Rao Mulpuri: Yes. So Graham, this is Rao. Let me take the second question, and I’ll hand it to Amy to explain the $6 million charge — second part of the question. So gross margins going forward, as you know, our margin line hasn’t been a perfect straight line, but the trend line is clear. We have the product, architecture, the materials, which is foundational to margins, as you know, in any hardware company. And then as a manufacturer, we also have the right production metrics and the supply chain all worked out. So basically, the invention and engineering are complete. And what’s in front of us is scale. And to achieve scale, obviously, we need a certain number of minimum projects to get there. We have the unit economics worked out, we have the business model proven, and we are going to focus pretty heavily on the multifamily sector, although we still have a really good healthy airports business, we have a healthy institutional business and growing, but importantly, there’s still office builds, life science and renovations going on.
But as a growth area, we worked very hard at it and lucky that we’ve been able to get the product completed and be ready for multifamily, specifically. Within that, the relationships we’ve built over the last 3, 4 years, with installations in key markets. And obviously, our backers being active in this market is really helpful to us going forward. So the best way I would address kind of how this coming quarter looks and going forward is we have all of the right cost structures in place, including the lower breakeven points. And now it’s about growing in that segment. and it will be on a quarter-to-quarter basis, potentially bumpy, but the long-term trend is to use the positive contribution to get to profitability. And as far as 2024, as I said, we are pretty heavily focused on the multifamily sector, and we are not yet guiding for revenues next year, but I think we’ll do that in the next call.
With that, Amy, do you want to address the $6 million question?
Amy Reeves: Yes, Graham. So we have two liabilities on our balance sheet that require us to project future cost of manufacturing on a per unit basis. First, on the warranty liability, we took $4 million charge. As we’ve explained in the past, with the fixed nature of our manufacturing costs, our unit economics can vary significantly with volumes. And so given the reduced outlook that we have for future production requirements, those unit economics for our future warranty replacements are now expected to be higher than we previously estimated. Now on the contract loss accrual, we are estimate — we have to record a liability for the total amount of costs that would be in excess of a contract revenue price, and that total cost includes the cost of manufacturing. So essentially, what we have is a higher percentage of our factory fixed costs that are being allocated to the smart building platform projects that are currently being manufactured.
Graham Price: Okay. Understood. Thank you both for the color on those items. I think, Rao, you touched quite a bit on my second question, but obviously, we are still seeing a lot of pressure in the commercial office market. I was wondering if you could talk about some of the other end markets, which you did a little bit, airports, health care, obviously, multifamily housing and maybe specifically, the impact from interest rates that your customers are experiencing in each of those markets?
Rao Mulpuri: Yes. I think our business can be broadly broken into, let’s say, infrastructure and government spending and, let’s say, private sector. My comments, obviously, the interest rates and the dynamics apply to the private sector, so let’s focus on that for a moment about what’s going on with our customers’ businesses. One lens is how are their economics looking and this is a generic answer. Obviously, every project is different. But they have a trifecta of issues that our customers are facing. Number one, construction costs are still somewhere around 10% to 20% higher than they were before the pandemic, let’s say, if you take the baseline of about 3 years ago. And that’s driven by a variety of factors, probably labor cost is the biggest one.
But clearly, the cost to build is higher than it was. The second is cost of debt in which a lot of our commercial customers take on debt, at least during the construction phase, and then they either refinance or sell the property after they stabilize it. So cost of debt is a very important metric for them in total cost and their own returns. And as you know, interest rates are about double where they were. So their cost of debt is twice. On the revenue side, for a while, the leases and rents were going up, especially in the multifamily segment, and now the rents are a little bit more in threat. And it’s either an unknown or a potential stabilization of rents. So when you take the three factors together, it’s a less competitive time or it’s a less lucrative time to be building.
