Good day, and thank you for standing by. Welcome to the Harvard Bioscience Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dave Sirois, Director of SEC Reporting. Please go ahead.

Thank you, Shannon, and good morning, everyone. Thank you for joining the Harvard Bioscience fourth quarter 2022 earnings conference call. Before we begin, I would like to suggest that you take a moment and download a copy of a presentation that will be referred to during this call. The file is entitled Q4 2022 HBIO Quarterly Earnings Presentation and is located in the Investor Overview, Events and Presentations section of our website. Leading the call today will be Jim Green, Chairman of the Board, President and Chief Executive Officer; and Jennifer Cote, Interim Chief Financial Officer. Before I turn the call over to Jim, I will read our safe harbor statement. In our discussion today, we may make statements that constitute forward-looking statements. Our actual results and performance may differ materially from what we have projected due to risks and uncertainties including those described in our annual report on Form 10-K for the period ended December 31, 2021, our subsequent quarterly reports on Form 10-Q and our other public filings. Any forward-looking statements, including those related to the company's future results and activities represent our estimates as of today and should not be relied upon as representing our estimates as of any subsequent day. Also, much of today's call will focus on our non-GAAP quarterly results, which we believe better represent the ongoing economics of the business, reflect how we set and measure our incentive compensation plans and how we manage the business internally. The difference between our GAAP and non-GAAP results are outlined in the earnings release and today's presentation. These two documents, as well as a replay of this call, can be found on our website under Investor Overview, Events and Presentations. Additionally, any material financial or other statistical information presented on the call, which is not included in our press release and presentation, will be archived and available in the Investor Relations section of our website. I will now turn the call over to Jim. Jim, please go ahead.

