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spk05: Good day, and thank you for standing by. Welcome to the Accurius Medical third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. You will then hear a message that your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Carolyn Corner, with Investor Relations.
spk06: Thank you, Operator. Welcome to Acutis' third quarter 2022 earnings call. Joining me on today's call is David Roman, Chief Executive Officer, and Takeo Mukai, Interim Chief Financial Officer. This call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements. Factors that may cause results to differ from these forward-looking statements are discussed under the forward-looking statements section in the press release attached as an exhibit to ACUTUS's Form 8-K filed with the SEC today and are also discussed in more detail under the risk factors section in ACUTUS's most recent filings with the SEC, including the risk factors described in ACUTUS's Form 10-K. Any forward-looking statements provided during this call, including projections for future performance, are based on management's expectations as of today. ACUTUS undertakes no obligation to update these statements except as required by applicable law. ACUTUS's press release with third quarter 2022 results is also available on the ACUTUS website, www.acutusmedical.com, under the investor section and includes additional details about ACUTUS's financial results. The ACUTUS website also has ACUTUS's SEC filings, which you are encouraged to review. A recording of today's call will be available on the ACUTUS website by 5 p.m. Pacific time. Now, I'd like to turn the call over to David.
spk10: Thank you, Caroline, and good afternoon, everyone. During today's call, I will update you on the progress we are making on key strategic goals, as well as the status of our left-hand access portfolio sale to Medtronic. Takeya will provide an overview of our third quarter results, as well as our outlook for the rest of the year. On our last call in August, when I moved into the CEO role, we presented two strategic imperatives that would guide our business and set the foundation for Acutus' future. Driving utilization and operational excellence with people and culture at the foundation of everything we do. I'm happy with the steps we are taking to advance these objectives and want to take a moment to recognize the extraordinary commitment of my Acutus colleagues, as well as the support and engagement from our key physician partners. Starting with our first priority to drive utilization and adoption for AccuMap globally with a commercial strategy we introduced earlier this year is unfolding well. Our shift to focus on procedure volume growth and utilization over expanding the install base has enabled us to grow year-over-year procedure volumes, increase utilization per console, and drive higher revenue per case as we launch new products. Year to date, procedure volumes advanced 21% versus the prior year, with console utilization up 17% and revenue per procedure up 16% constant currency. This increased productivity has been accomplished with a near 40% reduction in our commercial organization as we have streamlined resources. Overall, these performance metrics reflect strength in our core business and give us confidence in our ability to drive future growth. While we continue to proactively relocate underperforming consoles, We also expect our installed base to return to growth in 2023. In addition, we are seeing good traction in adding multiple users within existing accounts, helping to strengthen utilization and increase disposable revenue per console. As we reinitiate our expansion efforts, we will remain disciplined in where we deploy our assets with a goal to exit 2023 with a higher installed base, higher utilization per console, and higher revenue per procedure. Further to achieving our growth objectives is our new product pipeline, which includes software, disposables, and hardware platforms. Exiting Q4 and into early 2023, we will move into full market release of our Acumap 8.5 software, which is designed to improve anatomy build and enable better visualization during Acumap procedures. We have taken a deliberate and focused approach in launching Acumap 8.5 to ensure a positive physician experience. This software release will be followed by AccuMap 9 in mid-2023. AccuMap 9 is expected to make significant improvements to catheter localization, procedural efficiency, and workflow flexibility. In addition to new software platforms, our AccuBlade force sensing ablation catheter and system launch in the U.S. is an important addition to the portfolio expected next year. In early October, we submitted our PMA for AccuBlade, which initiated the standard 180-day review clock. During this time period, we expect to receive questions from the FDA, as well as engage with the agency during site inspections and evaluation of our submission. From where we sit today, we continue to expect approval in the first half of 2023, consistent with our prior disclosures. The data from our U.S. AccuBlade 