Q2 2022 Rapid Micro Biosystems, Inc Earnings Call

August 12, 2022

Ladies and gentlemen, thank you for standing by and welcome to the rapid micro bio systems second quarter 2022 earnings Conference call.

I would now like to turn the call over to Mike <unk> Investor Relations. Please go ahead.

Good morning, and thank you for joining the rapid micro Biosystems second quarter 2022 earnings call Joy.

Joining me on the call are Rob <unk>, Chief Executive Officer, and Shaun <unk> Chief Financial Officer.

Earlier today, we issued a press release announcing our business update and our second quarter financial results.

Copy of the release is available on the Companys website at rapid micro bio dot com under investors and the news and events section before we begin I'd like to remind you that many statements made during this call may be considered forward looking statements within the meaning of federal Securities laws, which are made pursuant to the safe Harbor provisions of the private securities.

Litigation Reform Act of 1095.

Any statements contained in this call that relate to expectations or predictions of future events results or performance are forward looking statements, including but not limited to statements relating to rapid micro's financial condition and future revenue and system placements expectations for organizational restructuring plan.

Expectations for business development and growth the board of Directors review of potential strategic alternatives customer interest and adoption of the growth direct system and the potential impact of macroeconomic uncertainty and COVID-19 on rapid micros business.

Actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors.

For a list and description of the risks and uncertainties associated with rapid micros business. Please refer to the risk factors section of our annual report on Form 10-K filed with the Securities and Exchange Commission.

On March 24th 2022, as such risk factors are updated in our subsequent filings with the SEC.

We urge you to consider these factors and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance.

Also the company's contract with the U S. Biomedical advanced research and development authority or BARDA was completed in the fourth quarter of 2021.

Throughout our quarterly performance discussions will be excluding the noncommercial revenue impact from BARDA by comparing total 2022 revenue to commercial revenue in 2021.

This conference call contains time sensitive information and is accurate only as of the live broadcast today August 12 2022.

Rapid micro disclaims any intention or obligation, except as required by law to update or revise financial projections or forward looking statements, whether because of new information future events or otherwise.

And with that I'll now turn the call over to Rob.

Thank you Mike Good morning, everyone and thank you for joining US today typically I will start our prepared remarks with a brief review of our Q2 results. However, given that we issued two significant press releases. This morning, I'll focus my remarks today on the key takeaways from those announcements as well as a few other important business updates.

Sean will then cover our Q2 results in his remarks.

First we.

We are lowering our full year 2022 commercial revenue guidance to be at least $17 million due to a.

Difficult decrease in expected number of system placements in the second half of this year based on the assessment. We completed following the close of the second quarter.

This decrease was driven by changes in our expectations regarding the time it will take to close system opportunities. We had previously forecasted for the second half.

I'll provide more details on the specific reasons behind this later in my remarks.

Second we.

We are implementing an organizational restructuring plan to better align our cost structure with our revised 2022 outlook with a focus on prioritizing improved commercial execution and investments in key growth initiatives to drive future revenue growth.

Actions under this plan included an approximately 20% reduction in our workforce, which is largely focused on non commercial functions and the reduction of certain other expenses and capital expenditures.

We expect these actions will result in approximately $8 million to $9 million in annualized cost savings by Q1, 2023, helping us protect our significant cash position.

Yeah.

We are extremely focused on responsible cash management and continue to.

Our current cash and investments of nearly $170 million to provide us runway into at least 2026.

The second is like these are never easy and this was especially difficult given how hard the entire RMB team has worked.

I'd like to personally. Thank every colleague that is being impacted for their unwavering commitment to the company.

You have played an important part in the company's growth and path and your contributions are truly appreciated.

As part of the restructuring action, we are making changes to enhance our commercial organization and capability.

As a result of these changes our chief commercial officer will be leaving the company and I am assuming commercial leadership responsibilities.

In this role.

We're working very closely with our sales team to drive system placements through increased customer engagement and improved sales execution.

I spent several weeks in the field with customers during Q2 and those interactions helped to clarify for me. Both the challenges we saw in the latter half of the quarter and the actions we need to take to address them getting system placements back on track is my highest priority.

Third as many of you know on June 30, we received an unsolicited proposal from Kennedy Louis investment management to acquire all outstanding shares of the company for $5 per share.

After a comprehensive review our board has rejected this proposal after determining that it is an adequate and is not in the best interest of the company or our shareholders.

Also this morning, we announced that our board has engaged Morgan Stanley to work with US on a review of strategic alternatives to maximize shareholder value.

This process will include consideration of a wide range of options, including opportunities for sale.

Merger or other strategic transactions.

Although the board has determined that Kenny Louis' proposal of $5 per share is inadequate and is not in the best interest of the company or its shareholders. Morgan Stanley has reached out to invite them to participate in the process.

As I'm sure you're all aware.

We now need to let this process play out and therefore, we won't have further comment on it today.

The Board has also adopted a limited duration shareholder rights plan to protect the company and its shareholders and provide the board with the appropriate time and flexibility to conduct a review of strategic alternatives and pursue the best course of action for all shareholders. The.

The shareholder rights plan will automatically expire on the day after our 2023 annual meeting of stockholders unless approved by our stockholders at the 2023 annual meeting in which case it will expire in one year on August 11 2023.

As our board commenced as their strategic review, we remain confident in the significant potential of our market opportunity business model product and service differentiation and land and expand strategy.

Competitive intensity remains low and the value proposition for the growth direct system continues to resonate with both current and prospective customers.

Our recurring revenue from consumables and service contracts remained strong, reflecting the use and value of our systems in critical applications.

Additionally, customers are excited about our rapid sterility and multi touch on products in development.

We are also ahead of schedule on our manufacturing efficiency initiatives to lower costs and improve gross margins and consumables and we have a strong balance sheet, which provides us with long cash runway and resources to fund our key growth and margin improvement initiatives, Sean will provide additional details for each of these in a few minutes.

I would now like to shift back to discuss our revised guidance and walk through the key factors underlying our lowered expectations for full year 2022 system placements.

