Q3 2022 Rapid Micro Biosystems Inc Earnings Call

November 10, 2022

Operator: Hello. My name is Lisa and I will be your conference operator today.

Operator: At this time I would like to welcome everyone to the Rapid Micro Biosystems third quarter 2022 earnings conference call.

Operator: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator: To ask a question during this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press star one again.

Operator: Thank you. I would now like to turn the call over to Mr. Mike Beaulieu. Please go ahead, Sir.

Michael Beaulieu: Okay.

Michael Beaulieu: Good morning, and thank you for joining the Rapid Micro Biosystems third quarter 2022 earnings call.

Michael Beaulieu: Joining me on the call are Rob Spignesi, Chief Executive Officer, and Sean Wirtjes, Chief Financial Officer.

Michael Beaulieu: Earlier today, we issued a press release announcing our third quarter financial results.

Michael Beaulieu: A copy of the release is available on the Company's website at rapidmicrobio.com under "Investors" in the "News and Events" section.

Michael Beaulieu: Before we begin I would like to remind you that many statements made during this call maybe 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.

Michael Beaulieu: 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 anticipated year end cash balance cash runway and future revenue in system placements.

Michael Beaulieu: Expectations for our projected cost savings, resulting from the organizational restructuring actions expectations for business development and growth the board of directors review of potential strategic alternatives.

Michael Beaulieu: Customer interest and adoption of the growth direct system expectations for new for our new R&D nucleus bold alarm and the potential impact of macro economic uncertainty and COVID-19 on rapid micros business.

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

Michael Beaulieu: 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 24, 2022, as such risk factors are updated in our subsequent filings with the SEC.

Michael Beaulieu: 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.

Michael Beaulieu: 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.

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

Michael Beaulieu: This conference call contains time sensitive information and is accurate only as of the live broadcast today November 10 2022.

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

Michael Beaulieu: And with that I'll turn the call over to Rob.

Robert G. Spignesi: Thank you Mike Good morning, everyone and thank you for joining us today.

Robert G. Spignesi: Before I begin I would like to remind everyone that as we announced on August 12 2022.

the company's Board of directors initiated a review of strategic alternatives to determine the best path to maximize shareholder value.

Robert Spignesi: The board is progressing through its review and we will not have any further comments or updates on today's call. As a reminder, there can be no assurance that.

Robert G. Spignesi: The strategic alternative process will result in a particular transaction or any other strategic outcome.

Robert G. Spignesi: I'll begin my discussion with a few highlights from the third quarter, followed by a review of the progress we are making with respect to customer engagement.

Robert G. Spignesi: Next I will discuss the actions being taken and enhancements, we are making to improve commercial execution and.

Robert G. Spignesi: And finally, Shawn will provide details of our third quarter performance and fourth quarter outlook.

Robert G. Spignesi: As an organization our top priority remains accelerating growth direct system placements.

Robert G. Spignesi: Focus since assuming commercial leadership responsibility has been on enhancing customer engagement and experience and improving the efficiency and effectiveness of our sales team.

Robert G. Spignesi: We are pleased with our performance in the third quarter, which in most areas was ahead of the cadence we expected when we updated our guidance in August .

Robert G. Spignesi: Total commercial revenue in Q3 was $4 $7 million, we placed three growth direct systems during the quarter.

Robert G. Spignesi: One system went to a U S based biopharma customers in gene therapy field.

Robert G. Spignesi: And the other two systems replaced with a European customer focus on mrna therapies.

Robert G. Spignesi: As a result of our Q3 performance we are reaffirming our full year 2022 commercial revenue guidance of at least $17 million.

Robert G. Spignesi: In person access to customer sites continue to improve in the quarter by personally traveled to both Europe and Asia to meet with existing and prospective customers.

Robert G. Spignesi: Across my visits it was clear that our value proposition is resonating and our commercial teams are connecting with new and existing customers.

Robert G. Spignesi: excited about the sales pipeline building for 2023.

Yeah.