4 study will be submitted for presentation at the 2023 AF Symposium, and we are therefore unable to share specifics about the study results. That said, based on the efficacy and safety results in this study, as well as the strong commercial uptake outside the U.S., we are confident that AccuBlade will help support our growth objectives. Beyond 2023, our magnetic navigation system is moving through development. magnetic-based navigation has become industry standard, and we will be integrating this important feature into our AccuMap console, mapping catheter, and ablation catheter. We will provide additional updates on the timeline for our magnetics program as it progresses. With respect to pulse field ablation, or PFA, we continue to evaluate the next steps in our program. Recent data from other industry participants, such as those presented at the European Society of Cardiology in September, have provided insight into the performance of PFA in real-world settings. Consistent with our approach to make disciplined strategic and resource allocation decisions, we are carefully watching the evolution of this category and are assessing the best path forward for ACUTUS, whether with our internal program or via partnership. We will update you as we finalize our plans. Switching gears to our efforts to strengthen our operating and underlying financial performance. We undertook a major leadership restructuring and organizational realignment in July, and our teams are executing well in this new structure. We have reduced the layers of management in the organization and are driving efficient decision-making at the functional level. We are seeing these efforts play through in our results as we recorded our lowest level of operating expenses and cash burns since IPO, with declines of 30% and 23% respectively on a year-over-year basis. We expect further moderation in cash burn during the fourth quarter. At this point, we see our operating expenses at a more sustainable level and we'll look to selectively open headcount in certain areas while keeping very tight parameters on non-headcount expense. We know that we need to maintain discipline in our operating expenses, but we will ultimately need to invest in the business long term. As a result, this will require intense focus on our gross margin improvement workstreams that Takeo will discuss in his remarks. While it is early in the process and will take time to see results, I am pleased that we saw an approximate $1.3 million improvement on a sequential basis despite the expected heavy seasonality in revenue. In addition to internal restructuring to strengthen our financial position, we are making good progress in the transition of our Less Hard Access portfolio to Medtronic. In early November, We achieved the first major milestone post-transaction closing, which came several months ahead of previously communicated expectations. Acutis is now approved as an Original Equipment Manufacturer, or OEM, for Medtronic. Achieving this milestone also triggers a $20 million earn-out payment that we expect to receive by year-end. Acutis will continue selling the LeftHard Access portfolio until commercial distribution is fully transitioned to Medtronic. Accomplishing this earn-out required tremendous cross-functional engagement from our operations, quality, clinical, regulatory, and R&D teams, in addition to strong partnership with Medtronic. As a reminder, in addition to OEM qualification, we are eligible to receive a milestone payment of up to $17 million once we file for EU MDR, as well as four years of revenue-based earn-out payments. We expect to achieve the milestone for EUMDR during the first half of 2023, which is consistent with timelines we shared on our prior earnings call. Beyond the financial impact of these initiatives, we are reestablishing the company's culture and building a patient and physician-centric organization. Importantly, we are retaining our key talent with meaningful declines in voluntary attrition and September and October recording the lowest levels of attrition in years. I am very confident in our team and believe we have the right people in the right roles to execute our strategy. Putting this all together, we continue to see 2022 as a transition year where we reset our strategic priorities, focus our R&D programs on those products that enable higher utilization of AccuMap, and address some of the key adoption barriers and establish a strong operating foundation. Parsing through some of the external challenges, including FX headwinds, supply chain disruption, and a challenging capital equipment market, our business fundamentals are strong, setting us up well for the long term. Beyond 2022, we expect our business to see progressive improvements in 2023 and even stronger performance in 2024. When combined with our operational improvement initiatives, this business trajectory will position us well for the future and allow us to maximize value for all stakeholders. I will be happy to cover any of these topics in more detail during our Q&A session, and I will now turn the call over to Takeo.
