there and we do another trial then in the U.S. for the priority first is Europe CE Mark then test in the U.S. and submission for FDA approval. Depending on how everything goes, it can be a quite close together. And then for the IH 2, it's a different approach, there we do the clinical trials in the U.S. We do a grouping study in Europe and submit then for both approval for both EU and FDA.

[Josh Jennings:]

Thanks for that clarification. I thought I missed and just wanted to make sure. And then, and just on the U.S. field trials for IH 2, have you identified field trial sites and I'm sure if we just, should we expect that they're the main players in the U.S.?

[Franz Walt:]

Yes. I mean, they are two players 90% of the potential. So, you can assume they're for sure main players. And I think it's we are in discussion with them and there is no issue recruiting top labs to do the trials. And of course we have to see also from a timing perspective, there is an ability to pull it through and all that. But we're very confident, we're in dialogue with them but we're not at a little bit disclose where and what because there is a confidentiality agreement in place. And I think if the customer wants to disclose it, that's a different story. But believe I'll -- I'm it's a highly concentrated market. We do those trials with in fact things we've it's a very high credibility and everything.

[Josh Jennings:]

And just last question. This commercialization plans in Europe with CE Mark on the cost sphere. Excuse me. Any evolution, are you still planning to place MosaiQ systems in most centers and any update just in terms of this salesforce buildout understanding that it is a concentrated market. Thanks for taking the questions.

[Franz Walt:]

Yes. So, I mean the -- I hope I understand your question right, what's the flow of events getting used as a product in the customer side. So, first you place the instrument, you place a limited menu. They are trying it out, they do a validation. If they feel comfortable, they increase the utilization by porting over more than more testing metal. That's the way it goes. So, you start small and then you expand over time. But of course they're also the majority of the business opportunity to raise majority of the business opportunities are tender. And we just had a review just the other day and it's a wide time range and also are a little bit faster or some are taking longer. But I would say the rate that average approximately from beginning to end is nine months and then you have three months internal validation. So, whatever we place in '19, you will see it in '20, what we place in '20 you will see in '21. But once you're in the account and you've the technology which is used, you have of course an opportunity to expand the usage by enriching the content which can be for the platform. So, nothing has changed there. If the technology is great, it will displace all the technologies but it takes time. And yes, I would always like to compare it with the train. Its slight slow to leave the station but once it gets some speed, it's unstoppable. If that answers your question.

[Josh Jennings:]

That's super helpful. But I also just wanted to touch on these sales organization in place fully, is there anything that you need to do to --.

[Franz Walt:]

We're ready, ready to go.

[Josh Jennings:]

Ready to go, great. And then the capital. [indiscernible]

[Franz Walt:]

We are not allowed to do any sales activities yet. So, they're really each year ready to go.

[Josh Jennings:]

Great. And then just the model of placing MosaiQ systems without a big upfront capital purchase for your customers. That's still the model that you guys are pursuing in Europe?

[Franz Walt:]

Yes.

[Josh Jennings:]

Great, thanks a lot.

[Operator:]

The next question is from the line of Sung Ji Nam with BTIG. Please proceed with your question.

[Sung Nam:]

Hi, thanks for taking the questions. Just a couple of questions here. Maybe kind of expanding on Josh's question around commercial launch. Understanding that it's there are several months probably for validation before you start to see revenue impact. But would you be able to kind of quantify what the first year, first full-year of where you've been 24 months commercial launch could look like based on the customers you're currently you're targeting potentially and in terms from the revenue standpoint?

[Christopher Lindop:]

Well, we could guess or speculate but I think it's a little dangerous to do that at this time. I think Franz's comment is right. It's going to start slowly and will accelerate. I think I believe that once we're in these sites, it will be very sticky and I believe the key to that stickiness will be the menu expansion. And I think it because the menu expansion is still part of a development pathway, it's difficult to predict revenues with a great precision. But the key elements of our strategy include really the series revenue generation first in Europe with IH 2 in combination with STS1. And I think because of the nature of the big STS2, when it comes along later in the development cycle, will simply replace STS1 and unlock almost incremental revenue stream that would now with almost nominal incremental cost. Because you're expanding the menu from two to nine disease states or tasks. So, we could speculate that is very much going to depend on when we get our first quarter of revenue and which the country when and which we do it. What we know is that a large number of it has probably close to 90% of the accounts that are in our target group for the first year have expressed the interest in participating in the self-launch which is a precursor to any close tender process. And we're tracking that very carefully. But I just don’t want to give you --.

[Franz Walt:]

I think the way we look at it very from a very pragmatically is it's all about getting into the customer account and giving the technology a chance to prove itself in the customer hands. So, it doesn't make sense to have a kind of a topline growth for the field force. Because the media only think that counts are they trying it out, are they using it and once they're familiar with it and become within attractive menu, then the adoption is faster. Then waiting to have menu complete. So, the instruments validated, they know how to handle it, they have confidence in it. So, for me it's getting into the accounts is much more important and that will drive sales later on than being too much sales focused and you don’t get them to try it out.

[Sung Nam:]

Okay, great, that's helpful. And then, just a quick one on, I appreciate all the color around the medical device regulation in Europe. Was curious as to whether that takes into account BREXIT or if you if there might be potential further delays associated with BREXIT as well?

[Franz Walt:]

Yes. We're looking there and we also what alternatives we have and of course BREXIT is also a little bit of moving target; sometimes a bit more sinister in using the patent, then it looks brighter again. So, we are taking all that in parallel all the options we have and what would and yes we will see I mean the first microarrays with the UL. And we see whether the next submissions will be this auto notified bodies as we get along. So, we really keep track on that almost on a weekly basis to ensure that we get our product in a time limit. That's called the regulatory process. But most notified bodies have the same thing because all the companies they're representing have to move to the new regulation and this requires additional audits and everything. And they're not able just a short term short notice to increase starting. So, it's not like you move to another one. They have plenty all for the time, yes. It's that you carry the problem over. And with BREXIT and with BREXIT, yes, we're better close to that.

[Christopher Lindop:]

Yes, and developing.

[Franz Walt:]

Maybe close to put it. Yes, that's happening there, yes.

[Christopher Lindop:]

But we are focused on developing contingency plans but what we can receive is as potential exclusives.

[Sung Nam:]

Great, thank you. And congrats in all the progress you're making.

[Christopher Lindop:]

Thank you, I appreciate it.

[Operator:]

Thank you. At this time we've come to the end of our Q&A session. Now I'll turn the floor right to Mr. Walt for closing remark.

[Franz Walt:]

Yes. Thank you everybody for joining us on this call today. So, close in continuous to make considerable progress on MosaiQ and we look forward to its initial commercial launch next financial year. So, thank you very much. Bye-bye everybody, thank you.

[Operator:]

Thank you. Today's conference has concluded. Thank you for your participation. You may now disconnect your lines this time.