Hello. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Rapid Micro Biosystems Third Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Mike Beaulieu. Please go ahead, sir.

Good morning and thank you for joining the Rapid Micro Biosystems third 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 our third quarter financial results. A copy of the release is available on the company’s website at rapidmicrobio.com under Investors in the News & 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, anticipated year-end cash balance, cash runway and future revenue and system placements, 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, customer interest and adoption of the Growth Direct System, expectations for new – for our new RMBNucleus Mold Alarm 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 U.S. 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 non-commercial 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, November 10, 2022. 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. And with that, I’ll turn the call over to Rob.

Thank you, Mike. Good morning, everyone. And thank you for joining us today. 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. 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 the strategic alternative process will result in a particular transaction or any other strategic outcome. I will 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. Next, I will discuss the actions being taken and enhancements we are making to improve commercial execution. And finally, Sean will provide details of our third quarter performance and fourth quarter outlook. As an organization, our top priority remains accelerating Growth Direct System placements. My focus since assuming commercial leadership responsibility has been on enhancing customer engagement and experience and improving the efficiency and effectiveness of our sales team. 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. Total commercial revenue in Q3 was $4.7 million. We placed 3 Growth Direct Systems during the quarter one system went to a U.S.-based biopharma customer in gene therapy field and the other two systems were placed with a European customer focused on mRNA therapies. As a result of our Q3 performance, we are reaffirming our full year 2022 commercial revenue guidance of at least $17 million. In-person access to customer sites continues to improve in the quarter, and I personally traveled…

Thanks, Rob. Good morning, everyone. This morning, we reported third quarter 2022 commercial revenue of $4.7 million, which compares 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. We placed 3 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 to the customer in late Q3 versus our expectation that those systems would be placed in Q4. Revenue from consumables increased approximately 30% in the third quarter compared to the prior year and over 20% sequentially. As we discussed last quarter, third-party logistics delays in the final days of Q2 pushed approximately $200,000 in consumables revenue into the third quarter. Service revenue was $1.5 million in Q3, which was relatively flat compared to the third quarter of 2021. We completed the validation of 4 systems in the third quarter. While the validations we completed were in line with our expectations, service revenue was below our expectations due to slower-than-expected progress on some ongoing validations due to customer timing. Recurring revenue increased 34% to $2.9 million in the third quarter compared to the third quarter of 2021, driven once again by both consumables and service contracts. 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. 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. System margins were negative in the quarter due mainly to lower system revenue and…

[Operator Instructions] Your first question comes from the line of Tejas Savant with Morgan Stanley.

Hi. This is Neil on for Tejas. Thanks for taking my questions. So I wanted to start with site access. Are you seeing any divergent trends as far as geography? And could you speak to maybe the trends or momentum you’re seeing in Asia and Europe versus North America?

Yes. So this is Rob. The trends are generally encouraging region-independent. A little bit of a caveat, I’ll talk about in Asia, but I’ve been personally in sites across North America with very good access. I would say Europe, good access, maybe a tick below the U.S., but still improving. And then Asia, specifically, I was in South Korea with good access. In China, it’s a little more challenging. But broadly in Asia, we have good access with our teams on sites.

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 hesitancy or budgetary constraints?

We haven’t seen a freeze per se, I would say, nor are we seeing a year-end budget flush. So I would say there is kind of a no remarkable movement in either direction. Clearly, the macroeconomic environment is what it is, but we haven’t specifically seen or been told about a budget freeze, per se.

Got it. And then last one for me, congrats on the announcement on the mold detection offering. With that now expected by year-end, how are you thinking about initial contributions in the fourth quarter? Would that present any upside to current top line guidance? And then what levels of adoption do you anticipate among your current installed base?

This is Sean here. So on mold detection, I think our focus in the near-term is really in 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, it did a launch pretty close to – within a month, probably at the end of the quarter based on current timing. We don’t expect any meaningful contribution in revenue in Q4. I think we do expect some contribution in ‘23, but again, we will be much more focused on getting customers onto that product, happy with it. And then I would think – I 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 Sean’s comments, yes, we don’t have any specific penetration rates that we will chat about today. But we do – the sentiment is quite strong around the product. It’s fairly differentiated and to provide a steer to our customers, whether or not mold is 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, and we will continue to update you all on future calls.

Great. Appreciate it. Congrats on the strong quarter.

Thank you.

Next question comes from the line of Dan Arias with Stifel.

Good morning, guys. Thanks for the questions. 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.

Yes. I’ll walk – there is a couple of different factors, Dan, so I’ll be happy to walk through that. So on systems, I mentioned lower production volumes. Given where we’ve been on some system placements this year versus where we came into the year with expectations, we hit a point where we decided we needed to right-size some of our inventory, finished goods systems in particular. So we did temporarily ramp down production in the quarter, and that has an impact on our ability to absorb some of our overhead costs. So costs that would – we would have expected to go into the actual inventory cost of those products. More of that went into expense in the quarter than we had earlier expected. So that’s factor number one. I think as we move forward and volumes pick up again, we will obviously increase that production volume, and we’d 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 on a – from a business continuity standpoint, just to ensure that if we needed to go back to a manual process, we had the right material, and this particular one is different than what we use in the automated process. So that material – and that was particularly important to us as we were in COVID. So we had that on hand. It’s reached a point now where it’s becoming obsolete. It actually has an expiry associated with it. So we reserved that in the quarter. That was a couple of hundred thousand dollars within consumables margins. And that’s obviously a one-time thing. We won’t expect that kind of thing to recur. And then on service, just we came in lighter than we expected, mainly due to validation activity, timing with customers. And that cost base is a little more mixed. So being a little bit light on revenue, there is a little bit more drop through and creates a little bit of negative pressure on the margins in that space. So those are the three main factors.