Robert G. Spignesi: We have also participated in a number of in person industry conferences for the first time in over two years. We are on track to attempt over 20 events and conferences around the globe. This calendar year, and we have been hosting an increasing number of customer tours and hands on growth direct sessions in the U S at our Lowell facility and in Europe at our Munich facility.

Munich facility.

Robert G. Spignesi: In September I was invited to participate in the PDA FDA joint regulatory conference in Washington D. C topic of Microbiology lab of the 20 first century.

Robert G. Spignesi: I gave a presentation on how rapid micro thinks about and is shaping the lab of the future.

Robert G. Spignesi: Along with a rapid micro colleague I took part in a panel discussion covering the micro QC lab of the future and industry 4.0 technologies, such as our growth rate and deliver required automation data integrity.

Robert G. Spignesi: And patient safety and move micro QC into the 20 first century.

Robert G. Spignesi: The panel also included a senior regulator, who provide a great insights into the regulatory landscape and strongly encourage market participants to consider adopting new technologies that modernize our micro QC labs, such as through both direct.

Robert G. Spignesi: Additionally, representatives from global pharma companies were in attendance and interacting with the panel during the Q&A session. He was an inspiring exchange among the regulators industry and rapid micro and as we discussed the benefits of technology, such as our Gulf direct operating cost efficiency and patient safety benefits of. Manufacturing.

Manufacturing.

Robert G. Spignesi: Also in early October we were a platinum sponsor of the 2022 PDA pharmaceutical Microbiology conference.

Robert G. Spignesi: Historically this is one of the largest microbiology conferences of the year is one of the most important annual events for rapid micro the conferences attended by global industry professionals, academia and regulatory authorities.

Robert G. Spignesi: This year at PDA, we featured an operational growth direct system and hosted several tech talks and poster presentations.

Robert G. Spignesi: RMB thought leadership and automated quality control was on full display in the customer retention, we received was significant.

Robert G. Spignesi: Importantly, our executive leadership and commercial teams hosted a dinner that was attended by several dozen customers. This special event enabled deep engagement between rapid micro executives and key users and decision makers at existing and prospective customers.

Robert G. Spignesi: As we have been discussing since the onset of Covid. Our sales process is highly consultative. When we are in person and on site with customers, we gain a better understanding of their workflows and challenges in their micro QC operations being the person also allows us a better environment to educate and in the case of the PDA conference and meetings at our. facilities to demonstrate.

facilities to demonstrate.

Robert G. Spignesi: Capabilities of the growth direct system.

Robert G. Spignesi: Again in person demonstrations show how growth directly meet the speed and data integrity and regulatory demands of the future of pharmaceutical manufacturer.

Robert G. Spignesi: In cases, where customers have visited our facilities, we have been able to present, our manufacturing capabilities provide hands on growth direct demonstrations and showcase our state of the art fully automated the consumables manufacturing process.

Robert G. Spignesi: As we discussed last quarter, improving customer access as one element of driving system sales or other top priority is to enhance the consistency and effectiveness of our global sales team.

Robert G. Spignesi: In August we continued to build on our marketing and lead generation capabilities by hiring a director of global marketing, who is experienced in building brand awareness and lead generation capabilities for multinational life Sciences companies.

Robert G. Spignesi: The combination of increased infield prospecting by our sales team and expanded marketing capabilities are significantly increasing the number of quality leads we are generating.

Robert G. Spignesi: We are also tasked our commercial leadership team implementing new strategies targeted at global key accounts.

Robert G. Spignesi: A meaningful portion of our funnel includes multi system opportunities from existing customers looking to expand that goes direct rollouts across our global manufacturing networks. We're also developing exciting opportunities with a number of new large and midsize crossovers.

Robert G. Spignesi: Looking forward, we expect to produce and publish an increasing number of science based white papers and technical Webinars that will continue to position rapid micro as the thought leader in the market.

Robert G. Spignesi: These efforts are expected to generate new sales leads and expand awareness of our innovative solutions.

