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spk00: Thank you for standing by. My name is Dee and I will be your conference operator today. At this time, I would like to welcome everyone to the Rapid Microbiosystems second quarter 2024 earnings conference 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 star 1 again. Thank you. I would now like to turn the call over to Michael Boulder with Investor Relations. Please go ahead.
spk02: Good morning, and thank you for joining the Rapid Microbiosystems second quarter 2024 earnings call. Joining me on the call are Rob Spignessi, President and Chief Executive Officer, and Sean Wurchis, Chief Financial Officer. Earlier today, we issued a press release announcing our second quarter 2024 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, assumptions regarding future financial performance, anticipated future cash usage and cash runway, guidance for 2024, including revenue, expenses, gross margins, system placements, and validation activities, the anticipated impact of our operational efficiency program, our efforts to reduce our use of cash for operating activities with the goal of enabling the company to achieve positive cash flow without additional financing, expectations for and planned activities related to the company's business development and growth, customer interest in adoption of the growth direct system, statements regarding rapid sterility, and the potential impact of macroeconomic uncertainty 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 most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission as updated from time to time 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, August 2nd, 2024. 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.
spk03: Thank you, Mike. Good morning, everyone, and thank you for joining us. As Mike mentioned, we issued a press release announcing our second quarter financial results this morning. These results exceeded our guidance and included a statement that reaffirmed our full year 2024 revenue outlook. As part of today's earnings release, we also announced an operational efficiency program. I will begin my discussion this morning with a review of our second quarter performance and highlights. followed by an update on the progress we are making against our 2024 priorities. I will then discuss the operational efficiency program announced this morning, and the key drivers we believe will meaningfully increase long-term shareholder value. I will then turn the call over to Sean, who will provide a more detailed review of our Q2 financial results, as well as our financial outlook. Starting with our second quarter performance, total revenue increased to $6.6 million, representing growth of 32% compared to the second quarter of 2023. Total revenue exceeded the guidance we provided in May and was a record quarter for the company. We placed five growth direct systems in the second quarter with placements in North America, Europe, and Asia Pacific. In June, we held our first growth direct rapid sterility day hosting potential customers at our Lexington Innovation Center and Demonstration Lab. Additionally, we are excited to announce that we placed our first growth direct rapid serility system with one of our existing customers during the second quarter. With respect to gross margins, we continue to increase manufacturing efficiencies and reduce product costs. These initiatives resulted in near break-even margins in the second quarter, which represented a significant sequential improvement from Q1. We remain on track for further margin improvement in Q3 and Q4. Now, I would like to discuss the progress we have made against our 2024 strategic priorities, starting with accelerating system placements. During the second quarter, our customer engagement efforts resulted in several significant advancements. We continue to move forward with multiple customers who are planning further deployment of the GrowthDirect platform across our global manufacturing networks. These are existing customers who have already realized the value proposition of our technology at multiple sites and are now planning to further standardize their workflows and processes across their global organizations. Also, one of our largest customers who has deployed growth direct systems globally has selected our platform as a core technology for their lab of the future strategy and is planning significant further system deployments over future quarters. This customer strategy incorporates the most advanced technology and automation into state-of-the-art biomanufacturing facilities and better positions it for the increasing demands and complexity of drug development. These are exciting developments that are expected to drive system orders and continue to strengthen the GrowthRx position as the clear standard in pharmaceutical quality control globally. Also, I would like to recognize a notable milestone In July, we placed our 150th growth direct system with one of our existing customers. This system also represented our ninth placement for the year, putting us in a strong position to achieve our full year guidance of at