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Thank you for standing by, and welcome to the ImpediMed Limited 4C Conference Call. [Operator Instructions]
I would now like to turn the conference over to Dr. Parmjot Bains, Interim CEO and Managing Director. Please go ahead.
Thank you. Good morning, and welcome to the ImpediMed Investor Call for the Second Quarter of Fiscal 2024. My name is Parmjot Bains. It's good to meet you all virtually. I've been recently appointed Interim CEO and Managing Director of ImpediMed. And with me today is McGregor Grant, who is the Interim CFO and Executive Chairman of the company.
I'm sure as much of you are aware, McGregor and I are appointed to our respective executive roles at ImpediMed at the end of November 2023. And I only commenced on the 8th of January this year. So this is still very early days for us.
What I would like to do on this call is, firstly, introduce myself and provide a bit of background on my experience in life sciences and in the health care industry in which I've been working for the past 30 years. Secondly, while I have only been with the company for just over 3 weeks, I have spent much of that time talking with staff, visiting members of the ImpediMed sales team and talking with customers across the United States. In light of this, I would like to share some of my initial observations and impressions on the commercial opportunity for SOZO in the U.S. and also on what we need to do to execute on this opportunity.
Finally, I will hand over to McGregor to go through the Appendix 4C and Activity Statement for the quarter ending 31st of December 2024, which were lodged with the ASX yesterday morning. After this, we will open the line for questions.
So first, a little background on myself. While I initially trained and practiced for several years as a medical doctor, the majority of my career has been focused on the business side of the health care industry. Over the past 8 years, I have held a range of executive roles with the global pharmaceutical company, Pfizer. These roles have included, most recently, overseeing multiple product launches; managing a large sales and marketing effort across 6 countries and 6 therapeutic areas, including oncology; working with health care distributors and channels and navigating the reimbursement landscape. During my time at Pfizer, I also held senior global roles across Pfizer units overseeing business development and marketing in our Asia Pacific region and Global Alliance initiatives across Pfizer's portfolio.
Prior to Pfizer, I worked at the George Institute where I was responsible for the commercialization of global public health products in the cardiovascular space. I've held CEO roles with 2 biotechnology companies, including Nueren Pharmaceuticals, which has recently enjoyed considerable success with the development and commercialization of its drug for rare neurological conditions for which I was involved in the very early clinical development stages. And I have spent 4 years as Engagement Manager with McKinsey & Company.
I believe this background has provided me with the depth and breadth of experience that is well aligned with what ImpediMed needs at this time in order to take advantage of the considerable commercial opportunity available for the SOZO system. I am very familiar with the challenges involved in launching products into the health care system, the complex process involved in selling products to hospitals and other health care customers which, in turn, highlights the need to have a very clear and well-thought-out go-to-market strategy and execution in order to be successful.
Now on to my first impressions. While I've only been with the company for just over 3 weeks, I have spent much of that time having in-depth discussions with staff at ImpediMed and talking with over 16 current and potential customers across facilities throughout the United States. In addition to spending time with the team in Carlsbad, I met up with our field-based colleagues, sales and clinical product support colleagues and customers in Dallas, Boston, Rhode Island, New York, Connecticut and Denver.
I would like to start by saying that when I was first approached about joining ImpediMed, I could immediately see an attractive and unique opportunity for bioimpedance spectroscopy as a way to improve the management of a range of medical conditions, including cancer-related lymphedema. Furthermore, it was clear that ImpediMed's SOZO system was unique in providing actionable insights from this technology in a differentiated and clinically validated manner.
I've spent the last 4 -- 2 weeks talking with both members of ImpediMed sales team and, as I said, 16 customers who are existing users of SOZO system in breast cancer. I would talk with interested customers and also world-class researchers who are very interested in working with us to collaborate on new indications. I heard from surgeons who are breast cancer and lymphedema survivors and the patient stories of how this technology has impacted their care. And I have come away with an appreciation of just how much the medical community values the insights this technology provides, the impact of this technology can have to optimize patient care and as a consequence of how significant the commercial opportunity for this technology is. I am genuinely very excited by the opportunity we have in front of us and with the prospect of bringing my experience and expertise to ensure rapid and effective execution to positively impact more patients' lives.
