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 Beaulieu, 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 Spignesi, Chief Executive Officer; and Sean Wirtjes, Chief Financial Officer. Earlier today, we issued a press release announcing a business update and our second quarter financial results. A copy of the release is available on the company's website at rapidmicrobio.com under investors in 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 1995. 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 Micro's 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 Micro's 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. 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 US Biomedical Advanced Research and Development Authority or BARDA was completed in the fourth quarter of 2021. Throughout our quarterly performance discussions, we'll 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 turn the call over to Rob.

Thank you, Mike. Good morning, everyone. And thank you for joining us today. Typically I will start off 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 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 the specific reasons behind this later in my remarks. Second, 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 and key growth initiatives to drive future revenue growth. The actions under this plan include an approximately 20% reduction in our workforce, which is largely focused on noncommercial 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 truly focused on responsible cash management and continue to expect our current cash and investments of nearly $170 million to provide us runway into at least 2026. Decisions like these are never easy and this was especially difficult given how hard the entire R&D…

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 fewer placements 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 $200,000 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 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 validations, the speed at which customers transition to routine use and their ordering patterns. 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 11 validations completed in the same period last year. A few validations 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 validations can vary based on customer resources or project variables such as site construction and this was…

[Operator Instructions]. Our first question comes from Tejas Savant from Morgan Stanley.

Hi this Yuko on for Tejas. Thank you for taking our questions. With a few quarters now of soft system placements. Could you remind us of the efforts underway to decrease that time lag anything for quarters and full utilization?

Yuko, you're coming across very quiet to us.

Could you repeat the question?

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

Yeah. Yuko, thanks for repeating the question. 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 required to do with customers to validate their systems. I think we've talked in the past about some things we're 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. I think we've got one phase of that work that's completed now that is removing several weeks from a typical validation process 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 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 there's we believe there's significant potential speed that part of the process as well.

Yeah. And just to build on Sean's point the group, that we constituted last year are basically global project managers that work hand in glove with our teams and our customers critically to move efficiently through the process. You saw and 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. And 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 path a number of processes as well. So all 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 system for being used and pulling through 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 close sale and your prepared remarks. Could you elaborate on those dynamics? And do you see this more pronounced in any particular region?

Yeah. No. You know it's the really the it's discussed on previous calls the it's critical for us to be on-site working with customers it's just a relatively complex sales processes usually more than one stakeholder involved in the decision-making process. So the remote nature of some elements of the sales process during COVID, things aggressed in the gear it just it just puts friction into the sales process makes it harder to estimate the timing. We are encouraged in Q2, we've been able to get on to many more sites as we discussed globally this is region independent, we've had very good access in the US. Certainly good access and improving access in Europe even, improving access in Asia. Importantly as well, customers are back at trade shows. So this live activity is increasing both at the big industry events globally as well as on site critical customer environments, which helps us to a get better visibility of timing of our process and also to facilitate the speed of it. Now things are opening up in Q2. And we're gradually and we're getting encouraged. But that was a feature in COVID 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 Arias from Stifel.

Good morning guys. Thanks for the questions. Sean, on the longer-term forecast, during the IPO process I think you would talk about cumulative placements by 2024 being sort of in the neighborhood of, 350 to 360 placements or installs. Given the way that this year is shaping up, and next year might look what do you see as a reasonable target at this point?

Yeah. I think I'm not going 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 2023 we expect to get back to good double-digit growth we expect our recurring revenue to continue to crank along and well into the double-digits. 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 competence 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, you know particularly with an expectation that placements get back on track that we'll be able to deliver the kind of growth that we typically expect for this business as we look at 2023 and beyond.

Okay. And then, Rob, maybe on validation timelines that, I think have been a little longer in cases and 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 meaning please shorten at this point and given the way that the business will be evolving next year?

Yeah. We've with what we call Project Rapid, we've impacted Dan, meaningfully the IOQPQ process, which we we've been tracking the timelines on you know as Sean touched on. We're still working on different parts. There are some downstream parts that we work with the customer on our time results studies, and what's called melt 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, and we expect more gains in the coming quarters.

Okay. Appreciate that. Thank you, guys.

Thank you.

Our next question comes from Max Masucci from Cowen.