spk09: Thank you, David, and good afternoon, everyone. I am incredibly excited for this opportunity at Acutis, and I look forward to bringing my nearly 20 years of corporate finance experience to support our goals and drive operational excellence at the company. During my remarks today, I will review our third quarter results as well as our outlook for the rest of the year. For the third quarter, net revenue of $3.6 million compared to $4.6 million in the year-ago third quarter. Consistent with our expectations, the sales decline versus the prior year was entirely driven by a $1.1 million decline in capital equipment sales. Underlying performance in the business remained strong in the quarter with 17% year-over-year growth in procedure volume and higher procedure penetration as revenue per case increased double digits globally on an FX neutral basis. Sales in the U.S. of $1.9 million declined 12% year-over-year, driven by lower capital equipment sales. U.S. disposable revenue was flat compared to the prior year third quarter and was impacted by lower stocking revenue from new installs and supply chain disruptions. We estimate that the supply chain disruptions reduced U.S. sales by approximately $100,000 in the last couple weeks of the third quarter, and these supply chain disruptions are so far persisting through the fourth quarter as well. Up until now, we have been able to manage industry-wide supply challenges through long-dated purchase orders. However, demand for one of our key accessory products has exceeded our expectations, which has depleted some of our components of our access inventory. We are working diligently to remedy this matter and appreciate our suppliers' intense efforts to resolve shortages. U.S. procedure volumes showed continued improvement with a fourth consecutive quarter of a sequential increase. We are pleased to see improved performance in procedure volumes, AccuMap adoption, and revenue per procedure, despite a lower install base and a tightening of commercial resources. We are focused on the continued execution of our commercial strategy and remain confident that we are taking the right steps to grow our U.S. business long term. Sales outside the United States, which include revenue through our distribution partner Biotronix for $1.7 million, and decreased compared to $2.4 million in the year prior. The year-over-year decrease outside the United States was driven by a decrease in capital sales, where we sold or converted eight consoles in the prior year. While revenue was impacted by seasonality as expected, we are very pleased with the growth in procedure volumes outside the United States, up strong double digits as we drive adoption in our direct businesses and expansion with Biotronix. My product segments Disposable product revenue of $2.9 million increased about 1% year-over-year. Procedure volumes of 441 increased 17% in the third quarter of 2022, reflecting continued growth in ACUMAP adoption. The primary factor contributing to the difference between procedure volume and disposable revenue growth was lower stocking orders associated with new installs compared to the prior year third quarter. We ended the third quarter of 2022 with an install base of 74 systems globally, down sequentially from 75 last quarter and up from 71 in the year-ago third quarter. Continuing our strategy of moving consoles into higher value accounts, in the third quarter of 2022, we removed six systems from accounts in the U.S. and repositioned one of those into a new account during the quarter. Outside the United States, we added two new consoles in our Europe and UK direct businesses and two with Biotronix. In the third quarter, capital revenue of $0.5 million decreased from $1.5 million in the year-ago third quarter driven by the prior year bullets of capital sales previously discussed. Service and other revenue of $0.3 million was up slightly from $0.2 million in Q3 2021. Non-GAAP gross margin was negative 109% compared with negative 77% in the third quarter of 2021 and negative 129% in the prior quarter. The factors negatively impacting our Q3 gross margin were similar to what we have discussed in prior periods, including unabsorbed overhead and carry-forward manufacturing variances, offsetting underlying direct product profitability. Improving operational performance is a critical part of our strategic roadmap. And the foundation of improved operating results is our gross margins. Critical work streams to drive this gross margin improvement include, one, reducing our operating overhead burden, which we have initiated through our cost improvement programs, and we expect to have an approximate 20-point positive impact on our gross margin starting 2023. Two, streamlining our manufacturing process, including automation and improving yields. And three, product design to include cost reduction as a critical input. Non-GAAP operating expenses were approximately $15.2 million in the third quarter of 2022, down 30% from the same period last year, and is the lowest level of quarterly non-GAAP operating expenses since IPO. On a sequential basis, non-GAAP operating expenses were down 23% as we realized the benefits of our restructuring programs. We have made significant progress in reducing our operating expenses by improving our discipline around cost management, and we expect our non-GAAP operating expenses to continue to decline year over year through the rest of 2022. As a reference point, our September non-GAAP operating expenses were annualizing at $55 million, down 37% from 2021. Excluding specified items, our non-GAAP net loss for the second quarter of 2022 with $20 million, or 70 cents per share, compared to a non-gas net loss of $26.7 million for the third quarter of 2021, or 87 cents per share. Our total cash and cash equivalence balance, including restricted cash at the end of Q3 2022, was $70.5 million. Our cash burn in the third quarter was $22.7 million, down 23% versus the prior year, and down 13% on a sequential basis. We are pleased with the improvements we have made in reducing our quarterly cash burn and will continue to drive intense focus on extending our cash runway while making the necessary investments to grow the business. Closing with our outlook for the rest of the year, we are seeing good progress in our strategy to drive procedure volume, utilization, and case revenue share growth. At the same time, We have experienced headwinds related to foreign exchange, supply chain disruption, and lower capital equipment sales. There are also some unknown variables on the timing of the commercial transition of our left hard access portfolio. Relative to our prior expectations, FX and supply chain headwinds have intensified while the underlying trends in our business are largely tracking in line with expectations. Taking these factors into consideration with our unit day performance as well as timing of the commercial transfer of our less hard access portfolio to Medtronic, we expect full year 2022 revenue to be in a range of $15.5 to $16 million. This includes about a $2.5 million decline versus 2021 in capital equipment revenue, FX headwinds of just over $500,000 on a year-over-year basis, which was slightly worse than where rates stood at our last earnings call, and over $300,000 from incremental supply chain headwinds that began late in Q3 and are continuing through Q4. Overall, the core fundamentals in our business are very consistent with what we have communicated in August, setting us up for a stabilization in the business exiting this year and improved performance in 2023 and thereafter. We appreciate your continued interest and support, and I will now turn the call back to the operator to facilitate our Q&A session. Operator?