As we've discussed on previous calls direct site and customer access is critical in our sales process, which can take up to 12 to 18 months from initial customer contact through the sale of the growth direct system.

As access to customer sites and in person engagement continue to improve gradually as we move through the second quarter and into Q3, we gained deeper insight into our customers' current processes for purchasing capital equipment, including challenges created by the pandemic, allowing us to more accurately assess the status and timing of sales opportunities during our coast.

Quarter analysis, we have also identified and are acting on opportunities to improve aspects of our sales process and sales team training.

With the insights gained it also became clear that many sales opportunities generated during the pandemic lack the accuracy of timing information that we historically got from onsite interactions with customers. We've learned that as customer site access improved we gain increased clarity when system placements could be expected, particularly at <unk>.

At the end of the quarter.

While our ongoing discussions with customers give us confidence that a significant number of the opportunities. We have generated will ultimately close we anticipate that more time will be required to move deals to the finish line.

As a result, we expect this to meaningfully impact our ability to close significant number of the system placement opportunities that we had previously anticipated in the second half of the year, including several multi system deals with existing customers.

Having said that we continue to work diligently with a number of these customers in an effort to pull additional placements into 2022.

It's important to note that approximately 70% of our global capital equipment sales force has been hired within the last year and is still ramping as site access expands and ongoing sales process improvements training and enablement initiatives take hold.

Improving the consistency and effectiveness of our global sales team remains a top priority and in conjunction with direct customer access is one of the most important element in driving system sales.

Selling happens best and our team's learned the most when they are on site and in person with customers. So we are confident they will begin to ramp faster as we implement further initiatives to align and improved training and processes and in person engagement continues to progress in the coming quarters.

While we are ramping up onsite engagement with customers and taken decisive action, we expect meaningful improvement assistant placements you take time some.

Some of the key actions that will drive. This improvement include we have largely completed our near term investments in expanding our commercial sales and field service support organizations with highly experienced industry professionals.

We are enhancing our sales processes with additional training and new sales tools and marketing campaigns.

We are actively engaging with our key existing customers, who support them as they integrate their existing growth direct systems and identify new opportunities to expand within our global manufacturing networks.

We continue to focus on our funnel quantity and quality and new high quality lead and opportunity generation.

During the second quarter, we participated in six in person industry conferences.

In the United States, two in Europe , and one of the largest industry conferences in Korea.

Multiple seminars teach ins and growth direct demonstrations, which generate dozens of new high quality customer leads customer feedback and reception was very strong across these events and we are well positioned as customer site access and in person activities improve all of which continues to give us confidence in our market opportunity.

In addition to the specific commercial action items, we continue to advance development of our mobile detection and rapid through loyalty products, both of which remain on track.

We expect to begin prelaunch activities for our exciting new mold detection product later this year and fully launched a product in the first half of 2023.

As a reminder, our multi testing software will enable customers to differentiate <unk> from other categories of micro organisms such as bacteria.

<unk> will be integrated into growth direct platform and is a highly differentiated product that revised customer's valuable operational and quality information much faster that will provide improved decision, making within the larger value proposition of our growth direct to include data integrity.

Also during the second quarter, we began beta testing a rapid sterility system with a large top pharma company. Our rapid should really offers compelling differentiation versus existing drilling products and will be especially important for time sensitive products, such as vaccines biologics sterile injectables and cell and gene therapies the beta.

It's going well and we're receiving valuable real world feedback that will help to ensure a successful launch.

We will continue to keep you updated on our progress over the coming months.

In summary, we remain confident that the growth direct system is creating the future of rapid secure microbial quality control automation, we have a strong customer base, which includes over half the top 20 largest global pharmaceutical manufacturers competitive intensity remains low and we continue to receive strong positive signals from customers and stakeholders.

And there is a large market opportunity for our growth direct system we.

We expect the steps we are taking to enable our commercial team to more effectively reach customers, helping them understand the benefits of our system and guidance through the implementation process in your facilities worldwide.

While our recent performance and revised 2020 to outlook are disappointing we are confident that the totality of our actions while the meaningful positive impact on accelerating system sales and sustain a strong balance sheet for years to come.

That concludes my prepared remarks, I will now turn the call over to Shaun to discuss our second quarter performance and provide some additional details on our outlook Shawn.

Thanks, Rob good morning, everyone.

This morning, we reported second quarter 2022 revenue of $3 9 million, which compares to $5 $7 million of commercial revenue reported in Q2 2021.

Product revenue, which is comprised of systems and consumables was $2 4 million in Q2 compared to $4 $1 million last year. The decline was due to few replacements of growth direct systems, partially offset by continued growth in consumables.

We placed two growth direct systems in Q2, which was consistent with our expectations and compares to eight systems placed in the second quarter last year.

Revenue from consumables increased approximately 20% in the second quarter. Despite some third party logistics delays in the final days of the quarter that pushed approximately $200000 of consumable revenue out of Q2 and into the third quarter.

The growth in consumables revenue continues to be driven by our expanding base of validated systems in the field and additional validated systems entering in routine use.

While we expect consumables to continue to be a primary contributor to our growth over time the rate of growth can vary from quarter to quarter due to factors such as the pace and timing of system placements and validation the speed at which customers transition to routine use in their ordering pattern.

Service revenue was $1 4 million in Q2 compared to $1 6 million in the second quarter of 2021, we completed the validation of three systems in the second quarter, which was somewhat below our expectations. This compares to <unk> 11 validation is completed in the same period last year.

A few validation we expected to finish in Q2 pushed into Q3 due to customer related delays in the second half of the quarter as we've discussed previously the timing of validation can vary based on customer resources project variables such as site construction and this was the case in Q2.

That said the decline in validation was partially offset by encouraging growth of nearly 70% in service contract revenue associated with our growing base of validated system.

Recurring revenue increased 31% to $2 5 million in the second quarter, driven once again by both consumables and service contracts. Despite the impact of the consumables delay I mentioned earlier.

Excluding the impact of these delays recurring revenue grew over 40% in Q2.

Non recurring revenue was $1 4 million in Q2 compared to $3 $8 million last year as a result of lower revenue from system placements and validation.