Thank you, David. Hello, everyone, and thank you for joining us today. Let me start by saying that despite inflation, currency, and the lingering effects of the global supply chain, we kept our heads down and completed the previously disclosed portfolio optimization and related cost reductions. These actions are designed to support our stated goals for revenue growth with 58% to 60% gross margins and EBITDA margins in the high-teens or better. Now let's go to slide 3 of the presentation to look at highlights for the quarter. Reported revenue for the quarter was $28.4 million, down 14% from a very strong Q4 prior year. Adjusting for a $1 million impact from currency, we were down 11%. The majority of the impact was seen in pre-clinical revenues, with order demand recovering later in Q4 though not in time for revenue shipments to catch up. Strong order growth with a substantially improved product portfolio points to a strong start for 2023. Adjusted gross margin recovered to 57%, consistent with historical gross margins in spite of the remaining low-margin obsolete products as they wind down. Adjusted operating margin came in at 12%. Going forward, we will be reporting adjusted EBITDA, which in Q4 measured 13% of revenue. In the appendix, you'll find the bridge from GAAP measurements to non-GAAP adjusted EBITDA. Adjusted EPS measured $0.04 per share, down from a very strong $0.08 last year. And cash flow from operations measured $2.7 million. Now let's move to slide 4, take a look at the revenue in the quarter by product family. This slide shows Q4 2022 revenue adjusted to reflect Q4 2021 exchange rates. Starting with the first row of the table, our cellular molecular technology revenue was roughly flat when adjusted for currency. We had solid growth in Asia Pacific, which was offset by slowness in the Americas. Cell-based testing products were up double digits globally. We saw continued rotation out of the low-margin products, with revenues from discontinued products decreasing by about $300,000 versus the same quarter last year. We are seeing demand increase going forward, augmented by exciting new products with new consumables and services such as Electroporation for bioproduction. Next, our pre-clinical products were down 19% in constant currency from a historically strong Q4 prior year. Globally, telemetry and inhalation revenue shipments were down in Q3 and early in Q4, recovering somewhat in the quarter, though much of the order improvement came later in the quarter. The China lockdown further delayed shipments, with strong order demand recovering later in the quarter as lockdowns eased. Overall, order demand recovery later in the quarter didn't help Q4 much, but strong order growth with a solid book-to-bill ratio points to a strong start for 2023. The strong U.S. dollar compared to the euro and British pound drove a currency impact of the $1 million I spoke of earlier. Now let's move to slide 5, so I can tell you about some of the exciting new product launches in the quarter. Before I start, let me take a minute to explain a little bit about this slide. Over the last three years, we've optimized our product offerings to critical areas of the drug and therapy continuum. With cellular molecular technology products focusing on enabling research and discovery of new compounds by both biopharma companies and top academic research universities. And now more recently, we're also offering a bridge to bioproduction where Electroporation or electrofusion is a widely used method to create the new therapy, drug, or vaccine. Our preclinical systems primarily offer biotech, pharma, CRO, and large academics the ability to measure and wirelessly collect critical physiologic behavioral information from animal models. This data has been utilized for longitudinal studies and for the safety and regulatory filings required prior to clinical human use. Our enterprise software provides efficient access to the large data pools collected during preclinical testing for data reduction, post, and report generation and also for future AI-related processing as we see coming in the future. Starting with Cellular Molecular Technologies, in Q4 we received a large order from a top pharma company for our BTX Electroporation system configured for bio-production. This order began significant shipments in Q1 of 2023 and is expected to quickly ramp to $1 million annually, primarily driven by consumption of our unique Flatpack Reaction Chambers and augmented by expanded services. We're excited about this emerging value proposition for the BTX system in bio-production, which is often used today in pharmaceutical research and development to create the initial strength of therapeutics and vaccines. BTX Electroporation has the potential to provide a substantial ongoing stream of Flatpack and other consumable revenue that benefits from production quantities in addition to those historically required in research and discovery. Second, we introduced the new U7500, our Premium Spectrophotometer, building on our well-known ultra-spec name. This system replaces three existing models and is designed to better penetrate pharma and CRO companies and top academic sites and started shipping late in Q4. Lastly, continuing to drive market leadership in preclinical, wireless continuous monitoring, we launched our exclusive continuous monitoring Glucose Implant. This new implant allows for continuous monitoring of glucose levels and avoids the cost, inconvenience, and variability inherent in periodic manual blood draws for sampling. Glucose monitoring is expected to be an incremental growth driver in academic labs and government labs and pharma companies in the pursuit of solutions for the ever-growing problems of obesity and diabetes. This new line of implants began shipping late in Q4 and will augment new growth of our consumables and services in 2023 and beyond. Now I'll turn the call over to Jennifer Cote, our interim CFO, for a quick look at key financials. Jen?

