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spk00: Good morning and welcome to the RAPID Microbiosystems first quarter financial results call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like 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 the star one again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mike Villier of Investor Relations to begin the conference. Mike, over to you.
spk02: Good morning, and thank you for joining the Rapid Microbiosystems first quarter 2023 earnings call. Joining me on the call are Rob Spignesi, President and Chief Executive Officer, and Sean Werches, Chief Financial Officer. Earlier today, we issued a press release announcing our first quarter 2023 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 were 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, future revenue and system placements, expectations for business development and growth, customer interest and adoption of the growth direct system, expectations for our new RMB nucleus mold alarm, and the potential impact of macroeconomic uncertainty and the coronavirus pandemic 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 10, 2023, 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. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 5, 2023. 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 now turn the call over to Rob. Thank you, Mike.
spk03: Good morning, everyone, and thank you for joining us to review our first quarter 2023 results. I will begin this morning's call with a summary of our first quarter performance, followed by a brief discussion of the progress we are making to both accelerate growth direct system placements and advance our new product development opportunities. I will then turn the call over to Sean for a more detailed discussion of our financial results. Our execution in the first quarter was solid across systems, consumables, and services. First quarter total revenue was $5 million, representing growth of 21% compared to the first quarter last year. We placed three systems and completed the validation of two customer systems in a quarter. Recurring revenue increased 22% to $3.3 million compared to Q1 last year. On our fourth quarter earnings call in March, we indicated that we had confidence in our plan to accelerate system placements in 2023 and return rapid and micro to solid growth. We believe our first quarter performance is an early indicator of the effective execution against those plans. Based on our solid first quarter performance, the progress we've made to improve execution, and our funnel of system placement opportunities, we are reaffirming our full year 2023 revenue guidance of at least $22 million, representing growth of at least 30% compared to 2022. That said, and as we discussed in March, we are still operating in a dynamic macroeconomic environment, and our guidance reflects some of the uncertainty that this presents. Our highest priority remains accelerating growth direct system placements. Now I want to discuss some of the progress that we have made, as well as customer engagement activities that we have activated to support this priority. During the first quarter of 2023, I had the opportunity to visit customers across Europe and North America as we seek to strengthen existing partnerships and establish new relationships. With each visit, I am reminded of the challenges our customers face in keeping up with an increasingly complex manufacturing environment. Through these visits, my understanding of how our customers utilize the Growth Direct system continues to develop. I believe that the value proposition of the Growth Direct system, including faster time to results, automation, and data integrity, continues to resonate with our customers, which gives me confidence in our potential to grow both our recurring revenue and additional system placements. In March, we had the pleasure of hosting the quality leadership team of one of our key account customers at our Lexington facility. We believe that key account customers tend to be some of our strongest users of Growth Direct systems and represent a meaningful portion of our future multi-system order opportunities. We were pleased to receive positive customer feedback on the Growth Direct system and overall rapid micro-experience. and we are excited about the prospect of collaborating with customers on future global manufacturing expansion plans. While meeting at our Lexington facility, we were also able to share the progress we have made expanding our own manufacturing capabilities. Once completed, Lexington will complement our primary manufacturing site in Lowell, Massachusetts, and will include a backup consumable manufacturing line, full R&D capabilities, and importantly, a new growth direct customer demo lab. Construction and validation is expected to be completed by mid-year 2023. More recently in Europe, we held a two-day workshop for prospective customers which covered the theory and practice of rapid micro-methods, including regulatory compliance and a roundtable discussion of best practices. We believe that in-person customer workshops are a highly effective element of our sales process that hands-on experience with a growth direct demonstrates its value proposition to prospective customers. And finally, over the coming weeks, we plan to host industry professionals, customers, and prospective customers for site tours at our local facility. And as we move into the second half of the year, we continue to plan for growth direct days and to work with customers who are advocating on our behalf by presenting globally at industry events. These high-value events include robust Q&A sessions, and our structure to educate customers on the real-world benefits of automating their MQC processes and the value of the Growth Direct system. Now, I would like to provide an update on our new product development efforts, which are another key element of our growth strategy. Following the recent launch of RMB Nucleus Mold Alarm, we have transitioned into our product commercialization strategy. This plan includes focusing on customer education, increasing awareness and driving utilization of this new software product offering. I'm excited to report that we are off to an encouraging start. New customers have a high level of interest in MoldAlarm, and we are working with existing customers to educate them on the value of this product. Briefly, on our rapid sterility program, we have continued to make substantial progress with a top 20 global customer. We recently achieved an important development milestone and remain on track with our internal plans. We expect to provide additional details on this development program on future earnings calls. So, to summarize a few key takeaways, we believe that our first quarter performance was solid across the business and above expectations in many respects. We are executing against our plan to accelerate growth direct system placements. Our recurring revenue is growing meaningfully. Our funnel of new growth direct system opportunities remains solid, and we are gaining traction on the commercial release of mold alarm and advancing development of rapid sterility. Before turning the call over to Sean, I want to highlight the press release we put out last night announcing the appointment of Mike Wasacki as our Senior Vice President of Sales and Marketing, effective Monday, May 8th. Mike spent nearly two decades at General Electric and GE Healthcare and is a recognized commercial leader with a proven track record of implementing successful sales strategies that have driven significant revenue growth. Mike will be a member of our executive leadership team, and we are excited to have him on board. Now... I would like to turn the call over to Sean to discuss our first quarter performance. Sean?