Turning to gross margins product margins were negative <unk> $8 million in Q2 compared to negative 2.0 million.

Second quarter last year.

While system margins were negative in the quarter due to lower system revenue consumable margins improved meaningfully on both a year over year and sequential basis. We remain ahead of schedule as we continue to execute against our manufacturing efficiency initiatives to lower costs and improve margins on our consumable products.

Service margins were negative <unk> 4 million in Q2 compared to positive <unk> $3 million last year.

The decline was due to lower validation revenue as well as higher spending on personnel travel and materials associated with field service and validation activity.

On a combined basis, our second quarter gross margin percentage was flat at around negative 30% versus Q2 last year, despite a headwind from lower revenue.

The strong progress we've made with our ongoing manufacturing efficiency initiatives and consumables largely offset the negative impact from lower system and service revenue in the quarter.

While we continue to see some inflationary headwinds and certain material freight and labor costs. It did not have a meaningful impact during the quarter.

Moving down the P&L total operating expenses were $12 9 million in the second quarter, consisting of $3 5 million in sales and marketing $3.0 million in R&D and $6 4 million in G&A. This compares to total operating expenses of $9 1 million in the second quarter of 2021. This.

This increase was largely due to investments in commercial and product development as well as higher expenses incurred to operate as a public company.

Net loss was $13 1 million in Q2. This compares to a net loss of $11 8 million in the second quarter of 2021.

Net loss per share attributable to common shareholders was 31.

In Q2, 2022 as compared to $20 one in the prior year quarter. The majority of this difference is due to the increase in weighted average common shares outstanding in connection with the company's initial public offering in July 2021.

With respect to noncash expenses and Capex depreciation and amortization was <unk> 7 million stock comp expense was $1 3 million and capital expenditures were $2.0 million in the second quarter of 2022.

As of June 30, we had $166 9 million in cash cash equivalents and investments.

While the restructuring actions, we announced this morning, we will reduce our underlying cash burn rate meaningfully. They also involve severance and other nonrecurring cash payments that will negatively impact our burn rate through Q3 next year.

At the same time, we also continue to selectively invest in our growth initiatives, taking all this into consideration we expect to finish the year with between $140 million and $145 million in cash and investments.

We are focused on in managing our cash prudently and continue to expect that this will give us cash runway at least in 2026.

I'll now shift to the revised guidance, we announced earlier today.

As Rob discussed we are lowering our full year commercial revenue guidance to at least $17 million. This assumes that the company will place between three and five systems in the second half of the year with most or all of those placements made in the fourth quarter.

Change to our revenue guidance reflects our revised expectation for fewer system placements in fiscal year 2022, as we continue to work on expanding onsite customer access ramping our commercial team and optimizing commercial execution.

It also reflects macroeconomic uncertainty impacting the timing of some customer purchase decisions that we expect to persist through the end of the second half of the year for.

For example, turnover and staffing shortages have delayed some customer purchase decisions and supply chain disruptions at other customers have delayed new construction where growth directs our plan.

We are also experiencing longer than expected lead times for some multi system orders as we work with customers across several sites and geographies.

Compared to our previous guidance range lower system placements account for 70% to 80% of the reduction with lower validation revenue due to lower system placement accounting for the majority of the remainder.

Moving to validation, we now expect to complete at least seven validation in the second half.

Expect them to be split relatively equally between Q3 and Q4. This change is largely driven by our expectation of lower system placements, which will likely limit our opportunities to complete new validation for the second half.

With respect to consumables, we work closely with our customers to ensure they have the appropriate inventory levels to run their businesses and believe this gives us good near term visibility into this key recurring revenue stream.

We currently expect year over year consumables revenue growth of around 30% in the second half of the year with revenue increasing sequentially from Q2 to Q3, and then again from Q3 to Q4.

In service, we now expect full year 2022 revenue growth in the single digits with lower validation revenue due to lower system placements more than offset by mid double digit growth in recurring revenues from service contracts. We also expect service revenue to be relatively consistent between Q3 and Q4.

From an overall gross margin standpoint, we currently expect to take a step back in Q3 due to lower forecasted system placements.

While we are now unlikely to achieve positive gross margins in Q4 due to lower sales volume leverage versus our prior outlook. We continue to make good progress on our manufacturing efficiency initiatives and consumable and expect to benefit from higher system placement volume compared to the first three quarters of the year.

We are optimistic that these factors will move us meaningfully closer to this important milestone in Q4 and position us to achieve it in 2023.

Finally, we are expecting GAAP operating expenses in Q3, and Q4 to be between $14 million $15 million.

This is higher than Q2, due mainly to onetime costs relating to the restructuring and other related activities as well as estimated costs related to the unsolicited proposal. We recently received from Kennedy Lewis and the strategic review our board is commencing excluding these one time costs, we expect our operating expense run rate to rebase around roughly $12 million per quarter by the <unk>.

End of the year once the cost saving measures, we announced today take full effect that concludes my comments on our updated 2022 outlook. So at this point, we'll open the call up for questions operator.

The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if at any point wed like to withdraw from the queue. Please press star one again, we will take a moment to render our roster.

Our first question comes from Keith <unk> from Morgan Stanley .

Hi, This is Hugo on for <unk>. Thank you. Thank you for questions.

With a few quarters now.

System placements could you remind us of the efforts underway to decrease that time lag.

On full utilization.

Hugo Youre coming across very quiet to us.

Utilization so could you repeat the question.

Just efforts underway to decrease the time between system orders and full utilization.

Yes.

Correct.

Yes, Jeff So sure Hugo Thanks for repeating the question, yes. So we have a number of different things happening in the business on each phase kind of taking it from installation speeding that process up moving us into the validation more quickly and then each of the steps that we are.

Required to deal with customers to validate their systems I think we've talked in the past about.

Some things were doing to automate parts of that process or standardize them. So that we have documentation in hand as opposed to needing to do bespoke work with each customer we're making good progress on that.

We've got one phase of that work that's completed now that is removing <unk>.

<unk> weeks from a typical validation processes.