Thank you, Jim. I'm pleased to be able to share our financial results in greater detail. If you can please refer to slide 7, as a reminder my discussion will focus on adjusted results for P&L performance, which aligns with measurements we use to internally manage the business. Jim has already taken you through our revenue performance, and I will take you through additional details on our expenses, balance sheet, and cash flows. Q4 adjusted gross margin was 57.2%, as discussed earlier, this was consistent with the full year 2021 adjusted gross margin but was 2.4 percentage points below that of last Q4, 2021. Q4 2021 was a near record quarter for revenue and this drove favorable absorption of fixed overhead costs. Our gross margin for Q4 2022 was also impacted by increases in certain components costs. In general, our gross margin will fluctuate from period to period based on revenue mix and volume inflation, and impacts to supply chain among other factors. We initiated the discontinuation of non-strategic products in Q3 and also implemented pricing updates during Q4. We will enter Q1 of 2023 with lower labor and overhead costs, as the headcount reductions related to our portfolio rationalization are realized. With the implementation of these improvements, together with our pricing increases, we expect to see initial margin improvement in Q1 and to achieve the full benefit of these changes in Q2. Now, moving to operating margin. Q4 adjusted operating margin was $3.4 million or 11.9% compared to $5.3 million or 16% in Q4 2021. The decrease was primarily driven by lower revenue and, as a result, lower gross margin, partially offset by lower operating expenses in Q4. We continue to work diligently to optimize our cost structure across our global functions. Planned restructuring is largely behind us as we exit 2022, although we will continue to look for opportunities to improve the operating effectiveness of our company going forward. We do expect an increase in capital expenditures in 2023, as we invest in the consolidation of certain business tools and also invest in tooling and capital equipment related to new products. As we enter 2023, we will start to report on adjusted EBITDA, as Jim mentioned, in replacement of operating income and margin. The primary difference for Harvard Bioscience is depreciation on our fixed assets, which is approximately $300,000 each quarter and we believe this change aligns more closely with our focus on cash flow improvements and is consistent with the presentation of other comparable companies. Interest expense was $900,000 in Q4 2022 as compared to $400,000 in Q4 of 2021. We executed an interest rate swap during Q1 of 2023 to fix the majority of the interest on our floating rate bank debt and this mitigates further expense growth in 2023. Now, turning my attention to cash flow. As Jim mentioned, cash flow provided by operations was $2.7 million in Q4 of fiscal 2022 compared to $100,000 in last Q4. Primary drivers for this change related to accruals for variable compensation. Cash provided by operations for the full year was $1.2 million, consistent with 2021, despite $4 million of cash payments related to the final resolution of SEDAR litigation, which we put behind us early last year. Over the course of the year, we saw strong improvements in our days sales outstanding and reduced our accounts receivable balance by $4.8 million over the course of 2022. Inventory remains relatively flat, despite the headwinds of higher component costs and spot purchases to secure raw materials needed to produce our products. We expect to make meaningful progress against our days' inventory on hand metric in 2023. While our net debt is slightly higher at the end of 2022, we did reduce our outstanding debt by $1.8 million over the course of the year. This will be a focus and a strategic priority for us in 2023, and we are targeting solid reductions in our outstanding debt. Jim will cover this in the next section, as he discusses 2023 guidance. Back to you, Jim.

Thanks, Jen. Now, moving to our summary on slide nine and a look at what we see for the year 2023. With the market headwinds of 2022 behind us, our lean cost structure and our exciting new product portfolio in hand, we expect a strong 2023 for Harvard Bioscience. We expect reported revenue growth in the low to mid-single-digit range, inclusive of approximately 4 percentage points of discontinued product revenue. We also expect improved gross margins with significant expansion in adjusted EBITDA margins. With our expanded EBITDA, combined with improved working capital cash flow, we plan to significantly pay down our debt. We target reducing our debt leverage to the 2x level by the end of 2023. Thank you. Now, I'll turn the call back over to the operator and open the line for questions. Thanks.

Thank you. Our first question comes from the line of Bruce Jackson with Benchmark Company. Your line is now open.

Hi, Bruce.

Hi, good morning. Thank you for taking my question. So you mentioned that we would potentially be seeing some gross margin improvement during 2023. I was wondering if maybe you could give us an idea of the cadence on that margin improvement. So is going to continue to rise off the fourth quarter number? And where do you think it could get to by the end of the year?

Thanks, Bruce. That's a great question. We expect to see gross margin improve almost immediately. We will see – so we would expect to see the margin move into the 58% to 60% range, and I mean even in early in the year, and then improving through the year especially as we get to late in the year with higher volumes. Certainly, I would expect to be bouncing up against 60% or somewhere right in that area.

Okay. And then the other question I had is on the non-cash expenses, when we're looking at the new EBITDA number. Will the stock compensation or the amortization numbers change meaningfully during 2023 compared to 2022?