spk05: Thank you. And as a reminder, to ask a question, you will need to press Star 1-1 on your telephone. Please stand by while we compile the Q&A roster. One moment for our first question. It comes from Mary Tribault with BTIG. Please proceed.
spk01: Hi. Good evening, David and Takeo, and thanks for taking the questions. My first here, I want to hear a little bit more about that supply chain constraint. I think it's a good problem to have when you have too much demand for one of your products. So maybe you could tell us a little bit more on details and where you are in terms of resolving some of that.
spk10: Sure, Marie. Thanks for the question and good evening. So the product that is impacted by the supply chain disruption is our AccuGuide Max introducer sheath. This is a product that is used not only in AccuMap procedures, but also in other EP procedures, as many of our customers have found the steerability and usability of the device significantly improved versus other products on the market. Through the first nine months of the year, really actually through August, we were averaging about two AccuGuide Max products per every mapping procedure. So actually 50% of our sales were coming outside of AccuMap procedures. That ratio plummeted to 1 to 1 in September because we had to restrict access to customers who weren't using it for ACUTUS mapping procedures. And the decision we've made is to focus on supporting mapping procedures and have put customers on backorder out who are not mapping customers. So, through the first nine months of the year, we had generated about $1.1 million in revenue in this product. But we do think that we'll probably see something in the range of about $100,000 that impacted us in Q3, keeping in mind that a lot of our orders come toward the end of a quarter and probably something in the $300,000 plus range here in Q4. We do have a committed delivery date from the supplier. That committed delivery date, however, has shifted around a little bit. So, We are working very aggressively to resolve this, and our supplier is also working as a fantastic partner to help us get through this, but it'll probably be something that we can't resolve until early 2023. Okay, well understood.
spk01: Thank you for all the detail there, David. And then maybe my follow-up here on sort of the stickiness of systems that you do have in the installed base now. It sounds like You continue to shift some systems. Do you think you're nearing the end of that process? And in general, among your users, what is, you know, is there one factor that's sort of driving the utilization increases? Congrats on that metric as well. And thanks for taking the questions.
spk10: Sure. So on the console relocation effort, I would say the bulk of it is behind us. I think we will probably continue to move consoles around both in the fourth quarter and in the future, but not nearly at the rate that we have to date. I mean, some of the things that I would say affected the removal strategy was really our targeting upfront. And we've talked about this, I think, a little bit on prior calls, but it really, as we started to dig into the effort to identify which consoles were gaining utilization and which were likely to gain utilization, really segmenting and targeting the right physician at the right account has been really critical to driving utilization. And it's a little bit hard to say is it all academic centers or all community centers. It really is a doctor-by-doctor exercise. But where we found the most success is where we have a lead physician champion who then brings additional users into the fold. So right now, I think we're probably somewhere close, I think, to in the U.S., of our 30-some-odd install base, probably a third of those have multiple users now, and we're seeing increased adoption from secondary users as well. And that still continues to be more important to us than growing the install base, because effectively, in some ways, adding a second or third user is just the same as adding a second or third console at another site. Long way to answer the question, but I think we're coming toward a stabilization in the install base. And as I look at Q2 to Q3, 75 to 74 is effectively stable. But as we look to next year, we are planting the seeds now to drive growth in our install base, both in our direct business as we rebuild our funnel across the U.S. as well as in the U.K. and Central Europe. And along with significant expansion plans from Biotronic, we did shift three consoles to Biotronic here in the fourth quarter to seed their expansion efforts in Japan. I don't know if those will all be installed and utilized here in the fourth quarter, but they are entering a fairly significant geographic expansion phase in 2023 that will likely drive an increase in our install base next year, in addition to the U.S., where we do think our ablation catheter launch will be a catalyst to grow the install base as well.
spk01: Very interesting.
spk05: I'll hop back in queue. Thank you. One moment for our next question, please. And it comes from the line of Bill Povlenic with Canaccord. Please proceed.