At this point, but with more substantial.

Opportunity in front of us that we continue to work on as well.

We're also looking at opportunities using some.

Some folks that we've added to our organization to help manage the process with each customer to work with customers more proactively upfront to help them get from.

The point, where they complete their validation to routine use more quickly as well. So we're seeing some benefit from that I'd say, it's still relatively early days, but we believe there is significant potential to speed that part of the process.

Yes, and just to build on John's point the group.

That would be constituted.

Last year, our basically global project managers that work hand in glove with our with our teams and our customers critical needs to move efficiently through the process you Sean touched on this as well, but it's important to note that we've done this.

Dozens of times around the world and we've built a database.

Of the various organisms and approaches to implement the system when customers are starting to accept this data.

Which obviates the need to do some on site testing, which also accelerates the process and Additionally, we're able to parallel pass a number of processes as well. So all of this is geared towards getting customers into routine use faster and I think a very clear proof point that continues to prove itself out is our systems are being used in <unk>.

<unk> consumables and driving value for our customers globally as you can see in our recurring revenue.

Great. Thank you for that color and then you also noted longer lead times closed sale in your prepared remarks could you elaborate on those dynamics and do you see this is more pronounced in any particular region.

Yes no.

Yes.

Really.

Discussed on previous calls the it's critical for us to be onsite working working with customers. It's just a relatively complex sales process is usually more than one stakeholder involved in the decision making process. So.

The remote nature of some elements of the sales process.

During COVID-19.

<unk> in the gear just puts friction into the sales process makes it harder to estimate the timing while.

We are encouraged in Q2.

<unk> been able to get onto many more sites.

As we discussed globally. This is region independent <unk> had.

Hey, good access in the U S. Certainly good access and good access in Europe , even improving access.

In Asia.

Shortly as well customers are back at Tradeshows. So this live activity is increasing both at the big industry events globally as well as onsite critically of customer environments, which helps us to get better visibility of the timing of.

Our process and also to facilitate the speed up now.

So things are opening up in Q2, and we're gradually and we're getting encouraged but that was a feature in COVID-19 with regards to things being.

A bit difficult to resolve visibility, but we do see we do see.

The visibility gradually increasing as we are engaging more directly with customers.

Great. Thank you.

Our next question comes from Dan areas from Stifel.

Good morning, guys. Thanks for the questions Sean on the longer term forecast.

During the IPO process I think you had talked about cumulative placements by 2024 being sort of in the neighborhood of 350 to 360 placements where installs given the way that this year is shaping up in next year might look what do you see as a reasonable target at this point.

Yes, I think that's going to give a specific number Dan but I think what I can talk about is what we expect that to happen as we move our way out of this year and into next year. So.

'twenty three we expect to get back to good double digit growth, we expect our recurring revenue to continue to crank along.

Well into the double digits, and we expect system placements to be meaningfully better than they are this year I think Rob talked a lot about the reasons why we.

Have experienced what we've experienced but also why we have.

Growing confidence in our funnel and our ability to convert those deals with better and better clarity.

So I think as we look there will be probably a bit of a headwind on service and validation just given what this year's placements look like.

But I think overall, particularly with an expectation that placements get back on track that will we'll be able to deliver the kind of growth that we typically expect for this business as we look at 'twenty three and beyond.

Okay.

Okay, and then Rob maybe on validation timelines that I think have been a little longer in cases than maybe you would like three to nine months on average when you think about the parts of that process installation performance qualification method qualification.

Which of those do you think you can most meaningfully shorten at this point and given the way that the business will be evolving next year.

Yes.

What we call project rapidly impacted Dan meaningfully the Io Q PQ process.

Which we've which we've contracted the timelines on.

As Sean touched on we're still working on different parts. There are some downstream cards that we work with the customer on time to resolve studies in what's called metal qualifications, which is certainly in scope for us to continue to improve so the takeaway is.

We're pleased with the ongoing and recurring and continuous improvement we're making in weeks.

We expect more gains in the.

Coming quarters.

Okay. Appreciate it thank you guys.

Thank you.

Our next question comes from Max <unk>.

<unk> from Cowen.

Hi, This is Stephanie on for Mark. Thanks for taking my question, Rob We noticed that you identified from calculate a challenge.

<unk>.

The sale process.

Training you might just ballpark what exactly is the sales process and training looked like in Q2 the challenges.

And what areas specifically seems to improve.

Yes, sure so as I mentioned, our sales team our sales team is relatively new and Q2 marked the first time in a while that on a reasonably recurring basis, we gradually more into our customer environment. So it was I spent quite a bit of time with the team in the field as well so.

First is the process itself.

An increased focus on the training around our process again are relatively complex.

Sales process going from initial conversation to a customer through understanding customer needs all the way through a close and I'll go.

Look into detail on this call, but it is a process.

The sales reps have to be proficient industry consulted sale to move through that and proficient way and organized way to to close the sales of critical skills. So that's clearly an area that we've identified as.

Increased and training opportunities and then with that continued product exposure with our new team understanding the go direct and how it fits into the broader customer environment also a strong training element that we're focused on and then lead generation and new opportunity generation both with our.

Our increased marketing effort as well as our direct prospecting with our sales team are all among other initiatives that we're focused on two to improve our new opportunity creation, and then having our sales and close them.

On a streamlined timeframe.

Got it thanks for that color.

Second question around the organizational restructuring pretty much of that 20% reduction.

Lastly on noncommercial function can you remind us where you are.

Current company head count.

Where.

All team headcount.

More specifically around the other initiatives.

Production.

Restructuring plan and Bob.

Yeah, I'll start it off and I think Rob will have some comments to Stephanie.

We'll end after this action right just think of it is right around 200 head count.

For the business.

And we think thats the right place to be given where we are right now of the business and what we need to get done including the areas, where we're investing for growth in terms of our commercial organization and our product development, Rob talked about moulden, sterility, which are very important to us strategically.

Yes, Stephanie on sales the sales head count you think of our direct sales force our capital equipment sales force deployed across U S Europe and Asia.

As low double digit numbers and full quota carrying this doesn't include other elements of our commercial team.

