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Quotient Ltd  (NASDAQ:QTNT)
Q3 2019 Earnings Conference Call
Jan. 31, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

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'd 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 -- Chief Financial Officer

Thank you, Rob. Good morning, everyone, and welcome to Quotient's earnings conference call for our third fiscal quarter ended December 31st, 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 US 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 31st, 2019, and Quotient assumes no obligation to publicly update these forward-looking statements.

With that, I'd like to turn the call over to Quotient's Chief Executive Officer, Franz Walt.

Franz Walt -- Chief Executive Officer

Thanks, Chris. So this quarter represents the third in my tenure as 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 derisked and we are today also in the best financial situation in the existence of the Company. It's a new and compelling approach to testing and I believed when I joined and continue to believe today that MosaiQ will earn its place in in-vitro diagnostics. For me the question is not if, but rather when we will have the breakthrough. For this reason, we focused on a program of operational and development execution over the last nine months that would facilitate 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 reprioritization 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. This success in turn led by end of July to the exercise of $48 million worth of outstanding warrant.

In quarter two, the team built on this achievement to successfully complete three critical facility audits by our regulators, enabling all the reagent manufacturing at our new ARC facility in Scotland and MosaiQ microarray manufacturing in Switzerland. We also completed the steps required to CE mark the MosaiQ instrument and the work(ph)required to support the CE mark submission for our first IH microarray by the end of the quarter. We also took the opportunity during the summer to answer the question, what other areas in diagnostics might benefit from MosaiQ to enable flexible and cost-effective disease screening. As I expected this has turned out to be a very effective technology for immunoassay and molecular diagnostics disease panel testing. You can argue that whenever you want to do multiple tests in what we call disease panel, especially if those tests need to be done on different modalities like immunoassay test and (inaudible) MDx test, you would have a workflow and with that a cost advantage if it can be done with one single technology.

One way of saying that is that we believe our proprietary multiplexing microarray technology allows for multiple tests across different modalities and has the potential to transform transfusion diagnostics and beyond in the much larger laboratory diagnostics market. Examples could be specific panels for allergy, autoimmune disease, infectious disease, women's health or transplant medicine among other. There are fundamentally two ways to approach these longer-term opportunities, either through organic development or through partnership, matching a partner's existing diagnostic markets with MosaiQ elegant platform capabilities.

In the third quarter, we moved to the development phase of our first serological disease screening microarray to closure. The critical last step 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 proof 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 restructuring 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 through the sale of ordinary share in a secondary offering. In a turbulent market, the level of interest in our Company by investors was encouraging, and they 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's team ability to execute.

So after three quarters we have completed two or three things, we need to start commercialization. The manufacturing site for MosaiQ is now ISO 13458(ph)certified. In addition, we have the MosaiQ instrument CE marked. The CE marking of the initial IH microarray is the last missing piece.

In the past, we have told you that we assume up to six months review time. This might be tight as recently we have begun to hear from our network in the industry that review times are tending to be a bit longer than in the past. This is due to an increased workload at the notified bodies as they work with other companies who transitioned 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 commercialization before end of the first half of calendar year 2019, as previously communicated.

In parallel, we have also advanced our menu expansion plans, including preparing to move our expanded IH microarray into its verification and validation phase. This is the last step in development before commencing that microarray's US and European field trials. So, recent development data from 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 its regulatory phase. This expanded IH microarray is designed to deliver significant customer value through simplification, standardization and automation, and is expected to replace the initial IH microarray, which will be used with the European hypercare launch planned for later this year. This expanded version can not only automate what is already automated today, but in addition replace a lot of manual work and does add significant value to the customer operation.

Other menu expansion initiatives include the European field trial of our first SDS microarray, which has commenced. I could not be prouder 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 diagnostics, but also their ability to come together as a team and to focus on confidently overcoming challenges to achieve their shared goal.