As you are aware from the previous presentations, and you will hear from McGregor in the quarterly update, we are finally starting to get momentum with reimbursement coverage for the use of SOZO across the U.S. Following the inclusion of bioimpedance spectroscopy and the NCCN's oncology survivorship guidelines last year, we remain confident that we will have over 85% reimbursement coverage across the U.S. by the end of this financial year. This is a terrific milestone because without reimbursement coverage, it is very difficult for clinicians to adopt any technology or product for their patients in the U.S. For most sites, revenue neutrality or generation is critical. So reimbursement does play an important role in the adoption process.
However, while reimbursement is a requirement for adoption, it does not in itself drive adoption. There is work to be done on increasing our revenues and patient reach. This is where the company really needs to take charge and develop a deep understanding of the market, educate customers and understand their internal needs and processes. The company then need to use this insight to refine the go-to-market model and [ encourage ] sales and clinical implementation efforts to execute on the strategy.
In view of this and reflecting on the conversations I have had with the ImpediMed team and the customers, there are 3 key areas the company needs to focus its energy and efforts in the coming months, and we have already accelerated this work in the past 3 weeks.
Firstly, it is critical that the company gets a much deeper and granular understanding around the customers for the SOZO system and the total addressable market opportunity that they represent. I know the company has done some work in this area in the past. But based on my previous experience, this is an absolutely critical step for developing an effective sales and [Technical Difficulty] going to have the greatest impact on the successful rollout and commercial adoption of the SOZO system. We have already identified 11 top states that we want to focus on, and these are all expected to achieve critical mass reinvestment in the very near term.
Even within these states, we need to segment our customers and target and support the IDNs and health care facilities and clinicians that are considered clinical practice leaders that offer the greatest commercial potential and have the infrastructure to support rapid adoption through sales and marketing strategies. It is critical that we build out a robust pipeline fast.
This covers the expansion of adoption at existing sites and building a robust pipeline of leads for future sales. The focus here has to be about putting the right efforts into the right customers at the right time and monitoring this closely. We are working very hard on generating this data and ensuring this happens.
Finally, we need to make sure that the execution of our go-to-market model is best in class. I will bring my experience from managing multiple new product launches and optimizing the go-to-market model in my last role at Pfizer to ensure that our efforts have the best chance to deliver commercial success. This includes optimizing lead generation, nurturing the pipeline of opportunities and renewals through the faster execution. We have a long sales lead time. We need to simplify the sales and device implementation process, streamline the go-to-market operating model and tools and most importantly, track progress.
In my last role, I grew a flat business to double-digit growth in 18 months through effective execution of the go-to-market model and back to the basics. With such a compelling product and engaged team, I am confident we can do this at ImpediMed. Urgency and execution is critical being very cognizant of managing the cash burn rate.
Before I pass to McGregor to provide an overview of the last quarter, I would just like to reiterate, in the short time that I have been at ImpediMed, I am convinced that we have a very attractive opportunity available to us. And already, I can see ways that the company can become much more effective in realizing this opportunity. This is a very exciting time for ImpediMed, and I'm looking forward to leading the company in the next stage of its journey.
Now over to you, McGregor. Thank you.
Thank you, Parmjot. I would now like to go through the highlights of the Activity Statement and the Appendix 4C for the second quarter of FY '24 that was lodged with the ASX yesterday. As part of this, I will also describe a couple of changes in the way that we are reporting our financials in this quarter and going forward.
During the quarter, ImpediMed recorded unaudited revenue of $2.3 million compared with $2.5 million in the quarter ended 30 September 2023. The company sold a total of 37 SOZO systems during the quarter, of which 13 was sold in the U.S. This compares with a total of 20 systems sold in the preceding quarter, of which 19 was sold in the U.S. As foreshadowed, there was no revenue recorded from the clinical trial program conducted by AstraZeneca during the quarter, which compares with the $0.1 million that was recognized in quarter 1 FY '24.
The value of new contracts signed during the quarter, which we refer to as total contracted value or TCV, was $1.6 million compared with TCV of $2.4 million signed during Q1 FY '24. Before I go on, I would like to outline a couple of changes that we've made to the way we recognize revenue, which we believe provide a better representation of the business.
First, previously, the company separately reported revenue associated with the initial sale of SOZO Systems as device revenue, and the remaining revenue associated with each contract was reported as recurring subscription revenue. For this and future periods, we are not going to recognize any revenue specifically associated with the initial installation of the SOZO system. In the U.S., rather, we will report all revenue associated with each contract as revenue from contracts with customers. Revenue from the sale of devices outside of the U.S., which typically is not associated with an ongoing subscription revenue stream, will be recorded at the time the sale is completed.