least 20 system placements. Looking forward to the balance of 2024, we once again have two of our largest and best attended customer events upcoming. In October, we will be exhibiting at the PDA Pharmaceutical Microbiology Conference in Washington, D.C. And in November, we will be holding our annual Growth Direct Day in partnership with one of our major customers. Similar to last year's Growth Direct Day, which was hosted by Johnson & Johnson, we are excited to announce that this year's two-day event will be hosted by Lonza, one of the world's largest CDMOs near their Maastricht site in the Netherlands. Current and prospective customers will discuss the operational and data integrity benefits of the Growth Direct system, as well as share best practices for global deployment. Participants will also hear a variety of customer success stories, including patient impact stories from their peer companies in attendance. Additionally, our new rapid serility application will be a highlight of the event, and we expect strong customer interest. Participants will also tour the local Lonza site that includes a fully validated growth direct system in a GMP environment. With approximately 100 attendees expected, we look forward to this exciting event. Turning to gross margins, we continue to make significant progress and deliver near break-even gross margins in the second quarter. We continue to drive leverage in our business through the combination of high revenue growth and focused cost reduction. To highlight this dynamic, our second quarter cost of revenue decreased 1%, while our revenue increased 32% as compared to the second quarter of 2023. We expect to sustain these trends and remain confident in our ability to achieve positive gross margins in the second half of 2024. Next, we are excited to announce the commercial availability of GrowthDirect Rapid Serility. In fact, During the second quarter, we placed our first rapid serility system with one of our existing top 10 global pharma customers. During the quarter, we hosted two serility-focused online webinars and an in-person rapid serility day. This event included a hands-on demonstration of the new application, as well as expert-led discussions on topics that included rapid product release, automating workflows in a regulatory environment. We continue to plan customer events and scale our manufacturing capability in the second half of 2024. So, in summary, our performance through the first half of 2024 has been strong, and we are encouraged by our outlook. We are on track for a positive inflection in gross margins in the second half of 2024, and customer interest and rapid stability is high. Building on our strong business momentum, we recently completed an enterprise-wide review of opportunities to realize operational efficiencies. Based on the results of this review, we are implementing actions that are expected to enable the company to achieve positive cash flow by the end of 2027 without additional financing. This operational efficiency program is consistent with our priority to prudently manage our cash and improve the company's financial strength. This program is an addition to our ongoing and focused efforts to reduce product costs, drive higher manufacturing efficiencies, and increase service productivity. Sean will provide some additional details, but before turning over the call, I would like to highlight why we continue to believe Rapid and RightGrow is well positioned to deliver significant shareholder value. These key drivers and catalysts include our leading, highly differentiated growth-direct technology as undergoing global adoption by the world's largest and most sophisticated biopharmaceutical companies, oftentimes implemented in their mission-critical, high-value biologics and cell and gene therapy products. A clear value proposition that becomes embedded in workflows, which enables customers to operate more efficiently and securely, and allows them to move their microbial quality control operations into the 21st century with a fully automated data-secure platform. Broad commercial penetration, including a global growing base of 150 systems across North America, Europe, and Asia, which represents clear progress against our goal of becoming the industry standard in pharmaceutical quality control. A powerful business model, which includes not only strong revenue growth, but a significant and growing base of durable recurring revenue with rapidly improving gross margins. And finally, our operational efficiency program announced today, further increases the company's financial strength by providing a clear path to achieving positive cash flow. Based on these drivers, our consistent performance over the last two years and expected outlook, we strongly believe we are positioned to create substantial shareholder value. We will reinforce these messages about our business momentum, outlook, and strong customer value proposition through increased investor outreach, including upcoming meetings and conferences. And with that, I will now turn the call over to Sean to discuss our second quarter performance and outlook in more detail. Sean?