Robert G. Spignesi: Now I would like to shift gears and provide an update on our product development efforts.

Robert G. Spignesi: We're extremely pleased to announce our innovative mobile detection product during the recent PDA conference, where there was a high level of customer interest and excitement. We are officially branding this new product RMB nucleus mobile arm.

Robert G. Spignesi: It will be available on the growth direct systems through a software update.

Mold alarm is designed to rapidly accurately detect and differentiate environmental molds from other organisms and the pharmaceutical manufacturing process.

Robert G. Spignesi: It incorporates enhanced.

Robert G. Spignesi: Enhanced data integrity and generates automated alerts as soon as Ebola detected in as little as one day.

Robert G. Spignesi: This capability allows for early intervention mitigation and reduce risk of further contamination.

Robert G. Spignesi: Turning to rapid sterility, our beta process with our customer partner is ongoing we are gaining in addressing valuable feedback on the product and confirming the core value prop of accuracy and <unk> results.

Robert G. Spignesi: It's really testing is often the final test report product release, and can take 14 or more days to complete using the traditional method, we and our customers are excited about our growth direct enable rapid sterility offering that will significantly accelerate time to detection and final results.

Robert G. Spignesi: We will provide updates as we continue to move through the beta process.

Robert G. Spignesi: To wrap up we are pleased with the progress we are making to improve customer engagement.

Robert G. Spignesi: I think commercial execution and advanced product development.

Robert G. Spignesi: Interest in our growth direct remains high and the introduction of mobile arm provides even more differentiation and value that we can bring to customers and importantly, the actions we have taken to rightsize our cost structure provide us with flexibility as we can.

Robert G. Spignesi: To advance our commercial execution and invest in expanding our growth direct platform.

Robert G. Spignesi: We remain confident that we have the right strategy in place and will continue to take appropriate actions to improve system sales in future quarters.

Robert G. Spignesi: That concludes my prepared remarks, I will now turn the call over to Shaun to discuss our third quarter performance in more detail and provide some comments around our fourth quarter outlook Sean .

Sean M. Wirtjes: Thanks, Rob good morning, everyone.

Sean M. Wirtjes: This morning, we reported third quarter 2022, commercial revenue of $4 $7 million, which.

Sean M. Wirtjes: to $6 $3 million of commercial revenue reported in Q3 2021.

product revenue, which is comprised of systems and consumables was $3 $2 million in Q3 compared to $4 $8 million last year. The difference was due to fewer placements of growth direct systems, partially offset by continued growth in consumables.

Sean M. Wirtjes: Placed three growth direct systems in the third quarter, which was ahead of our guidance due to the timing of the two system order that was placed with the customer in late Q3 versus our expectation that those systems would be placed in Q4.

Sean M. Wirtjes: Revenue from consumables increased approximately 30% in the third quarter compared to the prior year and over 20% sequentially.

Sean M. Wirtjes: As we discussed last quarter third party logistics delays in the final days of Q2 pushed approximately $200000 in consumables revenue into the third quarter.

Sean M. Wirtjes: Service revenue was $1 5 million in Q3, which was relatively flat compared to the third quarter of 2021.

Sean M. Wirtjes: We completed the validation of four systems in the third quarter.

Sean M. Wirtjes: While the validation we completed were in line with our expectations service revenue was below our expectations due to slower than expected progress on some ongoing validation due to customer timing.

Sean M. Wirtjes: Recurring revenue increased 34% to $2 9 million in the third quarter compared to the third quarter of 2021.

Sean M. Wirtjes: Driven once again by both consumables and service contracts.

Sean M. Wirtjes: Nonrecurring revenue was $1 8 million in Q3 compared to $4 $1 million last year as a result of fewer system placements and lower validation activity.

Sean M. Wirtjes: Turning to gross margins product margins were negative $2 4 million in Q3 compared to negative $1 5 million in the third quarter last year.

Sean M. Wirtjes: System margins were negative in the quarter due mainly to lower system revenue and reduced production volumes, the latter of which drove sequential decline versus Q2.