I don't think so. I think they'll probably remain pretty stable. So there you already see those adjustments made in what we've always used for adjusted operating margin. What you'll see by moving to EBITDA is really also adding the depreciation, and for us, depreciation is not a great big number. We're not highly capital intensive, but we do think it gives us more of a pro-forma view of basically the cash generation of the company. And that's where we're really focusing this year is driving up EBITDA, reducing our multiple on our leverage ratio, paying down the debt, and really positioning, getting this business back into great shape, just like we started to do back when I first joined here. But now that we've completely changed the structure and the cost of the business, we really made these changes to have a much stronger portfolio; this is going to improve throughout the year. And like I said, even starting in Q1, you're going to see measurable improvement in the overall business. There is going to be some rotation out of revenue this revenue that we're working out of the things that we've obsoleted. And we project that to be somewhere around $5 million, or four percentage points. Much of that is going to rotate out in Q1. And then as we get into Q2 and forward, we certainly see expansion of our core revenues offsetting that number early in the year and then driving the overall growth as we get to more like Q3 and Q4. But all through the year, you'll see a much better operating leverage on this business.

Okay. Okay. Then last question for me is on China. Sometimes, historically, the revenue number has shown some sensitivity to market conditions in China. What are you seeing right now? And what do you anticipate for 2023?

China is – we see this as a major growth driver for our business and we see it driving across the spectrum of our product lines both in – we see growth coming very nicely on the CMT side, and on the pre-clinical. We did with the shutdowns that happened last year cause some fluctuation and delays in ordering at times, and then impacts on shipment and shipment revenues. But there was probably some buildup in late in Q4 with the book-to-bill really moving so we couldn't ship things fast enough. But the demand line, the demand stream really has dramatically improved in China. They've opened up. There's also a lot more investment in China now in advanced research for discovery. We're seeing that driving our outlook for China. We see significant opportunity growing also on the preclinical side, because that's an area that the Chinese really want to grow that area, both in research and then in the ability to actually produce these new drugs and therapies. So yes, China is definitely going to be a big growth driver for us in 2023.

Thank you.

Thanks, Bruce.

Thank you. Our next question comes from Harrison Schrage with KeyBanc. Your line is open.

Hi, Harrison.

Hey, Jim. First question for me is just on the guide. So low to mid single-digits was about 4% of the portfolio optimization. Would you say that that high single-digit to low double-digit range that that kind of implies on the base business is a good way to think about it going forward in the longer term?

I agree. That aligns well with the targets I aimed to establish initially. As I mentioned earlier, we will experience some rotation with the $5 million coming out in the first quarter and possibly some in the second quarter. However, this will be counterbalanced as new growth emerges, which offers a significantly improved business mix. Therefore, I believe you're correct in suggesting that we might see high single-digit growth on a reported basis, potentially nearing 10%, focusing on the core business. There might be a slight increase or it could remain flat in terms of reported growth, around 5% or a bit better. I will provide more detailed updates as we progress through the year and as visibility improves with the development of our pipeline.

Got it. That's helpful. And then on the portfolio optimization and new products that you're rolling out. I guess could you kind of talk to strategically how you're thinking about the different end markets that you're going to be catering to and the new business and new portfolio compared to the old portfolio, maybe in terms of is it more biopharma compared to academic government? And what are you kind of thinking there?