spk05: Thanks, Rob, and good morning, everyone. I'll start my comments today with a review of our second quarter results. I'll then review our third quarter and full year 2024 outlook, followed by additional color on the operational efficiency program we announced this morning. Q2 revenue increased 32% to $6.6 million compared to $5 million in Q2 2023. During the second quarter, we placed five growth direct systems, including our first rapid sterility system, compared to two in the second quarter last year. We also completed five validations in the quarter compared to three in the second quarter last year. Product revenue, which is comprised of systems and consumables, increased 43% to $4.5 million in the quarter, compared to $3.2 million in Q2 last year. The growth in product revenue was primarily driven by the higher number of growth direct systems placed in the quarter. The Q2 consumables revenue growth rate was in the single digits compared to what was, at the time, record revenue in Q2 last year. Service revenue increased approximately 14% to $2.1 million in the second quarter, compared to $1.8 million in Q2 last year. This growth is driven by higher validation and service contract revenue. Second quarter recurring revenue, which consists of consumables and service contracts, increased 7% to $3.8 million, compared to $3.6 million in Q2 last year. Non-recurring revenue, which is comprised mainly of systems and validation revenue, increased 97% to $2.8 million compared to $1.4 million in the prior year quarter. Turning to gross margins, product margins were negative $0.4 million or negative 8% in Q2 compared to negative $1.5 million or negative 48% in the second quarter last year. This 40 percentage point improvement demonstrates the meaningful progress we are making on our initiatives to reduce product costs and increase manufacturing efficiency. The higher volume of growth-threat systems placed also positively impacted gross margins in the quarter. Service margins were positive $0.2 million, or positive 9% in the second quarter, compared to negative $0.4 million, or negative 20% in the second quarter last year, with a 29 percentage point increase driven by higher revenue and productivity. On a combined basis, our second quarter gross margin was negative $0.2 million, or negative 3%, compared to negative $1.9 million or negative 38% in Q2 last year. This represents a 35 percentage point improvement. Continuing down the P&L, total operating expenses were $13.2 million in Q2, which was flat compared to the prior year quarter. Within OPEX, R&D expenses and sales and marketing expenses were $3.7 million and $3.6 million, respectively, representing a combined increase of approximately 15%. This increase was mainly associated with the commercialization of our new rapid sterility application, as well as other new product development activities and our new R&D innovation center and demo lab in Lexington, Massachusetts. At the same time, G&A expenses were down approximately 14% to $5.8 million in Q2 as a result of focused ongoing efforts to reduce spending in this area. These savings allowed us to hold total OpEx spending flat in the quarter. Net loss was $12.6 million in Q2. This compares to a net loss of $14 million in Q2 last year. Net loss per share was 29 cents in Q2 compared to net loss per share of 33 cents in the prior year quarter. With respect to non-cash expenses and capital expenditures, depreciation and amortization expenses were $0.8 million in the quarter, Stock compensation expense was $1.2 million in the quarter, and capital expenditures were $0.5 million in the second quarter. We ended the second quarter with approximately $70 million of cash and investments. Now, I'll turn to our Q3 and full year 2024 outlook. We continue to expect total revenue of at least $27 million for the full year 2024, which assumes we will place at least 20 systems. This implies year-over-year revenue growth of at least 20%. This guidance continues to reflect some uncertainty related to the timing and scale of customer purchase decisions. For the third quarter, we expect total revenue of at least $6 million, which assumes at least four system placements and reflects typical summer seasonality. We continue to expect revenue and placements to peak in Q4, consistent with our typical annual cadence and the guidance we originally provided in March. Looking at consumables, we expect Q3 revenue to be relatively consistent with Q2, subject to some normal variability from the timing of customer orders and shipments within the quarter. We then expect consumables revenue to increase sequentially in Q4. With respect to service, we continue to expect revenue to be between $2 million and $2.5 million in both Q3 and Q4, with variability primarily driven by the timing of validation activities. We are reaffirming our guidance of at least 16 validations in 2024, including at least three in the third quarter. Turning to gross margins, we continue to expect gross margins to be positive in both Q3 and Q4, as well as for the full year. We expect product margins to improve sequentially in Q3, driven by ongoing cost reduction and manufacturing efficiency initiatives, as well as increasing volumes. We expect higher service margins in Q3 based on higher revenue and increased productivity compared to Q2. We continue to expect operating expenses to be in a range of $48 million to $52 million in 2024, with savings from the operational efficiency program largely offset by related severance and other one-time costs over the remainder of 2024. For the full year, we expect depreciation and amortization expense of approximately $3 million, stock compensation expense of approximately $5 million, CapEx of approximately $2 million, and other income, which is comprised primarily of interest income, of approximately $3 million. To wrap up, I'll review the operational efficiency program we announced today, as well as our revised expectations relating to our longer-term outlook and cash runway. The program involves focused reductions in our current workforce and planned hiring, as well as reductions in other non-headcount-related expenses across the business. We expect these actions to result in an approximate $7 million reduction in our annual expenses and cash burn. These savings are in addition to those being generated by our existing programs to reduce product costs, drive higher manufacturing efficiency, control manufacturing overhead costs, and increase service productivity. Through the combination of these actions, along with our assumptions for revenue growth, We expect to achieve positive cash flow by the end of 2027 without additional financing. A few assumptions regarding our financial performance over the next several years underpin this expectation. First, average annual revenue growth rates between the mid-20s and 30%. Second, continued meaningful annual improvement in our gross margins, reaching mid-double digits by the end of 2027. Third, after a notable step down in 2025 as a result of our operational efficiency program, relatively flat operating expenses over the following few years. And fourth, maintenance levels of CapEx and relatively minor cash impacts from changes in working capital each year. All of the above assumptions are based on our current 2024 guidance as a starting point, including our expectation that we will burn roughly $40 million in cash for the full year 2024. It's also important to point out that we expect our P&L to include approximately $8 million in non-cash depreciation and amortization and stock compensation expenses, which have no impact on cash, as well as a positive contribution from cash interest income each year. We are planning to host an investor event in November during which we intend to provide additional color supporting the assumptions I've just outlined. In summary, We believe the operational efficiency program we announced today is an important step in reducing cash burn meaningfully over each of the next several years. Together with our expectation of continued strong revenue growth and significant gross margin improvement, as well as active management of OpEx, CapEx, and working capital, this gives us confidence in achieving our goal of positive cash flow by the end of 2027 without additional financing. That concludes my comments, so at this point, we'll open the call up for questions. Operator?
spk00: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question or are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Our first question comes from the line of Tejas Sevent from Morgan Stanley. Please go ahead.
spk01: Good morning. This is Yuko on the call for Tejas. Thank you for taking our questions. With the announcement of new targets along with the operational efficiency program, could you comment on working capital initiatives to improve cash usage? You previously called out inventory as one of the key levers. How did that trend this quarter, and how are you balancing inventory reduction and stocking to get customers comfortable that there will be consumables readily available?
spk05: Hey, Yuko. It's Sean. So I think we are very focused on inventory as we look forward in terms of managing working capital. For the first half of the year, we're actually up a little bit. It involves a couple of different things that I'd say are kind of rebalancing which will set us up well, we believe, for the second half of the year to be a period where we see meaningful reduction in inventory. We have always maintained safety stock levels to make sure that we have inventory across the product offerings that we have to ensure that we have no disruptions. I think if you look back to the COVID period, a lot of people did have supply chain and inventory management issues. We did not, and we would attribute that to the the practices we have around making sure we maintain those safety stock levels and expect to continue to do that going forward.
spk03: Yeah, you go ahead, Rob. We also have what we call customer business reviews with customers, and part of that review is our inventory performance, and we continually receive extremely strong feedback about the quality and timeliness of our supply chain globally from our customers.
spk01: Great. Thank you for that color. And then also, could you elaborate more on the customer who placed the sterility system and underlying factors that drove them to place that system? Given sterility is a low-volume application, although it comes with higher pricing, is the benefit of automated system potentially less attractive in that study versus environmental? Could you elaborate on any key differences in the workflow that may make the incentive to adopt birth direct perhaps a slightly different value prop in a sterile LXE setting versus other applications?