spk03: Hi, it's Sean on for Bill tonight. Thanks for taking our questions. David, I'm just wondering, how should we think about the rollout of AcuBlade on Peru next year? What will the rollout look like to existing users in the U.S.? ?
spk10: Thanks, John. So the rollout will mostly – will first focus on our existing users. And the primary reason for that is as we look at the utilization of AccuMap, one thing that we've observed is physicians who find value in AccuMap, one of the biggest pushbacks we get is around utilization and workflow efficiency. adding an ablation catheter to the workflow will make a significant difference in their overall experience, as well as be economically more efficient for the hospital system. So we don't have any official demands. We don't have approval for the product, but we have a fair amount of incoming interest from all of our existing users around AccuBlade. So when we gain approval for the product and are able to begin the contracting process, we will initially focus on those accounts where we have mapping systems installed and where we have active users so we can see significant uptake and increase in revenue per case at those sites. It will take some time to get on contract and go through those sort of normal administrative processes, which we can't begin until we gain approval. So, we would expect the AccuBlade impact to kind of ramp throughout the year with a more significant contribution, obviously, in Q4 than at the time of launch.
spk03: Great, thanks. And then for a follow-up, this relates to that. We're already in the process, say, of expanding that TAM. I know in the last call you kind of talked about where today you really use it mostly in the two plus AF redo cases. Where does that stand today, and how do you think that progresses next year upon launch of ACCUPLATE 2? Thanks for taking our questions again.
spk10: Yeah, so great question. Right now, of our total procedures in the third quarter, about 80% of the procedures in Europe were some sort of redo procedures, whether that was AF or atrial tachycardia or whatever. In the U.S., it was a little over 50% were redo cases. So you can see the trend in Europe that that is where our physician partners are finding the most value in the system. Ultimately, We need to expand our addressable market from redo cases and very challenging cases to move into de novo persistent cases. And that is the entire logic underpinning our roadmap right now, which is launching AccuMap 8.5 and AccuMap 9. We'll continue to make the procedure experience better for the physician, allow for greater procedural efficiency. Introducing AccuBlade will take away a major adoption barrier where physicians can really use AccuMap on a standalone basis. And that is very important to just tack onto your prior question about prioritizing existing users. We will also use AccuBlade as a vehicle to expand our install base because it allows us to tick off one of the key pieces of pushback to using Acutis right now, which is not being able to do it on a standalone basis. And as we move into 2024 with our magnetics program, that will really, further open up the market and make using Acumap even easier and allow us to get at sort of the total addressable market that I would describe as persistent for your de novo persistent AF, first-time redos, atrial tachycardia and atrial flutters, and second and beyond redos. And that market probably totals up to something in like the $2.5 to $3 billion range of addressable opportunity that we think we'll have access to within the next, call it, 16 to 18 months. Great. Thank you.
spk05: Thank you. And one moment for our next question. And it comes from the line of Margaret Cagsall with William Blair. Please go ahead.
spk07: Hey, good afternoon, everyone. Thanks for taking the question. I was hoping to start with 2023 and just some of the commentary around the install base increase. Is there a number that I guess you guys would feel comfortable with versus not comfortable with, you know, given the team in place today and maybe some aspects of the macro environment, meaning, you know, can you add 10 systems? Can you add 15 systems? Or is that just not the way you guys are thinking about it? Thanks.
spk10: Yeah, it's a great question, Margaret. And we have been, as you kind of go through our 2023 planning, we're asking ourselves a similar set of questions about, growing the installed base. And you're right that there are some lingering and potential macro considerations that we have to include in our thought process. I'm not ready to give a number on installed base growth for next year. I will say that we are building a funnel today that we already have visibility into certain of those prospects CONVERTING TO NEW INSTALLS IN EARLY 2023 RELATED TO THEIR OWN HOSPITAL BUDGET CYCLES. AND EVEN IF THEY'RE PLACING THE SYSTEM UNDER EVALUATION, MANY HOSPITALS ALLOCATE BUDGETS FOR NEW PRODUCT EVALUATION DISPOSAL PURCHASING. SO WE'RE STARTING TO BUILD A FUNNEL OF CALL OF A HANDFUL OF SITES HERE IN THE U.S. THAT WE ALREADY HAVE GOOD LINE OF SITE TO FOR EARLY 2023. AND THEN THERE'S THE EXPANSION INITIATED IN OUR EX-U.S. BUSINESS PARTICULARLY THROUGH Biotronic. The debate that we have to go through on this, though, is if we could add a second, third, or fourth user at an existing account and drive incremental same-store procedure volume growth, that is much more economically attractive to us as a company and allows us to achieve a good chunk of our overall financial objectives. So I think 2023 will be a balance of increasing the install base, and increasing the number of users within existing accounts, which is something we haven't really talked about before. We've really talked before about increased usage with current users in existing accounts. But if you add that additional layer to it, you're going to have to balance those two. And I kind of view adding users as very similar to adding consoles, and that that should be paired with higher revenue per case and overall higher revenue.