Sean M. Wirtjes: While consumable margins improved on a year over year basis due to the continued progress we're making on our manufacturing efficiency initiatives.

Sean M. Wirtjes: They declined on a sequential basis due to unfavorable mix and the write off of expired materials used in our old manual manufacturing process that we previously purchased for business continuity purposes.

Sean M. Wirtjes: Service margins were negative $376000 in Q3 compared to negative $37000 last year.

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

Sean M. Wirtjes: On a combined basis, our third quarter gross margin percentage was negative 59% versus negative 24% in Q3 last year.

Sean M. Wirtjes: 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.

Sean M. Wirtjes: Moving down the P&L total operating expenses were $14 1 million in the third quarter consisting.

Sean M. Wirtjes: Consisting of $3 9 million in sales and marketing three.

Sean M. Wirtjes: $3.0 million in R&D, and $7 $2 million in G&A.

Sean M. Wirtjes: This compares to total operating expenses of $10 8 million in the third quarter of 2021.

Sean M. Wirtjes: The increase was mainly due to $1 $1 million severance and other costs associated with the restructuring actions, we announced in August as well as $1 $2 million in expenses related to the unsolicited offer received by the company in late June and the strategic review process announced in August .

Sean M. Wirtjes: Net loss was $16 $3 million in Q3.

Sean M. Wirtjes: This compares to a net loss of $25.0 million in the third quarter last year.

Sean M. Wirtjes: The higher net loss in Q3 last year was primarily due to the impact of an $8 $2 million charge to adjust the fair value of our outstanding preferred stock warrants prior to their conversion into class a common stock warrants in connection with our IPO and a $3 $1 million charge related to the repayment of our term debt in the prior year period.

And higher net interest income in the current year period.

Sean M. Wirtjes: Actually offset by higher operating expenses in the current year period.

Sean M. Wirtjes: Net loss per share attributable to common shareholders.

38, cents in Q3, 2022 as compared to a net loss of 71 cents in the prior year quarter.

Sean M. Wirtjes: With respect to noncash expenses, and Capex depreciation and amortization was $0.7 million.

Sean M. Wirtjes: Comp expense was <unk> 7 million in capital.

Expenditures were $1 6 million in the third quarter of 2022.

As of September 30, we had $150 1 million in cash cash equivalents and investments.

We expect to finish the year with a cash and investments balance of approximately $140 million and remain confident this balance provides a cash runway at least into 2026.

Turning to our outlook my comments will be focused on the fourth quarter and full year 2022.

We are reaffirming our full year 2022 commercial revenue guidance of at least 17.0 million.

This guidance assumes that the company will place at least two systems in the fourth quarter, which is in line with the high end of the second half outlook, we provided in August .

This guidance continues to reflect a similar level of macroeconomic uncertainty and variability and some customer purchase decisions, including longer than expected lead times for multi system orders, which were discussed on our last earnings call.

Moving to validation, we expect to complete the validation and the fourth quarter, which is also in line with our prior guidance.

We expect revenue from consumables to step down sequentially in the fourth quarter before returning to sequential growth in the first quarter of 2023.

This is based on our current forecast for the cadence of customer deliveries as well as the impact of the $200000 in consumables revenue that shifted from the second quarter into Q3.

In service, we expect single digit sequential revenue growth in Q4 with higher service contract revenue largely offset by lower revenue from validation due to reduced system placements over recent quarters.

Based on this revenue outlook, we expect sequential improvement in our fourth quarter gross margin versus Q3, driven by continued benefits from cost reduction activities and lower onetime charges, partially offset by the impact of lower system placements.

Fourth quarter GAAP operating expenses are expected to be relatively consistent with the third quarter.

To summarize we believe the company is well positioned heading into 2023 and that the actions we are taking to improve our commercial execution will drive future system sales growth and enhance shareholder value.

We look forward to providing you more details on our 2023 outlook on our fourth quarter earnings call.