Second, many of the contracts are based on annual increases in the monthly subscription fee to reflect the anticipated greater utilization of the system and the increased reimbursement amounts that customers could potentially claim over time. Previously, the amount of recurring subscription revenue was reported in each period, reflecting this increased pricing over the life of each contract. In this quarter and in future periods, the revenue from contracts with customers will simply be recognized as equal monthly amounts over the term of each contract.
So I'd just like to walk you through an example of this. If we had a contract for $72,000 over 3 years, previously, we would record revenue in the first year of the initial installation of the SOZO system along with 12-month subscription of revenue at a lower 1-year rate -- year 1 rate, followed by 12 months at a higher 2-year rate and then followed by 12 months at an even higher year 3 rate.
Under the new approach, we will simply recognize revenue of $2,000 per month for each of the 36 months of the contract. We think this is a much simpler approach, and it will make it easier for shareholders to understand how our revenue pipeline is evolving.
With this change, we will only provide an annual recurring revenue number for the forthcoming 12 months. Previously, the company separated -- provided an ARR for the second 12 months of the contracts that were in place. However, under the new approach, these numbers should be more or less the same, other than for contracts that conclude or are not renewed in the second 12-month period.
I note that the change in the way we report revenue was made in Q2 FY '24, and the net effect of that change did not have a material impact on this quarter's results.
I'll now provide an update on the expansion of reimbursement coverage in the U.S. As announced in November '23, UnitedHealthcare, the largest private payer in the U.S., updated its commercial and individual Exchange Medical Policy Omnibus Codes policy to state that bioimpedance spectroscopy, or BIS, for lymphedema assessment, CPT Code 93702, no longer requires clinical review. The removal of the requirement for clinical review is referred to as silent coverage, and this policy came into effect in January 2024.
Medicare in the U.S., along with 38 other private payers, currently provide silent coverage for CPT Code 93702. In addition, there are 13 private payers that have published positive medical policies. This compares with the end of Q1 FY '24 when 27 private payers were providing silent coverage and 12 private payers had published positive medical policies.
Following the changes to the way policy decisions are implemented for members of the Blue Cross Blue Shield Association, which we described in our -- as part of our last activities report, the company expects approximately 85% of private payers in the U.S. will be providing coverage for the use of the SOZO system for lymphedema by the end of FY '24.
With the updated policy from UnitedHealthcare, along with other private payer policy changes that have come into effect since the inclusion of BIS for lymphedema assessment in the NCCN guidelines, there are now 13 states in the U.S. that have achieved critical mass.
The company defines critical mass as having greater than 80% of the population covered for reimbursement by either Medicare or private payers. The company has identified 11 states as being high priority from a commercialization perspective based on potential patient population, medical leadership in lymphedema prevention and payer coverage. And of these, 7 states have already achieved critical mass. The company believes that all 11 high-priority states are likely to achieve critical mass by April 2024.
So to conclude, I think we are in a very good position with respect to reimbursement coverage in the U.S., which is a really important requirement for adoption. As Parmjot said earlier, our job is now to make the most of that reimbursement coverage by developing a well-thought-out go-to-market model and to execute.
So with that, I would now like to open up the call for any questions.
[Operator Instructions] Your first question comes from Shane Storey with Wilsons.
Thanks for that example, McGregor, there on the new revenue recognition. I had a couple of questions there from the customer perspective. Will they see any change themselves? Or would they still see, let's say, an annual step-up in pricing or rates? And then what we'll see then is perhaps a small difference between, say, recognized revenue and cash receipts. Is it as simple as that?
Yes. That's exactly right, Shane. At this stage, we don't expect that the pricing to customers is going to change, although that is something that we are continuing to review. And I think as reimbursement arrangements change in states that impact the discussions we have with particular customers, that may change. But initially, this step-up pricing model will continue from a customer perspective. But as we've said, the revenue recognition will be spread evenly over the time. So it's really just a time difference between perhaps when we invoice and receive the cash and when we actually book the revenue.
Second and last question. I'm going to let you off the hook a little bit on TAM reestimation, but what I will get some thoughts on maybe is -- I mean when you look at, I guess, the company's previous statements around TAM and you sort of embark upon your own process to sort of go through and get your own numbers. I mean what areas are you focusing on? What do you sense is -- I mean if there's gap analysis anywhere, I mean, where do you see the early parts of your inquiry will sort of focus on, please?