spk07: Okay. That then brings me to my second question, which is, you know, these systems, I guess, that have two or three or four positions maybe using the one system, should we think about it as a linear change, you know, with relatively, you know, minimal additional costs that you guys have to put in? And then, you know, if we look at that one-third of the installed base that does have more than one user, you know, what was that, I guess, a year ago, and what could it be in a year? Thanks.
spk10: Yeah, so the incremental cost of adding that new user is very low. And the reason for that is many of the hospitals we serve have multiple EPs as it is. Also, many of them have teaching or fellowship programs or observational programs. So I'll give you an example that just occurred yesterday where we've been working with a user in San Antonio for the past year or so who's been gradually – gradually increasing his utilization of AccuMap in a specific subset of his patients. There was one of his physician colleagues observing a case yesterday in this particular category and was so impressed with the use of AccuMap in the case that he added a new case as a first-time user today. And that is the experience that we're seeing is sort of the grassroots type adoption when you get a physician on board with using AccuMap for a specific subset of his or her cases. It ends up then becoming sort of a mushrooming effect to others in the practice. So the incremental cost to that for us is fairly limited. Obviously, there's some training and marketing expense associated with driving those cases. But otherwise, that's a very efficient way for us to grow the business. In terms of how many sites have multiple users a year ago, I'm not sure of the answer to that, except that it was certainly lower. because some of those sites that I identified as having multiple users have really been very recent phenomena.
spk07: And a go-forward rate. I'm sorry. Where would you like to see that? Just where would you like to see that percentage? If it's a third today, you know, can it get to 50%, you know, a year from now? Or, you know, are you working on it, I guess, with sales reps?
spk10: It's hard to put an exact number on it, and we're not – specifically incentivizing reps to go after that. Our therapy managers or our mappers are evaluated on procedure volumes. That is a primary input into their quarterly incentive and compensation structure. I don't know if I would put a target metric on it today, except that what we're ultimately solving for is going to be growth in procedure volumes globally and within each region. next year, and then how we get there, we're going to have to obviously bear down on whether that's going to be users per account or new consoles, and that'll probably differ by geographic region.
spk07: Great. Thank you very much.
spk05: Thank you. One moment for our next question, please. And it comes from the line of Robin Marcus with JP Morgan. Please proceed.
spk02: Hi, thanks for taking the question. This is Rohan on for Robby. I just had a quick one on operating spend. You talked about how OpEx is at a more sustainable level now. Is this across both S&A and R&D, and how are you thinking about this trending into next year, especially given you mentioned you were looking to add some additional headcount? I'm going to have one clarification follow-up.
spk10: Sure, thanks for the question, Rohan. So on the operating expense side – I kind of look at it in totality because one of the things that we've become much more agile at over the past several months is reallocating resources across different parts of the company. So when I talked about adding headcount, that was at the end of an exhaustive process we went through as a senior leadership team to look at all the headcount requests across the organization and then prioritize what we thought we could fund within the existing confines of our budget. So, from, you're probably, the additional headcount will be sort of incremental in either area, but there are other savings that we expect to incur that will effectively make a lot of this headcount self-funding. So, as we look at the $15.2 million of operating expense that we registered in Q3 of this year, we talked about September annualizing at $55 million, so call that $13.8 million on a quarterly basis. I think this sort of mid-teens type number is reasonable, kind of called $15 to $17 million in Q4, and then something similar to that throughout 2023.
spk02: Great. That's super helpful. I just had one kind of more clarification point of clarification on the headwind from supply chain or supply chain headwind next quarter. Was it $100,000 impact in third quarter and then an additional $300,000 in fourth quarter or $300,000 for the whole year?