As our consumable salespeople in our validation service folks.

Got it okay. Thanks for taking my question.

Sure. Thank you.

Our next question comes from Rachel Castillo from J P. Morgan.

Hi, Thanks for taking the questions guys.

First of all congrats Mark and you said you no longer expect gross margin to flip positive in <unk>. So can you just walk us through how we should think about the market margin progression here.

As an aside and you've also talked out that 70% gross margin target, thus far and we appreciate that most of that really comes from operating elaborates on looking for bulk volume lines.

Can you just walk us through is there a number that is really tied to that 70% gross margin target would it be a $50 million in consumer both 100 million to be able to reach that and any color on that.

Margins will be helpful. Thanks.

Yes, I'll start more near term Rachel I think.

You touched on it operating Leverages, what what is driving the change in where our expectation for Q4 with system placements expectations now where we have done.

It doesn't give us enough leverage there I mentioned in my comments. We were ahead of schedule on consumables margins compared to what I think longer term that's very encouraging.

That we are.

Doing the things that we had intended to do and doing it at least at this point in year than what we expected.

Yes, im not going to give a specific number it's out in that range that youre talking about in terms of when we can get consumable margins up to to the kind of range that you mentioned I think but it's contingent upon both operating leverage and a number of internal initiatives. Both ones. We're doing today and others that we have teed up for the future to get to that point. So yes. There is.

An execution element there.

We are very very focused on in the business and our operations organization in particular, but that operating leverage is critical to getting us there as well. So we'll make progress on both fronts. We believe as we look towards <unk> 23.

Those are both areas that will help us continue to push those margins forward, both in consumables and overall and give us confidence that we will get flipped positive in 2023.

Got it and then if I guess, Neil I'll take some orders that were delayed during the quarter and those large multiyear orders, obviously can drive a fair amount of Lumpiness. So can you walk us through specifically what's going on.

And then is there a risk that those leads really fall out of the funnel and what's assumed for closing rates for each of those multi system orders pipeline.

Yes, so many of the orders that were referred to our existing customers not all is.

Good blend we think the.

We are confident that we will secure those orders its more.

A function of time than if <unk> and <unk>.

Typically boils down in these cases, we're no different.

Two usually cut customer specific issues.

We see construction these macro broadly macro areas, we can call. It turnover for example has still been a feature if we lose a project product champion or someone can be deployed to.

A different internal project can slowdown.

<unk>, we see construction.

Frequently getting our way to in some cases.

Our site needs to be fitted for the growth of <unk> in some cases, new lateral being built all of these can create.

Lags with regard to system system placements in the current situation is no different.

Got it that's it for me thank you.

That does conclude today's questions.

I would now like to turn the call over to Rob speak Nasi CEO for closing remarks.

Well. Thank you all for joining US today, we appreciate your interest in our company and look forward to speaking with many of you won't coming weeks and we hope to see many of you in person on September 13 at the Morgan Stanley Healthcare conference. Thank you again.

Okay.

Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.

Okay.

[music].

Yes.

Okay.

Yes.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the rapid micro Biosystems second quarter 2022 earnings Conference call.

I would now like to turn the call over to Mike full year Investor Relations. Please go ahead.

Good morning, and thank you for joining the rapid micro Biosystems second quarter 2022 earnings call.

Joining me on the call are Rob <unk>, Chief Executive Officer, and Shaun <unk> Chief Financial Officer.

Earlier today, we issued a press release announcing our business update and our second quarter financial results.

A copy of the release is available on the Companys website at rapid microbiome dot com under investors and the news and events section before we begin I'd like to remind you that many statements made during this call may be considered forward looking statements within the meaning of federal Securities laws, which are made pursuant to the safe Harbor provisions of the private secured.

<unk> Litigation Reform Act of 1095.

<unk> for business development and growth.

The board of Directors review of potential strategic alternatives customer interest and adoption of the growth rack system and the potential impact of macroeconomic uncertainty and COVID-19 on rapid micros business.

Actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors.

On March 24th 2022, as such risk factors are updated in our subsequent filings with the SEC.

We urge you to consider these factors and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance.

Also the company's contract with the U S. Biomedical advanced research and development authority or BARDA was completed in the fourth quarter of 2021.

Throughout our quarterly performance discussions will be excluding the noncommercial revenue impact from BARDA by comparing total 2022 revenue to commercial revenue in 2021.

This conference call contains time sensitive information and is accurate only as of the live broadcast today August 12 2022.

And with that I'll now turn the call over to Rob.

Sean will then cover our Q2 results in his remarks.

First.

We are lowering our full year 2022 commercial revenue guidance to be at least $17 million due to a significant decrease in expected number of system placements in the second half of this year based on an assessment. We completed following the close of the second quarter.

This decrease was driven by changes in our expectations regarding the time it will take to close system opportunities. We had previously forecasted for the second half.

I'll provide more details on our specific reasons behind this later in my remarks.

Second we.

The actions under this plan included an approximately 20% reduction in our workforce, which is largely focused on non commercial functions and the reduction of certain other expenses and capital expenditures.

We expect these actions will result in approximately $8 million to $9 million in annualized cost savings by Q1, 2023, helping us protect our significant cash position.

We are extremely focused on responsible cash management and continue to.

Our current cash and investments of nearly $170 million to provide us runway into at least 2026.

The second is like these are never easy and this was especially difficult given how hard the entire RMB team has worked.

Like to personally. Thank every colleague that is being impacted for their unwavering commitment to the company.

He will play an important part in the company's growth and path and your contributions are truly appreciated.

As part of the restructuring action, we are making changes to enhance our commercial organization and capability.

As a result of these changes our chief commercial officer will be leaving the company and I am assuming commercial leadership responsibilities.

In this role.

We're working very closely with our sales team to drive system placements to increase customer engagement and improved sales execution.

Third as many of you know on June 30, we received an unsolicited proposal from Kennedy Wilson investment management to acquire all outstanding shares of the company for $5 per share.

After a comprehensive review our board has rejected this proposal after determining that it is an adequate and is not in the best interest of the company or our shareholders.