spk03: Sure, sure. I think that's a good question, Yuko. So, yes, as you touched on, the EM is a higher-volume type of task where automation plays a role in automating a high-volume kind of repetitive task. Although the value proposition of GrowthDirect, I'll remind folks listening is, clearly full automation, but also strong data integrity, data management, data security. And automation, even in a lower volume environment, is very important for reduction in errors. So while automation plays a different role, I would say, in a high volume setting versus a low volume setting, the data integrity, the lower amount of hands-on time, and just the improved quality is incredibly important, again, in low volume or high volume. However, the additional extremely strong value proposition that rapid sterility has on our growth direct system is time to result. If you recall, as little as one day, we can give time to detection to a contamination, and as little as you know, three days, you know, final time to results. This compares generally to about two weeks if things go well to the legacy method. So customers are getting not only all the benefits of a fully automated platform technology, which, you know, more and more of the planet of the universe of customers is getting used to, but they have the incremental benefit with regard to sterility of the very fast time to detection and time to release, which in some cases is gating for release to patients and business implications, too, with regard to revenue recognition and things of that nature. So the value proposition of sterility is very strong. And this is under the, again, just another reminder, our strategy here is to build a next-generation strategy infrastructure for quality control across pharma. So we are automating, and sterility is a key part of this, essentially the full suite of daily routine use tests across environmental monitoring, testing, water testing, bioburden or product testing, and now sterility testing, all under the aegis, if you will, the value proposition of the GrowthDirect platform.
spk04: Thank you.
spk00: Our next question comes from the line of Dan Arias from Stifel. Please go ahead.
spk06: Hey, good morning. Thanks for the questions. Rob, maybe just following up on sterility, now that you've gotten some customers together on it, how are you feeling about uptake there in general? What do you think will be the difference between those that adopt that system or that capability? versus those that don't, within the existing user base, so those that you've connected with and you've convinced that growth direct is something that they need to have.
spk03: Yeah, so Dan, I wouldn't rule anyone out of not, you know, of using it at this point. So the, you know, it's early days in the commercial availability of the product. The, you know, we're excited about what we're seeing from the feedback. You heard the remarks about our Serility Day. We're having webinars and significant global customer connections and the feedback is strong. The funnel build is very strong. So within the existing customer base, I would say, universally strong feedback. We did place a system in the quarter to a large existing customer. and we would expect, you know, that trend to, you know, to continue. It is a capital equipment sales process, so it'll have, you know, some of those features with regard to, you know, the sales cycle timing. That being said, we also expect new customers, new customer segments, which we touched on in previous calls, right? So some of the You know, we're very, very strong, as you know, in biologics and cell and gene therapy. This really application does address quite strongly segments such as sterile injectables, for example, and vaccine categories. So it's also excitingly opening up conversations, I would say, with incremental and new, very large customer segments for us. And there's a recent example where, you know, we're having a sterility conversation with a with a customer in one of these new categories, and it's triggered a sales process around environmental monitoring. So a bit back to the comments I made at the end of Yuko's question is our strategy here is to bring a platform technology that automates effectively the majority of the microbial quality control requirements of companies. So our sales team now globally is equipped to have conversations up and down that workflow and help the customer solve their microbial QC problems. And we're starting to see the benefit of that already with the launch of sterility.
spk06: Okay. Just need to dig in on that a little bit more. I understand that hypothetically everybody could be or should be interested, but that's probably unlikely to be the case for a while. So what I'm What I'm kind of trying to understand is when you talk to your sales team or you look at those that you gathered together, what are the characteristics of those that feel like they're most likely adopters versus either less likely or adopters down the road? I know everybody should use it, but that's probably not going to happen anytime soon.
spk03: Yeah, okay, so fair enough. So the most likely customers to adopt earlier in the cycle will be largely the larger companies that know us well. I don't think that's a hard and universal rule because the funnel does have new customers and new segments. But if you think about it, again, consistent with our approach, we have a number of customers globally out there in the biologics and cell and gene that have higher value applications that know the Growth Direct, know the benefit of the Growth Direct, have implemented the Growth Direct, have managed the data around Growth Direct. And this is an extension of the menu around it. So that would be, you know, if I could kind of point out what I would expect to be the earlier adopters, and consistent with the placement we had, it is an existing large customer. It would be our existing customer base. I do want to highlight, though, the funnel is, has got a non-trivial amount of, I would say, new customer and new customer segments in it.