spk04: Thanks, Rob. Good morning, everyone. This morning, we reported first quarter 2023 revenue of $5.0 million, which compares to $4.2 million of revenue in Q1 2022. We placed three growth direct systems in the first quarter compared to two in Q1 last year. Our Q1 2023 placements included one system that we previously forecasted in Q2, but were able to pull into Q1. Product revenue, which is comprised of systems and consumables, was $3.3 million in Q1 compared to $2.6 million in Q1 last year. The additional system placed in Q1 this year accounted for the majority of the year-over-year increase in product revenue. Consumables revenue grew 12% compared to Q1 last year. Service revenue was $1.7 million in Q1 2023 compared to $1.6 million in Q1 last year. we completed the validation of two systems in the quarter compared to nine in the prior year quarter. Validation revenue was lower in Q1 this year, primarily as a result of fewer system placements in 2022 versus 2021, which resulted in a lower volume of validation activity in the period. Also, as a reminder, several validations that we expected to complete in Q4 2021 were delayed into Q1 last year, impacting the comparison. As of March 31st, we had a total of 105 validated systems, which drove growth in service contract revenue of almost 50% in Q1 2023, more than offsetting the lower validation revenue in the quarter. First quarter recurring revenue increased 22% to $3.3 million, compared to $2.7 million in Q1 last year, driven by growth in both consumables and service contract revenue. Non-recurring revenue was $1.8 million in Q1 compared to $1.5 million in the prior year quarter. Turning to gross margins, product margins were negative $1.7 million in Q1 compared to negative $1.8 million in the first quarter last year. The improvement was driven by continued progress on our manufacturing efficiency and product cost reduction initiatives and consumables. Despite the benefit of one incremental placement, system margins were lower in Q1 this year as they continue to be impacted by lower production volumes. Service margins were negative $0.1 million in Q1 2023, which was essentially flat compared to Q1 last year. The benefit of higher service contract revenue and good service cost control were offset by lower validation revenue in Q1 this year. On a combined basis, our first quarter gross margin percentage was negative 36%, compared to negative 46% last year. The year-over-year improvement was largely a result of ongoing progress on our manufacturing efficiency and product cost reduction initiatives in both consumables and systems. We are also focused on increasing productivity and efficiency in our service business. We continue to expect these activities, as well as increasing volumes, to lead us to positive gross margins in 2024. Moving down the P&L, total operating expenses were $13.1 million in the first quarter, consisting of $3.5 million in sales and marketing, $3.2 million in R&D, and $6.5 million in G&A. Excluding $0.9 million in retention costs related to the restructuring plan we announced in August last year, total OPEX was $12.2 million in Q1. This compares to total operating expenses of $13.1 million in the first quarter of 2022. Net loss was $13.9 million in Q1 2023. This compares to a net loss of $14.9 million in the first quarter last year. The year-over-year improvement was primarily due to higher interest income due to higher rates earned on our short- and long-term investments. Net loss per share was 32 cents in Q1 2023 compared to net loss per share of 35 cents in the prior year quarter. With respect to non-cash expenses and capital expenditures, depreciation and amortization was $0.8 million, stock compensation expense was $1.2 million, and capital expenditures were $0.8 million in the first quarter of 2023. I'll now turn to our 2023 outlook for the full year and the second quarter. We are reaffirming our previous full year 2023 revenue guidance. We continue to expect revenue of at least $22 million, which assumes we will place at least 15 systems and represents growth of at least 30%. As Rob mentioned, we are still operating in a dynamic macroeconomic environment. We are seeing customer budgets receive increased scrutiny, which is affecting the timing and scale of some purchase decisions and could create revenue variability especially in systems. Our guidance reflects some of this uncertainty, and we are continuously assessing the environment and monitoring customer interactions for changes in purchasing decisions. For the second quarter, we expect commercial revenue of at least $4 million, which assumes at least two system placements. From there, we expect to continue to build momentum as we move through the year, with revenue and system placements accelerating as we move into the second half of 2023. We continue to expect to complete at least 14 validations in 2023, with at least two in the second quarter. With respect to validation revenue, we expect Q2 to be similar to Q1. We then expect validation revenue to increase in the second half compared to the first half. Although there may be some quarter-to-quarter variability over the balance of the year, based on the timing of customer validation activities for previously placed systems, as well as the lag between system placements and related validation work for new system placements. Based on our revenue outlook, we expect our Q2 2023 gross margin to be lower than Q1 due to lower revenue and lower system production volumes, and then improve as the year progresses as our cost reduction and manufacturing efficiency initiatives generate additional benefits, especially in consumables and volume leverage increases. With respect to operating expenses, We continue to expect between $12.5 million and $13.5 million per quarter over the balance of 2023, with variability mainly driven by non-recurring severance expenses that will impact Q2 and Q3 of this year, as well as the timing of certain new product development activities. Finally, we had approximately $122 million in cash, cash equivalents, and investments as of March 31st. Our Q1 2023 cash burn included outflows related to the payment of several large 2022 expenses that we do not expect to recur over the balance of the year, including annual bonuses and costs related to the strategic alternatives review we completed in Q4. We also expect to realize significant cash benefits from working capital management, particularly ongoing inventory reduction activities, over the balance of the year. As a result, we continue to expect to end 2023 with cash investments at or slightly below $100 million, which is consistent with the guidance we provided in March. We remain confident that this provides us with cash runway at least into 2026. That concludes my comments on our full year in Q2 outlook, so at this point, we'll open the call up for questions. Operator?