Also this morning, we announced that our board has engaged Morgan Stanley to work with US on a review of strategic alternatives to maximize shareholder value.

This process will include consideration of a wide range of options, including opportunities for sale merger or other strategic transaction.

As I'm sure you're all aware.

We now need to let this process play out and therefore, we won't have further comment on it today.

The Board has also adopted a limited duration and shareholder rights plan to protect the company and its shareholders and provide the board with the appropriate time and flexibility to conduct a review of strategic alternatives and pursue the best course of action for all shareholders.

The shareholder rights plan will.

Buyer on the day after our 2023 annual meeting of stockholders unless approved by our stockholders at the 2023 annual meeting in which case it will expire in one year on August 11 2023.

As our board commenced as their strategic review, we remain confident in the significant potential of our market opportunity business model.

<unk> service differentiation and land and expand strategy.

Competitive intensity remains low and the value proposition for the <unk> system continues to resonate with both current and prospective customers.

Our recurring revenue from consumables and service contracts remains strong.

Reflecting the use and value of our systems in critical applications.

Additionally, customers are excited about our rapid sterility and more detection products in development.

I would now like to shift back to discuss our revised guidance and walk through the key factors underlying our lowered expectations for full year 2022 system placements.

As access to customer sites and in person engagement continue to improve gradually as we move through the second quarter into Q3, we gained deeper insight into our customers' current processes for purchasing capital equipment, including challenges created by the pandemic, allowing us to more accurately assess the status and timing of sales opportunities during our coast.

Quarter analysis, we have also identified and are acting on opportunities to improve aspects of our sales process and sales team training.

With the insights gained it also became clear that many sales opportunities generated during the pandemic lack the accuracy of timing information that we historically got from onside interactions with customers, we learn that as customer site access improved we gain increased clarity when system placements could be expected, particularly at <unk>.

At the end of the quarter.

Our ongoing discussions with customers to give us confidence that a significant number of the opportunities. We've generated will ultimately close we anticipate that more time will be required to move deals to the finish line.

Having said that we continue to work diligently with a number of these customers in an effort to pull additional placements into 2022.

It is important to note that approximately 70% of our global capital equipment sales force has been hired within the last year and is still ramping as site access expands and ongoing sales process improvements training and enablement initiatives take hold.

While we are ramping up onsite engagement with customers and taken decisive action, we expect meaningful improvement in system placements you take time.

We are enhancing our sales processes with additional training and new sales tools and marketing campaigns.

We continue to focus on our funnel quantity and quality and new high quality lead and opportunity generation.

During the second quarter, we participated in six in person industry conferences.

In the United States, two in Europe , and one of the largest industry conferences in Korea, we held multiple seminars teach ins and growth direct demonstrations, which generate dozens of new high quality customer leads customer feedback and reception was very strong across these events and we are well positioned as customer site access and in personnel.

<unk> improve all of which continues to give us confidence in our market opportunity.

In addition to these specific commercial action items, we continue to advance development of our mobile detection and rapid sterility products, both of which remain on track.

We expect to begin prelaunch activities for our exciting new multi touch on product later this year and fully launch the product in the first half of 2023.

As a reminder, our multi touch and software will enable customers to differentiate <unk> from.

From other categories, who are micro organisms such as bacteria.

Mole detection will be integrated into the growth of that platform and is a highly differentiated product that revised customers valuable operational and quality information much faster that will provide improved decision, making within the larger value proposition of our growth direct to include data integrity.

Also during the second quarter, we began beta testing a rapid sterility system with a large top pharma company a rapid should really offers compelling differentiation versus existing sterility products and will be especially important for time sensitive products, such as vaccines biologics sterile injectables and cell and gene therapies.

<unk> is going well and we're receiving valuable real world feedback that will help to ensure a successful launch we.

We will continue to keep you updated on our progress over the coming months.

In summary, we remain confident that the growth of our system is creating the future of rapid secure microbial quality control automation, we have a strong customer base, which includes over half the top 20 largest global pharmaceutical manufacturers competitive intensity remains low and we continue to receive strong positive signals from customers and stakeholders.

And there is a large market opportunity for our growth direct system.

We expect the steps we are taking to enable our commercial team to more effectively reach customers help them understand the benefits of our system and guidance through the implementation process and your facilities worldwide.

That concludes my prepared remarks, I will now turn the call over to Shaun to discuss our second quarter performance and provide some additional details on our outlook Shawn.

Thanks, Rob good morning, everyone.

This morning, we reported second quarter 2022 revenue of $3 9 million, which compares to $5 $7 million of commercial revenue reported in Q2 2021.

We placed two growth direct systems in Q2, which was consistent with our expectations and compares to eight systems placed in the second quarter last year.

The growth in consumables revenue continues to be driven by our expanding base of validated systems in the field and additional validated systems entering routine use.

Service revenue was $1 4 million in Q2 compared to $1 6 million in the second quarter of 2021, we completed the validation of <unk> systems in the second quarter, which was somewhat below our expectations. This compares to <unk> 11 validation is completed in the same period last year.

Few validation as we expected to finish in Q2 pushed into Q3 due to customer related delays in the second half of the quarter as we've discussed previously the timing of validation can vary based on customer resources or project variables such as site construction and this was the case in Q2.

That said the decline in validation was partially offset by encouraging growth of nearly 70% in service contract revenue associated with our growing base of validated system.

Recurring revenue increased 31% to $2 5 million in the second quarter, driven once again by both consumables and service contracts. Despite the impact of the consumables delay I mentioned earlier.

Excluding the impact of these delays recurring revenue grew over 40% in Q2.

Nonrecurring revenue was $1 4 million in Q2 compared to $3 $8 million last year as a result of lower revenue from system placements consolidation.

Turning to gross margins product margins were negative <unk> $8 million in Q2 compared to negative $2.0 million in the second quarter last year.

Service margins were negative <unk> 4 million in Q2 compared to positive <unk> $3 million last year.

The decline was due to lower validation revenue as well as higher spending on personnel travel and materials associated with field service and validation activity.