spk10: It'll be in a range for the full year. We said over $300,000 for the full year. The $300,000 to $100,000 and then $100,000 in Q3, and then over $300,000 for the full year. I can't really put a ceiling on it, though. I would say the number could be closer to actually $400,000 for the full year, so $100,000 in Q3 and $300,000 in Q4. Go ahead. Sorry.
spk02: Sorry. Was that expected to continue into next year, in the first quarter of next year, or throughout the balance of the year to some extent?
spk10: That is a very tough question for us to answer right now. The supply component in question, we are expected to get delivery of that by the end of this year. However, as you've heard probably from others, supply chain commitments on deliveries have not all been met as expected. So if everything unfolds as we see it today, then we would be able to get these supply chain commitments dynamics resolved exiting this year. And you might see some lingering impact in January, just depending on how long it takes us to manufacture a product, go through sterilization, and then ship out to fill existing orders. But based on what we know today, we would expect this to resolve heading into next year. But I would also just cautious that by saying the supply chain environment has been relatively unpredictable, so we're watching it closely, but that's the latest information that we have.
spk02: Perfect. Thanks so much.
spk05: Thank you. One moment for our next question. And it comes from the line of Phil Coover with Goldman Sachs. Please proceed.
spk08: Thanks. Good afternoon. Thanks for taking the questions. I think just one compound question from us. The sequential step up in 4Q that's implied in the updated guidance today. Just hoping you can kind of give us the components of what gets you there. I heard an element of understocking or a lack of stocking that occurred in 3Q on the utilization side and then didn't hear a specific comment about the capital environment, which you guys called out last quarter. And so just wondering if you can comment on the funnel and sort of qualitatively on what's going on from a capital standpoint, please.
spk10: Thanks. Thanks, Phil. So a couple of things on the sequential step up. So firstly, there probably was around $200,000 to $300,000 of revenue that we shipped very late in the quarter that did not get delivered until the fourth quarter. And the way we recognize revenue, we don't recognize revenue until products are delivered to a customer. So that was, I would say, timing of orders and Given the size of our revenue base, that is a significant impact on a quarter-to-quarter basis. So, that revenue we have recognized here in Q4. We also have executed three new installs here in the U.S. with associated stocking orders that on all three of those, we would, are pretty high-volume users, and we would expect to see reorders exiting the year. We are counting on some capital here in Q4, one of which we were a small number of capital conversions here in the U.S., one of which we executed, one of which we got approval on today. And then we are also expecting incremental orders out of our business in Europe on a quarter-to-quarter basis as some of the typical Q3 seasonality work through the system here. So does that help on the 3Q to 4Q ramp?
spk08: Yeah, that's great. Thanks for taking the question.
spk10: And then on the capital environment, it's still very challenging. I would say it is no more challenging than we had articulated on our last call, but the time and administrative burden and back and forth around capital contracts is very, very lengthy right now. And that could be a reflection of the fact that we are an early stage company selling a product for a very specific category. But at least if I compare the capital environment that we face today versus a year ago, it is definitely more challenging.
spk05: Okay.
spk08: All right. That's helpful. Thanks.
spk05: Thank you. And as a reminder, to ask the question, simply press star 11 on your telephone. One moment for our next question. And it comes from the line of Javier Fonseca with Spartan Capital. Please go ahead.
spk04: Good evening. Hello, David and Takeo. Thanks for taking the call. So quick question on the gross margin. On top of the unbearable manufacturing variances mentioned in the press release, what expectations can you share for gross margin going into 2023 in the midst of, again, these variances and the continued restructuring and streamlining of the business?
spk09: Thank you, Javier. I can take this one. So in regards to the gross margin initiatives, we're really focused on three critical work streams, as we discussed, reducing our overhead, improving our yields, and are streamlining our manufacturing processes and also designed for manufacturability. So in 2022 this year, we've reduced our manufacturing overhead by over 35%, which we expect to roll into our standards next year. We are incurring a significantly less amount of manufacturing and unfavorable manufacturing variances this year than what we carried into this year as well. And also we're really making strong progress in improving our yields, and reducing our manufacturing process fees. And so with those, going into 2023, we previously stated around a $3 million steady revenue on a monthly basis to get to positive gross margin. With the improvements that we've been making, we're projecting a steady $2 million of revenue a month to get to a positive gross margin.
spk04: Excellent. Great insight. Thanks for taking my call. My question. Thank you.
spk05: And with that, ladies and gentlemen, we conclude our Q&A and program for today. Thank you for your participation, and you may now disconnect. Good day.
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