You're a little difficult to hear there, Shane. But I think your question is around TAM and what -- how we're thinking about that differently as the company has previously indicated what a TAM number is. And that perhaps is based on more of a sort of a top-down view of what the potential TAM could be. We have data now that gives us a lot of granular information around diagnosis and procedures at quite a granular level. And we're now looking at it from a sort of a bottom-up approach, and we're going to triangulate all of this and think about what realistically makes sense.
The TAM that the company has previously talked about covers not only -- it covers all forms of lymphedema or lymphedema coming from all forms of cancer types. And so within that TAM is the breast cancer piece of it. So I guess that's kind of the high level of how we're thinking about it. But we need some time to really pull us apart, and then we will come back with a more considered view of where we -- how we see the TAM and what our initial areas of focus will be.
Yes. And just to reiterate, we do have indication and reimbursement for all of those lymphedema. So therefore, while U.S. breast is the focus, there is considerable opportunity in those other indications. So we are going to take that -- look at the whole cancer-related lymphedema space, make sure we understand that clearly.
Your next question comes from Elyse Shapiro with Canaccord.
Can you just run through what the sales force looks like at the moment in terms of numbers and what they're doing in those kind of key 7 jurisdictions at the moment as well?
So right now, we've got 10 key account managers who are supported by 6 clinical implementation leads. Right now, they are spread across the United States and territories. But with this focus on the 11 priority states, we're working on just making sure we drive focus on specific customers. So we're right now going through an exercise in customer segmentation and then focus that we can really drive both our pipeline and our current commercial implementation.
Great. And then just looking at those 10 reps, how many hospitals or sites do you think each of them can kind of target on an annual basis?
That's what we're working on giving them targets on. That level of detail is the granularity that we need to develop as part of our go-to-market strategy and implementation. Because what we've got is 10 we'll target at one point, but we also need to ensure we've got lead generation appearing through our marketing efforts as well. So they will filter down and funnel through.
[Operator Instructions] Your next question comes from [ Ian Hyde ], who is a private investor.
On behalf of shareholders, welcome. And I do actually have a raft of questions, so if you can bear with me because I know a lot of people are interested in these things as well.
Staff losses. Since you've taken over in the last couple of months, has there been any senior staff or executives that have left the business at all?
Other than the ones that we've announced, no.
Okay. Great. So is it then safe to assume that as far as the day-to-day business operations and what's been happening, it's just been going along as standard without any disruptions, obviously, now subject to what changes that you'll be putting in place. Is that a fair statement?
I think that's reasonable, yes. Clearly, there's been a bit of noise as a result of all the changes. But what we've observed is that the team has continued sort of business as usual throughout this time. And of course, as Parmjot said, that we will be reviewing the opportunities to optimize the way we're organized and to align around the sort of the new go-to-market strategy.
Okay. You've mentioned about leveraging into group master corporate IDNs. I don't know if you can answer this or not, but up until now, has the company been doing anything in that regard?
Absolutely. So IDNs, from a company perspective, they have been looking at, and I think there were 20 MSAs signed for the IDNs, which clearly is an opportunity. I think it's an area where we can focus more because clearly they are large networks and now with reimbursement, if we could get some of these across the line, it will generate significant revenues. So it is an area that we are actually going to look at focusing and prioritizing [ results ] around to execute on this.
Okay. So not being an expert on the differences between the different ones, but an IDN, I assume, would be quite different to a group or a corporate's contract? And then I'm talking about a group or corporate contract, they could be -- it's just a brand of hospital, for want of a better term, and they may have someone in senior admin or what have you that actually determines group or corporate policy around treatment and/or what's going on. Is that a standard difference or a possible difference? And if that's the case, could -- like if you could get a corporate contract, say, yes, this is what needs to happen that can then obviously assist in sales and populating through the system.
Yes. I think they all vary. We've got large IDNs like [indiscernible] who have got around 74 facilities across the United States. And so all the way down to maybe you've got the Yale-New Haven group, which has got 5 facilities. And so you've kind of got these large networks that operate across the U.S.
I mean, U.S. oncology is significant. It's got 4,430 facilities, while each one operates slightly differently. So U.S. oncology may want Texas breast to kind of go lead first or Texas oncology which wants Texas breast to lead. So they're all -- they've all got various different decision-making processes.
And so for us, it's really critical to understand and then prioritize those accounts and then have a very targeted approach because you're right, we may look at different offers for these depending on reach, reimbursement and interest.