We have also moved forward 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 novel sample amplification module, which we plan to put in the hands of a third-party researcher for further study and evaluation later this year. This will permit us to publish independent clinical results using our innovative low-cost multiplexing approach to molecular disease screening, also later this year.

So moving forward, we continue to anticipate the following milestones over 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 deliver V&V data for our expanded IH microarray in the first half of 2019. We plan to have 24 tests, that's including test for antigen typing, antibody detection, and reverse grouping on this expanded version. With this menu expansion MosaiQ will represent a compelling alternative to the current combination of high throughput devices with limited menus and moderate throughput or manual techniques used today. So importantly, it will come with 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 as the precursor to 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 screening microarray.

So with that, let me hand over the call to Chris Lindop, our CFO. Chris?

Christopher Lindop -- Chief Financial Officer

Thank you, Franz. I'm happy to report that the 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 US of certain rare antisera 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 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 currently 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. And 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 31st. 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 15th of 2024, revise the principal amortization schedule to delay by two years, the initial redemption of the senior notes, which is now set to commence on April 15th of 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 up to an initial -- an additional -- excuse me -- $25 million aggregate principal amount of senior notes following our European CE marking of the initial MosaiQ IH microarray.

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 31st, 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 operating loss is $75 million to $78 million, and includes increased investments in our planned development goals. Estimated operating 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 -- Chief Executive Officer

Thank you very much, Chris. So, as we think about our plans for the next four quarters building on the successful completion of our MosaiQ manufacturing system and device approvals, it's now all about validation and approval of our planned menu expansion. This will start with the 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 mark and later FDA submission for our first SDS microarray. So near-term expansion plans also include our expanded IH microarray, which recent development data clearly show -- sorry -- for which recent development data, which we shared today supports our plans to move to US field trials in the first half of 2019, and to use data from our US field trial in combination with a bridging study to facilitate the submission for EU CE mark in the second half of 2019. With a combination of an expanded IH microarray together with the initial SDS microarray will give us a 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 screening capabilities sharing independently derived evaluation data later this year.

So in summary, we've 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 modality. 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 the tremendous contribution toward the continued success of Quotient. I will now ask the operator to begin the Q&A session please.

Questions and Answers:

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 Jefferies. Please proceed with your question.

Brandon Couillard -- Jefferies -- Analyst

Thanks. Good morning.

Franz Walt -- Chief Executive Officer

Good morning, Brandon.

Christopher Lindop -- Chief Financial Officer

Good morning.

Brandon Couillard -- Jefferies -- Analyst

First, with the extended antigen data that you presented this morning, looked pretty clean on the surface, anything unusual that -- which 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 some V&V data ready to present?

Franz Walt -- Chief Executive Officer

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.

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 '19.

Brandon Couillard -- Jefferies -- Analyst

And then 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 proof points for the viability of the molecular in there?

Franz Walt -- Chief Executive Officer

I think that everything we have seen is that it really works on the bench. All the data are extremely good. So, we're pretty confident. And of course, we would like to have now an external validation, that's why we give it to a third party conducting a clinical trial, and we assume, so mid-2019, we will be able to show you the results, which is then a validation that it works for molecular disease screening. I mean, our impression is a little bit that we started out with immunohematology, 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 screening. So, it's going very well, and I think also the ability on our capability with the microarrays is improving as we go along. And one example I can throw here in this the individual spot performance improved significantly. So for IH 1, we were very limited to one set of analysis parameters for all the spots. With the IH 2 and beyond, we have the ability to apply individual and specific analysis parameters to each spot giving us more flexibility to adjust the performance of the individual test, but this is a part of our learning and continuous improvement from IH 1. So, we started out with very good results, that's why we went for a CE mark submission, but it looks like as we go along over the month, we learn more about the technology and it's just improving, getting better. I'm very confident with molecular and SDS to answer your question.