On a combined basis, our second quarter gross margin percentage was flat at around negative 30% versus Q2 last year, despite the headwind from lower revenue.

The strong progress we've made with our ongoing manufacturing efficiency initiatives and consumables largely offset the negative impact from lower system and service revenue in the quarter.

We continue to see some inflationary headwinds and certain material freight and labor costs. It did not have a meaningful impact during the quarter.

Moving down the P&L total operating expenses were $12 9 million in the second quarter, consisting of $3 5 million in sales and marketing 3.0 million and RMB and $6 4 million in G&A. This compares to total operating expenses of $9 1 million in the second quarter of 2021. This increase was long.

Due to investments in commercial and product development as well as higher expenses incurred to operate as a public company.

Net loss was $13 1 million in Q2. This compares to a net loss of $11 8 million in the second quarter of 2021.

Net loss per share attributable to common shareholders was 31.

As of June 30, we had $166 9 million in cash cash equivalents and investments.

While the restructuring actions, we announced this morning, we will reduce our underlying cash burn rate meaningfully. They also involves severance and other nonrecurring cash payments that will negatively impact our burn rate through Q3 next year.

We are focused on in managing our cash prudently and continue to expect that this will give us cash runway at least into 2026.

I'll now shift to the revised guidance, we announced earlier today.

It also reflects macroeconomic uncertainty impacting the timing of some customer purchase decisions that we expect to persist through the end of the second half of the year for.

For example, turnover and staffing shortages have delayed some customer purchase decisions and supply chain disruptions at other customers have delayed new construction where growth directs our plan we.

We are also experiencing longer than expected lead times for some multi system orders as we work with customers across several sites and geographies.

Impaired to our previous guidance range lower system placements account for 70% to 80% of the reduction with lower validation revenue due to lower system placement accounting for the majority of the remainder.

Moving to validation, we now expect to complete at least seven validation in the second half.

With respect to consumables, we worked closely with our customers to ensure they have appropriate inventory levels to run their businesses and believe this gives us good near term visibility into this key recurring revenue stream.

We currently expect year over year consumables revenue growth of around 30% in the second half of the year with revenue increasing sequentially from Q2 to Q3, and then again from Q3 to Q4.

From an overall gross margin standpoint, we currently expect to take a step back in Q3 due to lower forecasted system placements.

We are optimistic that these factors will move us meaningfully closer to this important milestone in Q4 and position us to achieve it in 2023.

Finally, we are expecting GAAP operating expenses in Q3, and Q4 to be between $14 million $15 million.

This is higher than Q2, due mainly to onetime costs relating to the restructuring and other related activities as well as estimated costs related to the unsolicited proposal. We recently received from Kennedy Lewis and the strategic review our board is commencing excluding these onetime costs, we expect our operating expense run rate to rebase around roughly $12 million per quarter by the end.

For the year once the cost saving measures, we announced today take full effect that concludes my comments on our updated 2022 outlook. So at this point, we will open the call up for questions operator.

Okay.

The floor is now opened for your questions to ask a question at this time. Please press star one on your telephone keypad. If at any point you would like to withdraw from the queue. Please press star one again, we will take a moment to render our roster.

Our first question comes from Keith <unk> from Morgan Stanley .

Hi, this is hugo on for questions.

With a few quarters now.

System placements could you remind us of the efforts underway to decrease that time lag.

Borders on full utilization.

You go you're coming across very quiet to us.

Innovation, so could you repeat the question.

Just efforts underway to decrease the time between system orders and full utilization.

Yes.

Correct.

Yes, yes sure Hugo Thanks for repeating the question, yes. So we have a number of different things happening in the business on each phase kind of taking it from installation speeding that process up moving us into validation more quickly and then each of the steps that we are.

We're required to do with customers to validate their systems I think we've talked in the past about.

We've got one phase of that work. That's completed now that is removing several weeks from a typical validation processes.

At this point, but with more substantial opportunity in front of us that we continue to work on as well.

We're also looking at opportunities using some.

Some folks that we've added to our organization to help manage the process with each customer to work with customers more proactively upfront to help them get from.

That would be constituted.

Last year, our basically global project managers that work hand in glove with our with our teams and our customers critically just to move efficiently through the process you Sean touched on this as well, but it's important to note that we've done this Doug.

Dozens of times around the world and we've built a database.

Of the various organisms and approaches to implement the system and customers are starting to accept this data.

Obviates the need to do some on site testing. It's also accelerates the process and Additionally, we're able to parallel pass a number of processes as well. So all of this is geared towards getting customers into routine use faster and I think a very clear proof point that continues to prove itself out is our systems are being used in <unk>.

<unk> consumables and driving value for our customers globally as you can see in our recurring revenue.

Yes no.

Yes.

Really.

<unk> discussed on previous calls the it's critical for us to be onsite working working with customers. It's just a relatively complex sales process is usually more than one stakeholder involved in the decision making process. So.

The remote nature of some elements of the sales process.

During COVID-19.

Things are addressed in the gear just puts friction into the sales process makes it harder to estimate the timing.

We are encouraged in Q2.

<unk> been able to get onto many more sites.

As we discussed globally. This is region independent he said.

Hey, good access in the U S certainly good access and improving access in Europe , even improving access.

In Asia.

Our process and also to facilitate the speed oven now things are opening up in Q2, and we're gradually and we're getting encouraged but that was a feature in COVID-19 with regard to things being.

A bit difficult to resolve visibility, but we do see we do see.

The visibility gradually increasing as we are engaging more directly with customers.

Great. Thank you.

Our next question comes from Dan areas from Stifel.

Good morning, guys. Thanks for the questions Sean on the longer term forecast during the IPO process. I think you had talked about cumulative placements by 2024 being sort of in the neighborhood of 350 to 360 placements where installs given the way that this year is shaping up in next year might look what do you see as the <unk>.

Reasonable target at this point.

Yes, I think that's going to give a specific number Dan but I think what I can talk about is what we expect that to kind of happen as we move our way out of this year and into next year. So.

'twenty three we expect to get back to good double digit growth, we expect our recurring revenue to continue to crank along.