Sure. Okay. So obviously, that's a major part of your project going forward.
Yes. Yes, absolutely. IDNs are absolutely critical for us. And there are smaller IDNs or networks within states, which will be part of a state's prioritization activity but definitely a focus at the national level.
Okay. So for the layman, can you explain if there's any real difference in the world regarding the difference between silent coverage and positive medical policies issued by insurers? Or it's just a term and fundamentally day-to-day operations and how the U.S. health system views that there's no real difference?
That's our understanding that there is no practical difference between policies that are positive versus policies that are silent. The important point is that the insurer will accept and reimburse when procedures are built under the code, the relevant code.
Okay. So we have jumped well and truly up the ladder of the level of coverage that we can sell into?
Yes, yes. It's a meaningful -- it's a very meaningful improvement in the -- over the last quarter or so.
Yes. And these customers, they definitely look at this. It's really critical because often clinics have to run their own P&L. So reimbursement is really key.
Okay. Well, that's a perfect segue to the next question. So is the difference between silent coverage and positive medical policies for reimbursement, is there any difference or it's the same? And what rates have you been able to achieve? Has it been the post $200-ish per test that has been achieved to date or...
The reimbursement rates are determined by the payers themselves. That information is not made public. And -- but the -- and does vary considerably from payer to payer and state to state. I think that the Medicare rate is around about $150. And the private insurers are paying a bit more -- quite a bit more from that. So -- but yes, the rates are -- certainly makes sense and consistent with expectations.
Okay. And you mentioned you had strong renewals. So can you give us any numbers around what percentage is happening there? And with the new renewals, what's happening with the contract price that they're renewing on?
There have been some renewals that have occurred during the quarter. I can't say whether or not I would consider them to be strong, but we continue to renew. And it goes back to the churn rate that is very low. So we continue to renew. And generally, when we renew, we renew at the rates that were in place for the third year of the contract that we're renewing or we are able to achieve some slight improvements in those.
Okay. And patient tests for the quarter?
Yes. So we're not really focusing on the number of patient tests that we're seeing the machine used on. Obviously, that's an interesting measure of utilization, but it's not actually the driver of our revenue. Our revenue is based on the monthly license fees that are charged. And those are charged regardless of utilization, but the rates at which those license fees are determined have some regard to the volume of procedures that will be there. So we're kind of steering away from focusing on that particular metric at the moment.
Yes. And the only -- just to add on those. Well, there are 3 opportunities for this business. One is renewals, one is expansion of existing sites, and the second one is new site generation for new sales and new sites. So we are making sure we have a focus on looking at those sites that have [ closed ] their devices to ensure that the utilization is enough that we can actually drive expansion. So it's one of the metrics, and we're actually putting a whole range of metrics into the business to just make sure that we can track to ensure that we get the expansion within sight.
Sure. Okay. And number of NCCN in sites. So we're getting close to getting 100%?
I don't have that.
Sorry, we haven't heard from that, [ Ian ]. I think it was significant. And we are looking at the sites we don't have to understand why. So it's a focus.
Okay. And lastly, because there, no doubt, will be frustrated people with all my questions, taking their time. Do you anticipate, as the momentum builds that the lead time, fingers crossed, should actually start to reduce from 6 months? I know it's probably going to be that initially. But as momentum with payers and everything else accelerates, do you see that coming down at all? Or that's a total wait and see?
No, no. It's a target because 6 months is a long lead time. So what we're working on, in fact, over this last week is looking at that sales process and then say where are the pain points? And then what do we need to do better to make sure we tighten that implementation process up? I mean, clearly, it takes -- they've got to get this hospital's IT systems, you've got to get contracting done. You got to get through legal. You've got to align on budget tree time lines and processes. So we're actually just going through the whole process flows now, both sales lead time, but also time of implementation with sales being made and then just deep diving into how we accelerate execution because it is key for these sites.
Okay. Well, I do have more, but I will go up to the next one.
Your next question comes from [ Greg Harrison ], who is a private investor.
I just wanted to -- the wording, obviously, that you're using today, I think, is quite positive. I've been in sales and textiles for about 25 years. So I think the execution focus on revenue sales. What are the -- in the discussions you've had with customers, what are the key objections you're coming across on -- that they're not expanding size or actually implementing sale of devices? I'm just interested because the sales obviously, for the last quarter, were pretty poor. So there's obviously some objections that customers are facing, and I'm just interested to understand that.