I consider these activities to be somewhat independent, but the main focus is on key areas. Our discovery technologies, such as electroporation and cell-based testing, are reported through our molecular and cellular side, where we expect to see significant growth. We are aware of the increasing use of electroporation and electrofusion in developing new drugs, large molecule therapies, and vaccines, which will boost growth in academic research and discovery. Additionally, our new capability to bridge to bio-production, especially since we can create the initial compounds, presents a natural expansion opportunity for us. This area is relatively new, offering plenty of room for growth, and we are dedicating efforts and time to ensure this contributes positively to our business. Moreover, we are placing greater emphasis on identifying and showcasing annuity-based growth. In the past, we haven't had the necessary tools to report this effectively. For instance, with product lines like AAA and electroporation, about half of the revenue we foresee is expected to come from consumables and services. We are therefore increasing our consumables segment, and the new products we are introducing are aimed at enhancing the overall system to encourage the consumption of these materials and services. We are significantly expanding our service offerings; for example, if our products are utilized in bio-production, we can assist pharmaceutical companies or biotech firms in navigating the GMP process. They need qualification to produce products with our technology. Likewise, for pre-clinical work, companies require GLP compliance to gather data for regulatory submissions, which we also support. Expanding service offerings means we are moving beyond merely selling capital equipment to providing comprehensive support post-sale. This shift is reflected in our strategy, and we are witnessing a change as a result. We anticipate significant growth on the consumable side with our new expanded service offerings, including calibration, installation, and ongoing support services. I want to highlight three or four areas where we see real opportunities for growth, much of which could materialize in the short term. On a long-term note, we believe there is significant value in accessing large data pools through our enterprise software solutions and Ponemah software. These have been integral for many pharmaceutical companies and CROs during the pre-clinical phases, facilitating data collection. There will be a strong push to leverage historical and longitudinal data for submissions, which will still require passing final evaluations and safety pharmacology tests—an important and stable aspect of our business. We believe our access to large data pools will expand as new advanced AI-based data processing technologies emerge. This area of growth may be further down the line, but we are poised to invest wisely. While we cannot invest in everything simultaneously, we are selecting key areas for growth, such as bio-production and advancements in organoid technologies. We are already well-equipped with the necessary technology for organ-on-chip applications. In summary, we have several promising areas ahead, and I look forward to sharing with shareholders the direction of these investments and the potential for significant business growth and improvements.

Got it. Super helpful. Thanks, Jim.

Right. Thank you, Harrison.

Thank you. Our next question comes from the line of Christopher Sakai with Singular Research. Your line is now open.

Hi, Christopher.

Hi. This is Asim for Chris. Jim, with the restructuring completed and operating margins on the rise, you have committed to debt reduction. I was curious about your plans for new product development; are you considering business development through acquisitions, or are you focusing mainly on building your pipeline from scratch?

Yes. No, great question. What I really wanted to do was to first make sure that we made these changes, that we could show a stable growth business with far improved operating leverage. As I get through the next couple of quarters, a couple of things will happen. One is we'll be in a much better position to first of all know where those real growth opportunities and improvement opportunities are. We are really figuring this out now. And then secondly, figure out what's the right way to fund it. How do we want to do that? Do we want to do it mostly through organic? Do we want to use maybe to do some M&A or some teaming and licensing? All those opportunities we'll be developing here this year. In my mind, there's no question we need to grow the business, continue. Of course, the best growth is always organic, but we really want to be able to augment and get into some of these newer spaces. Then we'll look at what's the best way to accomplish those growth factors.

Perfect. And I know inflation and currency have adversely affected your current results. In terms of guidance, how you have kind of factored those two things in if you can give some color?

Yes. Well, I mean, first of all, we started dialing in new pricing, which we see that starting already to come into our revenue streams. So pricing is going to help us offset – they will help us offset any inflation. The currency in general we kind of think is starting to stabilize and ease. But to me, the best way for me to do this is to continue to just keep driving my overall cost structure down, see where I can expand both pricing and volume and really get through this the right way. And as we pay the debt down, and I'll be paying that down quite a bit this year, we're not going to see such an impact from interest rates. And then again as things stabilize on the currencies that will help us on a currency translation basis. So again, we should start to see an ease of currency impacts inflation. Again, we'll improve that against that with pricing and as we grow and get more leverage in the business. The drop down leverage is much better now with this new growth and not to mention with the new product portfolio, the mix of products is dramatically improving.

Perfect. Thank you.

Thanks, Christopher.

Thank you. This concludes the question-and-answer session. I would now like to hand the call back over to Jim Green for closing remarks.

Thank you, and thanks for joining us everybody. This ends today's presentation. Certainly, I hope that you'll join us in May for our first quarter results for our fiscal 2023 and we look forward to this being such a great business that we'd envisioned it to be. And again, thanks again for your patience and sticking with us as investors. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.