That concludes my comments on our Q3 performance and our Q4 and full year 2022 outlook now we will open the call up for questions operator.

At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.

Your first question comes from the line of <unk> with Morgan Stanley .

Hi, This is Neil on for David Thanks for taking my question. So wanted to start with site access are you seeing any divergent trends as far as geography could you speak to maybe the trends of momentum Youre seeing in Asia, and Europe versus North America.

Yes. So this is rob.

The trends are generally encouraging reading independent.

A little bit of a caveat I'll talk about in.

In Asia, but I've been personally insights.

North America with with very good access I would say Europe .

Good access maybe maybe a tick below the U S, but still improve.

Improving and then Asia and specifically I was.

South Korea with good access or are in China, It's a little more challenging.

But broadly in Asia, we put out.

Access with not with our teams.

Right.

Okay, that's really helpful and then.

Recently, one of your peers indicated that some of their large cap pharma customers have begun to freeze capex spend through the remainder of the year have you seen anything similar among any of your customers or any challenges you can speak to as far as customer hasnt hesitancy or budgetary constraints.

We haven't we haven't seen a fleece per se I.

I would say nor are we seeing it up.

Our year end, a year end budget flush so I.

I would say yes.

No remarkable movement in either direction clearly the macroeconomic environment.

What it is but we haven't specifically seen or been told about the budget fees per se.

Got it and then last one for me congrats on the deal.

You're asking on the multi section offering with that now expected by year end. How are you thinking about initial contributions in the fourth quarter will that present any upside to current topline guidance and then what levels of adoption do you anticipate among your current installed base.

Hey, this is Sean here, so on mold detection I think our focus in the near term is really an saturating the market as much as we can with that offering getting customers to use it.

Get used to it and ultimately get to a point, where they are willing to sign up for a recurring annual subscription. So I think as we look at Q4.

Did a launch pretty close to that.

Within a month probably ended the quarter.

Just on current timing and don't expect any meaningful contribution in revenue in Q4, I think we do expect some contribution in 'twenty three but again, we'll be much more focused on getting customers onto that product happy with it and then I would think that would expect to see much more of a contribution from it as we move into 2024 and beyond and get into that recurring.

Annual model with that product.

This is rob to jump on.

<unk> comments, yes, we don't have any specific.

Penetration rates that Chad.

Chat about today, but we do the sentiments quite strong around the product.

It's truly differentiated and to provide a steer to our customers whether or not <unk> present in their operations on a significantly accelerated basis is a very strong value prop. So we're excited about it our customers are as well.

We will continue to update you on future calls.

Great I appreciate it.

Congrats on the strong quarter.

Thank you.

Question comes from the line of Stan areas with Stifel.

Good morning, guys. Thanks for the question Sean on the sequential margin progression how much of the step down there was due to the write down that you mentioned and then can you remind me of the other factor that you highlighted I missed what you said that was.

Yeah, there's a couple of different factors that I'm happy to walk through that so on systems I mentioned lower production volumes.

Given where we've been on the system.

<unk> this year versus where we came into the year with expectations and we hit a point, where we decided we needed to rightsize some of our inventory finished goods systems in particular.

We did temporarily ramp down production in the quarter and that has an impact on our ability to absorb some of our overhead cost. So cost that we would have expected to go into the actual.

Inventory cost of those products more of that went into the expense in the quarter than we had earlier expected. So thats factor number one I think as we move forward.

And volumes pick up again will obviously increase that production volume and we would expect to see that go the other direction.

With time on consumables the write off that we had.

As you know in 2020, we went live on our automated consumable line, we have had some material that we maintain.

From a business continuity standpoint, just to ensure that if we needed to go back to a manual process. We had the right material on this particular, one is different than what we used in the automated process.

So that material and that was particularly important to us as we are in COVID-19.

So we have that on hand, it's reached a point now where it's becoming obsolete it actually hasnt expiry associated with it. So we reserve that in a quarter that was a couple of hundred thousand dollars lifting margins.