I think it's -- I haven't actually had a lot of objections. A lot of the people that have got the sites were positive, and I also have potential customers. For the potential customers that was -- that getting into budget cycles and having reimbursement was key because they have to show that they're revenue-neutral or revenue-generating.
That was -- I think the underlying belief in the technology is strong across the sites in the system. You're also putting in a whole lymphedema prevention model of care. And so really, it's being able to help the customer, all the doctors and the lymphedema therapist understand and how it's going to get put into their clinic.
So for example, what does the patient flow look like? Does the patient come into the breast cancer -- to the breast cancer surgeon and get the prescreening test on? And then how do they get those follow-up tests? So really, it's a lot of handholding at the moment to really help customers get this model of care and then patients being tested, which is why I think that immediate low-hanging fruit is really the expansion where you've got that model of care into systems and you've got more patients coming through.
Getting the renewals are the ones -- the new sites, sorry, the ones that are slightly more difficult just because you have to help them implement. And so we're just trying to standardize and streamline that process.
Okay. And do you think you're able to automate -- or I'm not going to say automate -- streamline that process over time? Or is it a handholding? Just because obviously with the NCCN guidelines, you thought, hey, the revenue will start flowing. But natural fact is there's a lot more hurdles in place that you need to get across.
No, I think it was streamlining because -- and we are -- as we put more systems and we have to streamline because we have to be able to scale this process up. So we are working on that and just making sure that all the materials out there for the key account managers so that the hospitals know how to implement.
And as you see, it's in the NCCN guideline. So it's really part of quality of care and standard of care. And so sites really are now going to come to us and say, look, we know we need to implement this.
Okay. So you're actually getting sites, you're hearing that from the site that this is impactful.
Yes. Yes. Yes. Absolutely. And we're getting surgeons outside of breast cancer, right? So because -- and node removals in melanoma. It's in pelvic cancers, it's -- lymphedema is affecting multiple patients. And so we are getting other sites approach us and sell into other indications.
Your next question comes from [ Miriam Lee ], who is a private investor.
Well, actually, some of my questions have probably been answered. I have begun to worry that some of the hospitals, et cetera, had decided they would be quite happy just to keep on with what they were doing, [ take measure ] or just panning out the pamphlet there and watch out the swelling and pain or whatever and wouldn't be bothered about the SOZO. But you feel that, that's not going to be the case, but it really hinges on the reimbursement and because you've only just got reimbursement in quite a number of states that there's going to be that delay that they're going to want to take it up when they can be guaranteed of getting paid for the test. Is that how you see it?
I think so. No, but we also do need to market and we do need to drive medical awareness and medical education. So it's just making sure that the messaging is getting out there. And so in the last 3 months, the organization hired a Chief Medical Officer, who is a former breast cancer surgeon. And so there's multiple strategies because we have to really -- we do have to drive awareness. Just because it's on the guidelines doesn't mean -- and the reimbursement means it will automatically get adopted.
So we are really focusing that sales, marketing, medical activities, medical education, peer-to-peer education around those priority states. We are a small company. So we have to focus and really see where we can drive priority states and IDNs.
Right. So you don't have the salespeople focus on the particular states where you feel it's going to make a difference?
Sales and marketing the medical as well because it's -- to get a clinician or health care provider to convert, you do need to have 5 to 6 interactions with them. So they'll need to get marketing material that means you go to conferences. So it's just creating that integrated omnichannel approach that make sure the messaging is getting out to the customers and then the leads are generated and then the key account managers can follow up through with execution.
Right. Just on the past, which is rather [ grant 13 ]. Does that include the 3 multisystem contracts, which apparently, according to the last quarterly, had stalled at the end of the first quarter and we expect it to close in the second quarter? Did they close?
One of the 3 has closed, but it closed in quarter 3, not in quarter 2. The other 2 are expected to close this quarter as well.
Great. So -- and how many systems will that encompass?
Yes. There's a total of around 9.
Well, that's certainly positive. Maybe I can ask anything more particularly useful. Yes. Okay.
Your next question comes from [ Lutz Stefan ] who is a private investor.
Yes. Two questions. Yesterday, according to the 4C, there was an exceptionally high costs regarding staff and admin. So about $7.5 million for the quarter or 2.5 per month on average. Where does this number come from? That looks way too high for me for, as you mentioned, a small company and the sales just were $2.3 million. How do you justify those costs?