Brandon Couillard -- Jefferies -- Analyst

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

Christopher Lindop -- Chief Financial Officer

We're still in the range, but it's sort of the high-end of the range. If you take out 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 $5 million and a little over $5 million. Obviously, we have debt service, but that's limited to interest, and that because of the refined redemption terms on the senior notes takes us well out into 2020, in our current planning.

Brandon Couillard -- Jefferies -- Analyst

Very good. Thank you.

Operator

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

Josh Jennings -- Cowen & Company -- Analyst

Hi. Good morning, gentlemen. Congrats on some nice -- continuing nice progress.

Christopher Lindop -- Chief Financial Officer

Good morning.

Franz Walt -- Chief Executive Officer

Thank you, Josh. Thank you.

Josh Jennings -- Cowen & Company -- Analyst

I was hoping(ph)you 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 that notified bodies have a bigger workload, due to the medical device regulation review times are a bit longer. Is there anything else you can share, I mean, in terms of your dialog with a notified body? Have there been any (multiple speakers) just wanted to -- yeah -- but you reiterated the (multiple speakers)?

Franz Walt -- Chief Executive Officer

Yeah, absolutely. So, maybe for those who are not familiar with the topic, just a quick explanation. Maybe some of you know that and maybe others not. So 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 -- medical device safety and effectiveness in the EU market, but it's 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, so that's two years later for IVDR, which stands for In Vitro Diagnostic Regulation, it was also a directive and it's now changing to a regulation. As a result of this change, the notified bodies have an additional workload during this transition period. This is due to the performance of early audits for auto 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 processes as well, which altogether seems to slowdown the review process. So for us, personally we are in intense dialog with the notified body and there is 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 this might take a little bit longer, because of the extra workload, but we don't know whether it takes longer. We assume six months, maybe we get there, but for us it's a couple of weeks earlier or later, it doesn't change anything. And we're pretty confident that we get the CE mark.

Josh Jennings -- Cowen & Company -- Analyst

Thanks for that. And just to expand on Brandon's question about the antigen typing panel menu. It looks like you brought into the floor 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 into the future, does that menu continue to expand or how should we be thinking about other of the more rare families? Are these necessary for the (multiple speakers).

Franz Walt -- Chief Executive Officer

No. 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, roughly 12 tests. Everything beyond the 12 tests is done manually, very lengthy, tedious manual work. So with 24, we have a significant advantage over everything out there, but there are also diminishing returns. If you go more, more, more rare type of tests 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 that 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 yet maybe an oversight, so I think it's a better product, and it's also a much safe product. So with respect to the press release, we are only showing there the antigen typing menu, which is 20 antibodies, but it represents 22 tests and we have also deliver(ph)scoping and antibody detection that represents two more tests, that's how it comes up to 24.

Josh Jennings -- Cowen & Company -- Analyst

Fantastic. That's helpful. And just on the SDS field trials you guys have moved forward with, just wanted to be clear, you instituted field trials in the US, is that what I heard and any (multiple speakers)?

Franz Walt -- Chief Executive Officer

No. In Europe.

Josh Jennings -- Cowen & Company -- Analyst

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

Franz Walt -- Chief Executive Officer

US cancelled. I mean, that's also with the IH 2. For the SDS, we do now the field trial in Europe, we started already a field trial in Europe. And then once we have the data, we move from there and we do another trial then in the US. So the priority first is Europe CE mark, then test in the US 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 US. We do a bridging study in Europe and submit then for both -- approval for both EU and FDA.

Josh Jennings -- Cowen & Company -- Analyst

Thanks for that clarification. I thought I misheard and just wanted to make sure. And then -- and just on the US 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 US?

Franz Walt -- Chief Executive Officer

Yeah. I mean, they are two players, 90% of the potential. So, you can assume they're for sure main players. And I think 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 the ability to pull it through and all that. But we're very confident, we're in dialogue with them but we're not at the liberty to 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 with a very high credibility and everything.