Well into the double digits and we.

We expect system placements to be meaningfully better than they are this year I think Rob talked a lot about the reasons why we.

Have experienced what we've experienced but also why we have.

Growing confidence in our funnel and our ability to convert those deals with better and better clarity.

So I think as we look there will be probably a bit of a headwind on service and validation just given what this year's placements look like.

Okay.

Which of those do you think you can most meaningfully shorten at this point and given the way that the business will be evolving next year.

Yes.

What we call project rapid we've impacted band meaningfully the Io Q PQ process.

Which we've which we've contracted the timelines on.

Sean touched on we're still working on different parts. There are some downstream parts that we work with the customer on time result studies in what's called method qualifications, which is certainly in scope for us to continue to improve so the takeaway is.

We're pleased with the ongoing and recurring and continuous improvement we're making in weeks.

We expect more gains in that.

Coming quarters.

Okay I appreciate it thank you guys.

Thank you.

Our next question comes from Max.

<unk> from Cowen.

Hi, This is Stephanie on for Mark. Thanks for taking my question, Rob We noticed that you identified from sales related challenge and opportunity to improve.

Sales process and sales team.

<unk>.

Or what exactly is the sales process and training looked like in Q2 the challenges.

And what areas specifically seems to improve.

Yes, sure so as I mentioned, our sales team and our sales team is relatively new and Q2 marked the first time in a while that on a reasonably recurring basis, we gradually more into our customer environment. So it was I spent quite a bit of time with the team in the field as well so.

First is the process itself.

Increased focus on the training around our process again are relatively complex.

Sales process going from initial conversation to a customer through understanding the customer needs all the way through a close and I'll go into detail on this call, but it is a process that the sales reps have to be proficient industry consultant sale to move through that and proficient way and organized way to to close the sales of critical.

So that's clearly an area that we've identified as.

Increased and training opportunities and then with that continued product exposure with our new team understand that go direct and how it fits into the broader customer environment also a strong training element that we're focused on and then lead generation and new opportunity generation both with our.

Our increased marketing effort as well as our direct prospecting with our sales team are all among other initiatives that we're focused on to to improve new opportunity creation and then having our sales team closed on.

On a streamlined timeframe.

Okay.

Got it thanks for that color.

And then second question around the organizational restructuring so you mentioned that one.

90% reduction.

Alright.

Non commercial function can you remind us where you are.

Current company head count.

In addition were.

Yes.

Head Count plan.

Firstly around the other initiatives.

The transaction that we struck.

Bob.

Yes, I'll start it off and I think Rob will have some comments to Stephanie yes.

And after this action right just think of it is right around 200 head count.

For the business and that.

We think thats the right place to be given where we are right now as a business and what we need to get done including the areas, where we're investing for growth in terms of our commercial organization and our product development, Rob talked about mold and sterility, which are very important to us quite strategically.

Yes, Anthony on sales the sales head count you think of our direct <unk>.

Sales force our capital equipment sales force deployed across U S Europe , and Asia as as low double digit numbers and full quota carrying this doesn't include other elements of our commercial team.

Such as our consumable salespeople in our validation service folks.

Got it alright, great. Thanks for taking my questions.

Sure. Thank you.

Our next question comes from Rachel Castillo from J P. Morgan.

Hi, Thanks for taking the question as you guys and just firstly on gross margins. You said you no longer expect gross margin positive in <unk>. So can you just walk us through how we should think about margin progression here.

As an aside and you've also talked out that 70% gross margin target, thus far and we have.

Appreciate that most of that really comes from operating leverage looking forward both volume lines.

Can you just walk us through is there a <unk> number that's really tied to that 70% gross margin target would it be a $50 million in consumer both 100 million to be able to reach that.

Any color on that.

Gross margins would be helpful. Thanks.

Yes, I'll start more near term Rachel I think.

You touched on it operating Leverages, what what is driving the change in where our expectation for Q4 system placements expectations now where we have them now.

It doesn't give us enough leverage there.

It in my comments, we were ahead of schedule on consumables margins compared to what I think longer term that's very encouraging.

That we are.

Doing the things that we had intended to do and doing it at least at this point near than what we expected.

Yes, im not going to give a specific number we did out in that range that youre talking about in terms of when we can get consumable margins up to to the kind of range that you mentioned I think but it's contingent upon both operating leverage and a number of internal initiatives. Both the ones. We're doing today and others that we have teed up for the future to get to that point. So yes. There is.

Execution element there.

We are very very focused on in the business and our operations organization in particular, but that operating leverage is critical to getting us there as well. So we will make progress on both fronts. We believe as we look towards 2003.

Those are both areas that will help us continue to push those margins forward, both in consumables and overall and give us confidence that we will get flipped positive in 2023.

Got it and then you flagged.

Neil I'll take some orders that were delayed during the quarter and there was large multi orders obviously can drive a fair amount of Lumpiness. So can you walk us through specifically what's going on.

And then is there a risk that those leads really fall out of the funnel and what's assumed for closing rates for each of the multi system orders pipeline.

Yes, so many of the orders that were referred to our existing customers not all is.

Good blend we think the.

We are confident that we will secure those waters it's more.

A function of time than if <unk> and <unk>.

Typically boils down in these cases, we're no different.

Two usually cut customer specific issues.

We see construction these macro broadly macro areas, we can call. It turnover for example has still been a feature if we lose a project champion or someone can be deployed to.

A different internal project can slowdown process, we see construction.

Frequently get in our way to in some cases.

Our site needs to be fitted for the both the racks in some cases, new lateral being built all of these can create.

Lags with regard to system system placements in the current situations and the difference.

Got it that's it for me thank you.

That does conclude today's questions.

I would now like to turn the call over to Rob speak Nasi CEO for closing remarks.

Well. Thank you all for joining US today, we appreciate your interest in our company and look forward to speaking with many of you in coming weeks and we hope to see many of you in person on September 14th at the Morgan Stanley Healthcare Conference. Thank you again.

Okay.

Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.

Q2 2022 Rapid Micro Biosystems, Inc Earnings Call

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