Yes. Thanks, [ Stefan ]. So the run rate of staffing costs for the second half of FY '23 was about $4.5 million a quarter, and that's now stepped up to about $5.5 million a quarter. And part of that is driven by -- in that time, some new sales reps have been hired. We've hired a Chief Marketing Medical Officer. There are some one-off items in there around the payment of short-term incentives and so on. But it is partly to do with growing the number of roles that are in the business.
You make a point about the relationship between the costs that are being incurred and the revenue of the business. And I agree with you that there is an imbalance there. However, we do have -- for a company like ImpediMed, which is a regulated medical device business, there is a certain level of cost that you need to have in place in order to support the development and the marketing of a product like this.
However -- so the real challenge for this business is not so much to cut the costs, although that is something that we have a very keen eye on to make sure that we control, but really is to drive the top line of the business with the resources that we've got and to make sure that the resources we have are working in the most effective way possible. So the focus for us is really going to be much more around developing and executing on our go-to-market strategy rather than driving costs out of the business.
But as I said, we certainly are going to be keeping an eye on ensuring we don't let that one get away from us certainly until we are more confident about the top line growth that's going to flow. And as I said, there are a couple of one-off items that are in there, but that's kind of the run rate that we're going to be at.
Okay. Next question. Let's say, I'll just make it up. Your sales team is very successful. And suddenly, there's a huge demand, and you have to produce 1,000 units. Would you be able to scale up?
Yes. So the manufacturing is managed by a third-party manufacturer. So that's one aspect of it. And so they would have the capacity to scale up. A good problem to have, something that we sort of monitor fairly closely. We believe that the relationship that we have with that manufacturer will -- and their capacity and capability will allow us to scale up appropriately in the time frame that we have.
We're going to start having a much better visibility to our pipeline and knowing what demand is coming down the pipe so that we can respond to that appropriately. But I don't think at this stage, supply of the product is going to be a challenge for us.
Your next question comes from [ John Vincent ], who is a private investor.
I had similar questions to [ Stefan ], particularly in relation to ongoing other costs. And it seems to me that the company is recruiting at the moment, particularly in the West Coast. But in the last period, we actually had a small number of sales in the U.S. and a much larger number of sales hopefully. Are you able to tell me where the other sales occurred?
Yes. The -- as we said, the number of the 13 units sold in the U.S. and 24, I think, sold in another market. So the majority of those were in Australia, to the Australian distributor.
Right. Okay. And obviously, expanding the sales base means that the cost of that is going to be borne for at least probably half a financial period because your lead time is 6 months. So people coming on board and making sales are not going to recover the cost of them for some time. It's not going to be recovered within the 6-month period and probably not within -- maybe even in the next financial year. Is there a model on the intersecting of particularly labor costs as compared to sales revenues or projected sales revenues? You, obviously, have a forecast of sales, but we, as investors, need to know what the intersection time is going to be and what pain the company goes through in getting to that intersecting time.
Yes. You mentioned that you've seen some recruiting on the West Coast. There have been a couple of open positions that have happened as a result of a couple of departures of sales reps. So we are not increasing the total number of reps we have, which is the 10 key account managers and the 6 clinical support staff that we've got. So any recruiting that you see is just replacing -- is backfilling existing roles.
Our plan is, at this stage, is not to expand that team beyond where it is right now until we really get our go-to-market model working effectively and we've got a better idea of what's working, what's not working and make sure that the current resources that we have are directed to the most effective areas in terms of states and customers and the like.
So it's really just about optimizing what we have. And through that process, we will get a better insight as to what are the key metrics that we need to be measuring. So you're asking about sort of metrics and sort of breakeven points and all that kind of stuff. We're on a journey of figuring all that out.
Yes. It's a key focus.
Okay. And bearing in mind the revenue that's being generated per quarter compared to the cost of generating it, the company is losing a substantial amount of money per quarter. And obviously, there's a finite amount of money in the bank. But what objective does Board have in terms of endeavoring to ensure that the company is not going to go back and ask shareholders for more money?
Well, we are very keenly aware of that issue, [ John ], and very sensitive to it. And the changes that have been made are a response to the challenges the business has been facing. And so we're focused on taking -- leading the team to drive the top line to get the revenue going and get the cash in the door.
Yes, very prudent use of shareholder funds.
And how long do you expect that the driving of sales is going to actually have some impact on the company's red list? Well, because if you don't recognize revenue monthly, it's not going to be a large amount of money coming in because of a sale, you're going to be recording that per month. So yes, the sales...