And that's obviously, a one time thing we won't expect that kind of thing recur.

And then on service just.

He came in lighter than we expected mainly due to validation activity timing with customers and that cost base is a little more fixed.

So being a little bit light on revenue there is a little bit more drop through creates a little bit of negative pressure on the margins in that space. So those are the three main factors.

Yes, Okay. That's helpful breakdown there.

And then maybe Rob on the access environment and sort of thawing there a bit out of Covid can you just talk to the appetite for new instrumentation. When you look at new versus existing customers, what youre hearing out there and and.

And where you think incremental placements might be skewed towards 2023.

Yes so.

Thanks, Dan I think it's generally encouraging environment.

For both.

In the field quite a bit and meeting with both new and.

An existing.

Customers.

Our forward.

Pipeline has got a good balance between them. So as I mentioned, we do have.

Multi system.

Opportunities in our pipeline for existing customers, but I'm also quite encouraged and excited about new customers in our pipeline as well.

So it's a good balance and we of course manage that balance we want to land in the continued to expand with our current customers, but then land, new large and midsize customers as well to stack up and keeping the land and expand.

Process, moving and to that point, it's a good mix of top twenty's in more mid sized businesses. So I think the diversity is encouraging within what Rob just described.

Further further diversity geographically as well as our team in Asia.

Growing up and I think as you know we have been historically strong in North America and Europe .

And we are just kind.

Kind of complete the view of kind of the high level pipeline remains focused largely but not completely on coffee advanced modalities biologics and cell and gene therapy to include <unk>, which is a sizable segment of our current base as well as our forward pipeline.

Yeah, Okay. Okay, if I could just sneak one more in here on the restructuring plan I mean, obviously, that's going to leave you in a better position mid and longer term, but I'm. Just curious if there are areas that you might flag.

You know in the next quarter or two when it comes to just sort of taking a step back and efficiency or momentum as you've just pared back the number of bodies and minds that are that are devoted to a task to a function.

Yeah.

Yes.

Yes happy to answer that Dan So I think we're.

I think it was you talked about last quarter, we focus that on.

Areas, where not commercial for number one I think we're trying to protect commercial given the investments we've made and the importance of what's happening in the business.

So we were pretty specific in terms of where we targeted things EMEA I mentioned last call, but if I didn't I will now.

Part of that was.

Taking out some resources.

Resources that we had brought in on a contract basis as well. So we had kind of mixed some staffing hiring between full time hires and contractors knowing that there was some risk to the year end.

As some of that started to manifest itself, we were able to more easily adjust the organization to take some of those resources out it wasn't all of those kinds of resources to be fair.

But I think we were structured in a way that there was less disruption and taking those kinds of resources out as a part of the reps. So.

I think we're not seeing anything I'd say material that in terms of taking that step back that you mentioned in terms of the organization and our ability to get things done and we also did some things through the rift that did a few promotions did some things relative to the structure of certain organizations that I think are actually providing.

More horsepower or more focus in those organizations thats actually helping since we announced it as well.

Got it.

Yes, I would agree with Shaun as part of it.

We're able to promote some of our top performers in the leadership impact and certainly we're starting to see that and commercial broadly in other functions as well as Ben.

It's been a strong benefit.

Okay, that's fairly.

C outlook, yes.

Yes, I got you. Thanks.

Yeah.

Question comes from the line of <unk> with J P. Morgan.

Yes.

Hey, Thanks for taking the question.

So first off here just some on the validation. So you had for validation of this quarter and you're pointing to three for next quarter and that's in line with the prior guidance of seven validation in the back half of the year, but can you just walk us through why with validation is really take that step down sequentially and then as a follow up call that service revenue being later than that.

Patients do the validation, but it sounds like those were roughly in line for the quarter. So can you walk us through the puts and takes there as well.

Yeah. So on the first question Rachel I think validation. This is the Kpis metric. This is an indicator where we actually finished the work.

Honest system.

It's not necessarily directly correlated to the amount of activity, which tends to drive the revenue.