spk00: At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Tejas Zavant of Morgan Stanley. Your line is open.
spk01: Hello, this is Yuko on the call for Tejas. Thank you for taking our questions. Maybe to start, could you comment on what you're hearing around tightening budgets among your customers and Do you see it worse in one region versus another, or is it pretty similar across the board at this point?
spk03: Yes, this is Rob. There's no, we're not perceiving any differences across the three primary regions in which we operate. And as far as the first part of the question, you know, budgets haven't been have certainly not been slashed. As we talked about in our remarks, they are, in some cases, just going through what can be considered more scrutiny, which could extend some of the processes. It just feels like there's a tighter filter on some of the internal processes with some of our customers.
spk01: Okay, that's full color. Thank you. And then maybe somewhat of a related question. When you think about your current funnel, could you share the mix between existing and new customers? And how would you describe the proportional multi-unit potential versus single units and how that trended over the last several months?
spk03: Yeah, so the best way to think about it, I won't break it down in a quantitative way, but the best way to think about it, and this is a metric that we look at quite often, think of it as a good balance between new customers and and existing customers. We now have, which I'm incredibly encouraged by, three nearly fully staffed commercial regions in North America, Europe, and Asia. I'm incredibly excited about the talent, the new talent that we're bringing on board, as well as joining our existing top talent. So we've got our regions online. We're working with developing new customer opportunities, and our funnel reflects that. And the best evidence we have that our existing customers are continuing to see a growth direct value proposition is our recurring revenue and our consumption of consumables and services. So that propagates into our funnel, and we've got a healthy mix across our regions of both new and existing. Clearly, we're a bit newer in our Asia region, so that's a little bit more weighted towards newer customers. But on balance, We've got a good mix between new and existing. It's also important to note that we don't have much at all early emerging biotech exposure. The vast majority of our customer base, as you know, tends to be the larger customers that we have around the world, mostly in the global top 20, call it top 50, but very little early stage biotech exposure.
spk01: Got it. Makes sense. And then just one last one for me. With RM Bay Nucleus mold alarm launched and sterility consumable beta testing underway, based on customer feedback, where do you see the low-hanging fruit in terms of product enhancements, workflow improvements, as you think about future product pipeline?
spk03: Yeah, so future product pipeline beyond mold and sterility? Is that the question?
spk01: Yes.
spk03: Okay, yeah, so our product strategy is fundamentally, the Growth Direct is we view it as a platform technology. So we view it in the middle of a legacy manual workflow that we are able to automate, accelerate, and improve significantly with regard to data integrity. So our strategy is to provide more value in that workflow, so to move upstream in our product in the workflow and downstream in that workflow, which informs our product strategy. So mold is an example of providing more value to the current workflow, but also a step downstream as well. Typically, customers will seek to identify any kind of organism downstream, and giving them an early steer on that is part of our strategy. Sterility is one step further in automating the vast majority of routine use consumables. And our product strategy is very much that as well, to have a fully automated system that automates the vast majority of daily routine use tests in any pharmaceutical manufacturing environment. So look for, in the future, we won't get into too much detail now, but moving upstream and downstream, and also as we enable data, and data analytics, that general category is very much part of our thinking about future product development and release.
spk01: Thank you.
spk03: Well, thanks, Yuko. We've got the live call up now. Thanks, everyone, for joining us today.
spk00: This now concludes today's conference call. You may now disconnect.
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