Yes. Okay. That’s a 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 you’re hearing out there? And where you think incremental placements might be skewed towards in 2023?

Yes. Thanks, Dan. I think it’s a generally encouraging environment for both. I’ve been at the field quite a bit and meeting with both new and existing customers. The – our forward pipeline has got a good balance between them. So as I mentioned, we do have multisystem 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 and continue to expand with our current customers, but then land new, large and midsized customers as well to stack up and keeping the land and expand process moving.

Yes. And to that point, it’s a good mix of top 20s and more midsized businesses. So I think the diversity is encouraging within what Rob just described.

Yes, further diversity geographically as well as our team in Asia is pulling up. And I think, as you know, we’ve been historically strong in North America and Europe. And we are – just to kind of complete the view of kind of the high-level pipeline remains focused largely, but not completely, I would call it, the advanced modalities of biologics and cell and gene therapy to include CDMOs, which is a sizable segment of our current base as well as our forward pipeline.

Yes. 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 in the next quarter or two when it comes to just sort of taking a step back in efficiency or momentum as you’ve just pared back the numbers of bodies and minds that are devoted to with task or to a function? Thanks.

Yes. Yes, happy to answer that, Dan. So I think we’re – I think as we talked about last quarter, we focused that on areas where not commercial, number one, I think we’re trying to protect commercial given the investments we made and the importance of what’s happening in the business. So we were pretty specific in terms of where we targeted things. I may have mentioned last call, but if I didn’t, I will now. Part of that was taking out some 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 were some risks to the year. And as some of that started to manifest itself, we were able to more easily adjust the organization and take some of those resources out. It wasn’t all those kinds of resources to be fair. But I think we were structured in a way that there was less disruption in taking those kinds of resources out as a part of the riff. So I think we’re not seeing anything, I’d say, material in terms of taking that step back that you mentioned in terms of the organization or our ability to get things done. And we also did some things through the riff that we did a few promotions and did some things relative to the structure of certain organizations that I think are actually providing more horsepower or more focus in those organizations that’s actually helping since we announced it as well. Rob, you may have some thoughts.

Yes, I would agree with Sean. It’s part of it. We were able to promote some of our top performers and the leadership impact. And certainly, we’re starting to see that in commercial broadly and other functions as well. It’s been a strong benefit. Early days.

That’s the outlook, yes.

Yes, I got it. Thanks.

Next question comes from the line of Rachel Vatnsdal with JPMorgan.

Hey, thanks for taking the question. So first off here, just some on the validation. So you had four validations this quarter and you’re pointing to three for next quarter. That’s in line with the prior guidance of seven validations in the back half of the year. But can you just walk us through why would validations really take that step down sequentially? And then as a follow-up, you called out service revenue being lighter than your expectations due to validations, 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?

Yes. So on the first question, Rachel, I think validation, this is a KPI metric. This is an indicator where we’ve actually finished the work on a system. It doesn’t – 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 quarter. It wasn’t major downside, but it was a little bit lighter than we expected it to be in Q3. Your question in Q4, could you – sorry, could you repeat that? I’m not sure I caught that whole question.

Yes. That are just around the service revenue related to the validations. It sounds like you called out service revenue being lighter this quarter due to some of those validations. But then it looks like on a second half basis, validations 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 to note there, and I mentioned it in my script was that we – with the lower placements early in the year, the placements effectively create kind of a pipeline of validation work for our team to do with placements being below expectations, and we now are kind of managing very closely that validation pipeline because the amount of new work to do is 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, just 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 for instrument next year? And then do you have any visibility on that margin cadence and when this can turn positive? Thanks.

Yes, yes. So I think consumables pull-through, we’d expect that to continue to gradually increase as we move into and through 2023. I think we talked about somewhere in the 10% annual range in terms of what we’d expect that to look like over time. So not specifically doing that for ‘23, but that’s generally how we talked about that over time. Yes, I think in terms of margins, we still have a goal of getting margins positive in 2023. That’s not guidance at this point, and it’s kind of an 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 where we have more specific numbers to talk to you all about in 2023, I think about that as 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? Thanks.

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 will be sure to update everyone as soon as we have news on that topic.

Got it. Thank you.

Next question comes from the line of Max Masucci with Cowen.

Hi, this is Stephanie on for Max. Thanks for taking my questions. Just a quick one from me. So super encouraging to hear the efforts that you’ve put in to improve the sales process and sales force training, especially around building awareness. Are there any specific metrics you can provide around the impact that it’s had on sales force productivity and the ability to generate lease?

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 track lead generation and the rate of increased lead generation. We are – we also look at in-person connectivity. We’ve talked quite a bit about the criticality of that. So that is something that we do look at as well as sales force team productivity specifically, and we look at that a couple of different ways and also funnel composition and velocity. So I won’t 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 rate and quality that we expect.

Got it. That’s helpful. And then just one last one from me. Any – what are you seeing on supply chain plan? Are you seeing any impact to your operations on that?

Yes. I do think supply chain, if anything, is a little better. I think we’ve said historically, it hasn’t really impacted us. We were very conservative. But 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 that’s typically the other question that comes along with that. And I think we are seeing inflation in 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 questions.

Sure.

At this time, there are no further questions. I would like to turn the call back over to Rob Spignesi for closing remarks.

Well, thank you for joining us today. We appreciate your interest in our company and look forward to speaking with many of you in the coming weeks.

This concludes today’s conference. You may now disconnect.