spk06: Okay. All right. That's helpful. And then, Sean, on the gross margin trajectory, you sound pretty confident there. It's not hard to see how you flip to positive for the back half. But in order to get positive for the full year, I do need to be in like the mid to high single digit range in 3Q and then actually like the high teens range in 4Q on total gross margin. So is that the right level of increase? If not, help me out. And if so, I just need to understand a little better, you know, how the incremental improvement materializes from here.
spk05: Yeah, Dan, I think about it as the second half, probably a little less specific to Q3 and Q4, and that high single digit to low teens number range makes sense based on where we see things right now.
spk06: Okay. And then just if I could sort of extend the thought, and I know we'll talk to 2025 at a later date, but how do you feel about 4Q? Because you have some nice things working for you on the gross margin line very clearly. I mean, you'll be up, if that cadence changes, hold, you'll be up a good 20 plus percent from 2Q to 4Q. So is there anything you can say about 4Q as a jumping off point for gross margins next year?
spk05: Yeah, I mean, I think one thing to point out is our typical seasonality is just volume still matters. I mean, we're obviously making a lot of progress on the internal initiatives we have across our revenue areas to get margins up. you know, if we follow our typical seasonality, you know, there will be some pressure on margins sequentially from Q4 to Q1. But we would still expect to be positive in Q1 and then build even more from there. I think, you know, not going to give guidance at this point, but we did talk today about what we expect over the next several years across the business and gross margins was part of that. And You know, we've given a kind of endpoint by the end of 27 to get to mid-double-digit margins. I think, you know, that gives you some feel for where we think 25, 26, 27 will be on average. So I think, you know, if you think about where we could exit Q4, maybe a step down in Q1, but then we're building up positively throughout 2025 to get to a point where that overall full-year number for 25 is a meaningful step up from the overall 24 number. Yep, that makes sense. I can work with that. Okay.
spk06: Last one, if I could, just to slip in a question on the operational efficiency. How does that impact anything that you might do when it comes to just expansion of the commercial team? You know, you've got some important new products here. I think you still have ambitions of growing the sales coverage outside the U.S. So can you maybe just talk about the cash conservation that sounds like it's important in the context of still growing out the franchise, still touching more customers? Thanks.
spk03: Yeah, Dan, it's Rob. So our commercial team is in place. So we don't see meaningful growth to the team. We've answered on previous calls. We do have a sterility specialist, but we really view our sales team, we train them to be consultative sales professionals. So they're able to position and work with customers on the full range of applications. Again, all of environmental monitoring, water, bio-burden, and sterility applications. So we view our team in place globally, fully constituted teams in North America, Europe, and Asia. So we don't see meaningful growth in the near term and are comfortable with the coverage we have and the ability to drive to not only the near term, but also the longer-term outlook that Sean walked through and the prepared remarks.
spk04: Okay, great. Thank you, guys. Any questions?
spk03: Okay. I think that's the end of the question. So thank you, everyone, for the questions today. Appreciate the continued interest in our business. Listen, we're just going to wrap things up. We're very excited about the business and what we see in both the shorter-term and over-the-horizon here with regard to some elements of our outlook, a longer-term outlook that you heard today from a commercial standpoint, increasing discussions with senior-level customers about multi-system orders. I think you heard some of that in the prepared remarks. We're quite encouraged what we're seeing there with regard to the funnel builds and conversations globally, and specifically negotiations with customers currently on multi-system orders. Margin improvement is clearly one of our additional top priorities, and I think you can see clear and demonstrable progress there. Our third pillar of focus, new products, very excited about rapid sterility and certainly great early returns and more to follow, and then consistent with our Our fourth pillar of prudent cash management, excited about the operational efficiency program and what that means for the business with regard to achieving positive cash flow without additional financing. So again, thank you for your time. We'll wrap the call up now, and we look forward to speaking with many of you shortly.
spk00: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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