So we have a situation, where we were able to get four systems over the finish line.

But the level of activity kind of more broadly within our validation team and the work that they were doing was a little bit slower than we expected it to be which is what drove the downside on the on the quarter and it wasn't major downside, but it was a little bit lighter than we expected it to be in Q3.

Your question on Q4 could you sorry could you repeat that I'm not sure I caught that whole question.

Yeah.

Just around the service revenue related to the validation it sounds like you called out.

Service revenue being lighter this quarter due to some of those validation, but then it looks like on a second half basis validation are coming in line. So just can you walk us through the dynamics there.

Yes, it's really the same set of dynamics I mean, the one other thing that I think it's important.

Note, there and I mentioned in my script was.

Yes.

That we have with the lower placements early in the year, Dave placements effectively create kind of a pipeline of validation work for our teams to do with placements being below expectations.

And we've now are kind of managing very closely that validation pipeline because the amount of new work to do as a little bit lower than we expected. So that is one of the factors, that's driving Q4 being a little lower than we expected.

Less new activity to do than we expected earlier in the year.

Great and then can you just give us some high level framework on how we should think about 2023. So for example, what's your target pull through per instrument next year and then do you have any visibility on that margin cadence and windows can put part of that.

Thanks.

Yes, yes, so I think consumables pull through we would expect that to continue to gradually increase.

As we move into and through 2023, I think we've talked about.

Somewhere in the 10% annual range in terms of what wed expect that to look like.

Over time, so not specifically pointed out for 'twenty three but that's generally how we've talked about that over overtime.

Yes, I think.

Terms of margins, we still have a goal of getting margins positive in 2023, that's not guidance at this point as diamond internal goal that we're working toward as we think about 2023.

At this point, given where we are and just.

Until we get to a point, we have more specific numbers to talk to you all about in 2020 through I think about that at the latter part of the year as the target that we're aiming for.

Great and then last one for me just on the strategic review can you give us the latest timing expectations on when you expect that to finish.

Yes, as Rob said in his comments, we don't have any updates at this point, we're not going to put any timing out there, we'll we'll be sure to update everyone. As soon as we have news on that topic.

Thank you.

Okay.

Our question comes from the line of Matt <unk> with Cowen.

Yes.

Hi, This is Stephanie on for Matt. Thanks for taking my question just a quick one from me.

Hey, Brian .

To improve the sales process and sales Rep training.

Probably around building awareness.

Any specific metrics you can provide around the impact that it's had on sales force productivity.

It will be to generate leads.

Yes, so we of course track those kpis internally, it's not something that we released.

Publicly but from a high level, we do attract do do track.

Youll lead generation and the rate of increased lead generation. We are we also look at in.

In person connectivity, we've talked quite a bit about the criticality of that so that is.

We do look at as well as sales force team productivity, specifically looked at that a couple of different ways.

And also funnel composition.

And.

And velocity, so I wont get into the actual numbers, but those are some of the areas that we look at to make sure that our execution is progressing at the rates and quality that we expect.

Got it that's helpful. And then just the last one from me.

And what are you seeing on supply chain.

Impact to your operations on that.

Yes, it did things supply chain, if anything is a little better I think we've said historically it hasn't really impacted us we were very conservative if you think about it from an inventory standpoint at least.

We were very conservative in terms of maintaining high levels of safety stock. So we've been pretty isolated from impacts from supply chain and I think as I said the environment looks a little better as time has gone on this year, especially.

Inflation, you didn't specifically ask that but thats typically the the other question that comes along with that and I think we are seeing inflation.

Different places within the business I think a little bit in labor some materials I wouldn't say that it's widespread and I wouldn't say that it's having a material impact on the business at this point.

Got it thanks for taking my question.

Yeah.

Sure.

There are no further questions I would like to turn the call back over to Ralph <unk> for closing remarks.

Thank you for joining us today, we appreciate your interest in our company and look forward to speaking with many of you in coming weeks.

This concludes today's conference you may now disconnect.

[music].

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