Going back to one of your other questions...
Sorry?
Yes. No, I was just talking about jumping back to one of the earlier questions that was asked about the -- as a result of the revenue recognition change. That doesn't impact cash flow and doesn't impact the way we're billing our customers. The cash flow arrangements we have with customers, many of which are also billed monthly anyway rather than paying, say, a year or even 3 years in advance. That won't be impacted. So it's really just an accumulation. We just need to get the installed base up, and we need to get more SOZO systems out there generating revenue.
And the sort of target for sales of SOZO in the next 2 quarters, for example?
Yes, we're not disclosing any forecast at this stage.
Your next question comes from [ Michael Pin ] with [ Pin Steven Securities ].
I've got a few questions. Hopefully, there are quick answers. Is there any pushback from clinicians in the states about the value of the ImpediMed system?
Not that we're hearing. I mean we did have like Mass General came out with own-center publication just around ImpediMed but in discussion with our CMO was they understand it and acknowledge one of the technology options really to help manage lymphedema. So no pushback. I think there is now general acceptance of the technology. There is -- having a -- it's the only technology on the NCCN guidelines for survivorship. It's being reimbursed by major providers. So it's generally a very good acceptance.
Okay. My next question, and you're probably going to tell me the same answer you just gave previously. You talk about the states that are participating, but we don't have access to what states they are, what the existing states that are involved, the targets and so forth. Is that information available? Or is that commercial in confidence, you're not disclosing it?
Yes. Commercial in confidence because we've got -- well, it's not really much of a competitor, but there's a competitor. And so we're just carefully managing that information that goes out.
It's fair to say, though, that of the 11 key states, the 11 states that we've identified as being key states are those states that you would expect to be the key states in terms of population and so on.
Yes. It's more population driven. Obviously, degree of affluence and population would be the central indicators?
Correct.
Correct. Correct.
I'm going to be crude with this and throw this one at you. It seems to me, with the reporting of monthly revenue and so forth and the nature of the service with a very small variable cost component to it all with the software, that this is ripe for like bundled sales and like giving the milk, butter, take a coke refrigerator to fill up with the product and so forth. Are you looking to bundle the machines and just lock these people into subscriptions all-inclusive at any point? Or you still want to separate out the sale of the machine versus the subscription cost?
That would be -- we're reviewing all of the models, and that would be one possibility.
I'm thinking in the larger sites, we'd like to keep it simple, and that sort of want to build them on.
What we want to do is think about how to introduce lymphedema treatment as sort of a holistic model of care approach. So an IDN would think about -- or a hospital would think about all the different places where measurements are required. And some will be high volume, some will be low volume. So we're thinking about more of a system-wide approach and pricing that goes with that.
Yes. And the other -- and just back to the question around streamlining the sales process. Sometimes the holdup is going through both a separate CapEx and a separate OpEx budget. So we're just having a look at all of it right now and just saying, how do we -- what's the levers we can just accelerate this? And could you just go through a different approval process that doesn't impact our revenues adversely.
Okay. My last question. How many staff are there actually now? And how many do you think you'll have in a year's time?
The total headcount is...
84?
84. Yes, thereabouts globally.
No plan to currently grow. We want to drive the revenues in this business. Clearly, we want to have a plan and a path for growth outside of breast cancer lymphedema into other indications, particularly as we know we've got some reinvestment around heart failure. But we need to create the business cases for these and really understand the opportunity before we do any further recruitment.
All right. But going back to the earlier figure of $5.5 million a quarter being the burn on staffing, $20 million a year, much of that's a big number and it scares us all to some extent. If you've got 84 bodies of varying capacity, that's not really a big number, is it?
Well, it's not insubstantial lever, but I think you've got to have a range of skills and competencies in a business like this. And the challenge for us is to make sure that we've got the right mix and that everyone is appropriately focused on the right activities.
So of the 84 staff, how many would be shareholders in some form or another or incentive to be shareholders or the like?
A fair number. A fair number have some equity interest in the business.
And the remuneration includes extra access to equity or...
It's all part of the package, yes.
There are no further questions at this time. I'll now hand back to Dr. Bains for closing remarks.
And just I want to just thank you all for joining the call, for being shareholders, for supporting the business. Look, we're really looking forward to driving patient access and revenues for this technology. And so just thank you for your questions, and looking forward to continuing to engage.
That does conclude our conference for today. Thank you for participating. You may now disconnect.