Josh Jennings -- Cowen & Company -- Analyst

Excellent. Great. And just last question. This commercialization plans in Europe with CE mark on the cusp here, any evolution, are you still planning to place MosaiQ systems in most centers and any update just in terms of the sales force buildout understanding that it is a concentrated market? Thanks for taking the questions.

Franz Walt -- Chief Executive Officer

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, the vast(ph)majority of the business opportunities are tender. And they just had an IPO just the other day and it's a wide time range, some are a little bit fast or some are taking longer. But I would say the rate of average is 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 yeah, I would always like to compare it with the train, it's quite slow to leave the station but once it gets some speed, it's unstoppable. If that answers your question.

Josh Jennings -- Cowen & Company -- Analyst

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

Franz Walt -- Chief Executive Officer

We're ready, ready to go.

Josh Jennings -- Cowen & Company -- Analyst

Ready to go, great. And then the capital sales (multiple speakers).

Christopher Lindop -- Chief Financial Officer

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

Josh Jennings -- Cowen & Company -- Analyst

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

Franz Walt -- Chief Executive Officer

Yes.

Josh Jennings -- Cowen & Company -- Analyst

Great. Thanks a lot.

Operator

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

Sung Ji Nam -- BTIG -- Analyst

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 there are several months probably for validation before you start to see a 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 -- Chief Financial Officer

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 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 serious revenue generation first in Europe with IH 2 in combination with SDS 1. And I think because of the nature of the beast SDS 2, when it comes along later in the development cycle, will simply replace SDS 1 and unlock almost the incremental revenue stream that would -- with almost nominal incremental costs, because you're expanding the menu from two to nine disease states or tests. So, we could speculate, but it is very much going to depend on when we get our first quarter of revenue and then which country when and which we don't. What we know is that a large number of the accounts, probably close to 90% of the accounts that are in our target group for the first year have expressed interest in participating in the self-launch, which is a precursor to any closed tender process. And we're tracking that very carefully, but I just don't want to give you...

Franz Walt -- Chief Executive Officer

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 hand. So, it doesn't make sense to have a kind of a top line growth for the field force, because for me the only think that counts is are they trying it out, are they using it and once they're familiar with it and we come with an attractive menu, then the adoption is faster then waiting to have menu completed. So, the instrument is validated, they know how to handle it, they have confidence in it. So, for me getting into the account 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 Ji Nam -- BTIG -- Analyst

Okay. Great. That's helpful. And then, just a quick one on -- I appreciate all the color around the medical device regulations in Europe, I 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 -- Chief Executive Officer

Yes. So, we're looking there and also what alternatives we have and of course Brexit is also a little bit of moving target, sometimes a bit more sinister and losing the pace and then it looks brighter again. So, we are checking already parallel all the options we have. And what would -- yeah, and 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 timely manner through 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 to -- just a short-term short notice to increase staffing. So, it's not like you move to another one, they have plenty of time, yeah, it's -- you carry the problem over. And with Brexit and with Prexit(ph), yeah, we're very close to that.

Christopher Lindop -- Chief Financial Officer

Yeah, and developing.

Franz Walt -- Chief Executive Officer

(inaudible)

Christopher Lindop -- Chief Financial Officer

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

Sung Ji Nam -- BTIG -- Analyst

Great. Thank you. And congrats on all the progress you're making.

Franz Walt -- Chief Executive Officer

Thank you. Appreciate it.

Christopher Lindop -- Chief Financial Officer

Thank you very much.

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 -- Chief Executive Officer

Yes. Thank you, everybody, for joining us on this call today. So, Quotient continues 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.

Christopher Lindop -- Chief Financial Officer

Thank you.

Operator

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

Duration: 42 minutes

Call participants:

Christopher Lindop -- Chief Financial Officer

Franz Walt -- Chief Executive Officer

Brandon Couillard -- Jefferies -- Analyst

Josh Jennings -- Cowen & Company -- Analyst

Sung Ji Nam -- BTIG -- Analyst

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