Hi. This is Stephanie Yan for Max. Thanks for taking my question. Rob, you noticed that you identified some sales related challenges and opportunities to improve aspects of your sales process and sales team training. Do you mind just walking us through what exactly the sales process and training looks like in Q2 the challenges that you saw and what areas you specifically see room to improve?

Yeah. Sure. So as I mentioned, our sales team is relatively new and Q2 marked the first time in a while that on a reasonably recurring basis, we were gradually more to 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, a relatively complex sales process going from initial conversation, to a customer through, understanding the customer needs, all the way through a close. I won't go through the detail on this call, but it is a process that the sales reps have to be proficient, and it's a consultative sale, to move through that in a proficient way, an organized way to close the sales of critical skills. So, that's clearly an area that, we've identified as increased in training opportunities. And then with that, to continue product exposure with our new team, understanding the Growth Direct and how it fits into the broader customer environment, also a strong training element that we're focused on. And then lead generation, a new opportunity of generation, both with our increased marketing effort as well as our direct prospect with our sales team. We're all among other initiatives that we're focused on to improve new opportunity creation and then having our sales team close them on a streamlined timeframe.

Got it. Thanks for that color. And then second question around the organizational restructuring plan. So you mentioned that involved a 20% reduction in your company's workforce, mostly on non-commercial functions. Can you remind us where your current company headcount stands in addition to where your sales team headcount stands? And then more typically, around other initiatives other than the portfolio transaction that the restructuring plan involved.

Yeah, I'll start it off, and I think Rob will have some comments, too, Stephanie. Yes. So we'll end after this action, right? Just think of it as right around 200 head count for the business, and that – we think that's the right place to be given kind of 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 at this point strategically.

Yes. Stephanie, sale – the sales head count think of our direct sales force, our capital equipment sales force deployed across US, Europe and Asia, as low double-digit numbers and full quota carrying. This doesn't include other elements of our commercial team, such as our consumable sales people and our validation and service folks.

Got it. Understood. Thanks for taking my question.

Sure. Thank you.

Our next question comes from Rachel Cascio with JPMorgan.

Hi. Thanks for taking the question, you guys. So first off, on gross margin, you said you no longer expect gross margins to flip positive in 4Q. So, can you just walk us through how we should think about the margin progression here? As a side, you've also topped out that 70% gross margin target before. We appreciate that most of that really comes from operating leverage on the consumables volume line. So can you just walk us through, is there a consumables number that's really tied to that 70% gross margin target? Would it be at $50 million in consumables, $100 million to be able to reach that? On any color on that while you're thinking about gross margins would be helpful. Thanks.

Yes I'll start more near-term. Rachel I think you touched on it. operating leverage is what is driving the change and where our expectation for Q4 was system placements expectations not where we have them. It doesn't give us enough leverage there. I mentioned in my comments we were ahead of schedule on consumables margins compared to think longer term that's very encouraging. You know that we're doing the things that we had intended to do and doing it backwards. And at least at this point nearer than what we expected. I'm not going to give a specific number, we did that in that range that you're talking about in terms of when we can get considerable margins up 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 we bet we have teed up for the future to get to that point. So, there's an execution element there that 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 2023 those there 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'll get flip positive in 2023.

Got it. And then you flagged a few multi-system orders that were delayed during the quarter. Those large multi-orders, obviously, can drive a fair amount of lumpiness. So, can you walk us through specifically what's going on with those instances? And then is there a risk that those leads could really fall out of the funnel? And what's assumed for closing rates for each of those multi system orders going forward? Thanks.

Yes, so many of the orders that were referred to our existing customers not all is a good blend that we think we are confident that we will secure those waters, it's more a function of time than if and it typically boils down and these cases were no different to usually cut customer specific issues. We see construction these macro -- broadly macro areas we can call it you know turnover for example has still been a feature if we lose a project or champion or someone's redeployed to a different internal project can slow down a process we see construction, somewhat frequently getting our way to in some cases a site needs to be fitted for the growth racks. In some cases, new labs are being built. All these can create lags with regard to system placements and you know 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 Spignesi, CEO for closing remarks.

Well, thank you all for joining us today. We appreciate your interest in our company and I look forward to speaking with many of you in the coming weeks. We hope to see many of you in-person on September 13th at the Morgan Stanley Healthcare Conference. Thank you again.

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