Thank you for joining us for Harvard Bioscience's Second Quarter 2023 Earnings Call. I will now turn the call over to your host, David Sirois, Director of SEC Reporting. Please proceed.

Thank you, Latif, and good morning, everyone. Thank you for joining the Harvard Bioscience second quarter 2023 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 Q2 2023, 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, 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, 2022, 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, reflects 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, and hello, everybody. I'm pleased to see Q2 supporting our strong start to 2023. Now, let's go to Slide 3 of the presentation to look at the highlights for the quarter. Revenue in the quarter was $28.8 million, down modestly from last year on an as-reported basis. The year-over-year comparison includes a net effect of $1.6 million of discontinued products compared to the prior year period. I see this as a pretty smooth transition to our much improved and simplified portfolio as we are already seeing new product introductions from last year gaining traction. Gross margin improved to $16.7 million, or 58% of revenue, which includes the typical puts and takes of product mix and volume, along with the impact of some financial process updates that Jen will describe for you further in a few minutes. Adjusted operating profit improved to $3.6 million or 12.4% of revenue, up 2 percentage points from last year. Adjusted EBITDA measured $3.9 million or 13.6% of revenue, also up 2 percentage points from the prior year. GAAP earnings per share was a loss of $0.02. This includes quite a bit of noncash related accounting complexity that Jen will discuss with you in a few minutes. Adjusted EPS measured $0.04 per share, down from $0.05 last year. Cash flow from operations was $3.6 million versus a negative $200,000 last year. And in the appendix, you'll find the bridge from GAAP measurements to adjusted non-GAAP measurements. Now let's move to Slide 4 and take a look at revenue in the quarter by product family. This slide shows Q2 '23 revenue adjusted to reflect Q2 '22's exchange rates. Starting with the first row of the table, our cellular and molecular technology revenue was down 12% as reported and down 3.6% when adjusted for currency and the impact of discontinued products. We had strong growth in Asia Pacific, EMEA was roughly flat to last year, and we saw slowness in the Americas. We continue to rotate out of low-margin products primarily sold through distribution. Our revenue includes a net reduction of $1.6 million from discontinued products compared to last year, which were predominantly cellular and molecular products. Next, our preclinical product revenue was up 10% as reported and up 11.5% when adjusted for currency and discontinued products. Asia had strong growth, driven mostly by inhalation and respiratory products, EMEA had very strong growth across the entire preclinical product portfolio. Americas was down modestly on slower sales in inhalation and respiratory products. All said, we were down 1.5% as reported and up 3.9% when adjusted for currency and discontinued products. Let's move to Slide 5. I can tell you about some of our exciting new products and new product introductions this year. Before I start, let me explain a little bit about this slide. Over the past 3 years, we've optimized our product offerings to target key technologies in the drug and therapy development continuum. Our product strategy is to continue to introduce new technologies and applications in leading academic research labs and, at the same time, adapt these technologies for further penetration into the larger industrial applications of our customers in pharma, CRO, and biotech. Following this strategy, we've introduced 2 more product technologies this year designed to support our growth opportunities in advanced cell-based testing. We expect initial demand in both academic labs and BioPharma discovery and expanding opportunity in preclinical regulatory testing for toxicology and safety pharmacology. First, I'd like to highlight our new mesh array organoid MEA platform. Building on our leadership position in single well high-density multi-electrode arrays that are used today in academic research and discovery, we're introducing the first organoid-centric MEAs that measure signals from inside the organoid. This technology is initially targeted to neuro and cardiac applications such as activation, metabolism, and toxicology. We expect organoid-level testing to enable applications that historically were performed using full organ systems or animal models. We've next introduced our second-generation multi-well MEA platform. This multi-well platform is designed for higher volume MAA applications, giving us a vehicle to penetrate various industrial applications. This is another proof point where we leverage our leading position in high-density MEA and academic research and discovery and expand to industrial CRO and BioPharma applications. We plan for advanced applications such as organized to transition from the single to the multi-well and enable penetration of higher-volume industrial usage in CROs and BioPharma. This is an exciting time for Harvard Bioscience, and we continue to introduce leading technologies in research and discovery and drive new opportunities in industrial applications with our CRO and BioPharma customers, where we already have a well-established relationship and a great reputation. Now, I'll turn the call over to Jennifer, our CFO, for a look at the key financials. Jennifer?

Thank you very much, Jim. Let's jump into our Q2 and year-to-date financial results in greater detail. If you can please refer to Slide 7, as a reminder, we include discussions about our adjusted and non-GAAP financial results, which aligns with information we use to internally manage the business. Our slide deck includes the reconciliation between adjusted results and the corresponding GAAP measures on Slide 12. Jim has already taken you through our revenue performance, so a few more details on our gross margin, adjusted EBITDA, EPS, and cash flow. Our FY '23 Q2 gross margin grew to 58% compared to 57% in Q2 FY '22. During Q2 of 2023, we aligned our global inventory costing process, which had a slightly unfavorable impact on gross margin. We aligned to a common timeframe globally to amortize our capitalized inventory variances. This change happened in parallel with our annual standard cost roll this quarter. As described by Jim, our gross margins will fluctuate from period to period based on the revenue mix, volume, inflation, etc., among other factors. But year-to-date, our gross margins of 59.6% are up 3 to 4 percentage points compared to last year, and our outlook considers the impact of any process changes this quarter. Now let's discuss operating expenses and adjusted EBITDA. Adjusted EBITDA during Q2 was $3.9 million compared to $3.4 million last year. Our operating expenses are reduced since last Q2, primarily as a result of the restructuring and cost reduction activities we executed during the second half of 2022. Offsetting these reductions are increases in employee compensation related to annual merit increases as well as the fact that we've reserved for expected bonus payouts for 2023, which were not included last year. Now let's take a few minutes to discuss the year-over-year variation in our GAAP EPS that Jim alluded to earlier. A large part of the variation is due to accounting charges related to the litigation which was resolved in Q2 last year. Although this matter is behind us, the impact of these charges is reflected in our GAAP EPS. Our adjusted EPS excludes these impacts. On a GAAP basis, our Q2 2022 results included the reversal of litigation-related reserves originally recorded in the prior quarter, Q1 2022, of approximately $4.9 million. This favorably impacted last year's GAAP EPS. Also at that time, we received stock from Biostage as part of the settlement. Beginning in Q2 of this year, we adjusted the value of these shares to reflect mark-to-market accounting. This resulted in an unfavorable charge of approximately $1.6 million in this Q2. Taken together, these two litigation-related items create an unfavorable year-over-year swing in our GAAP EPS of $0.10 per share. We do not believe that these items reflect the fundamentals of our ongoing business. We do expect to see the impact of mark-to-market adjustments in future EPS numbers as long as these shares remain on our balance sheet. Again, these items are excluded from adjusted EPS, and these mark-to-market adjustments are noncash and do not impact our liquidity. The year-over-year changes in our GAAP EPS also includes the favorable impact of approximately $0.02 per share as we wound down last year's restructuring activities. The above items are excluded in our adjusted diluted EPS. Further detail on the above items is available in our 10-Q and the non-GAAP reconciliation tables included in our press release and in the appendix to this presentation. Now I'm excited to switch gears to highlight cash flow and liquidity. We had solid cash flow from operations of $3.6 million this quarter, representing our fourth consecutive quarter of operating cash flows. Our year-to-date pay down against our credit facility is $5.4 million. We expect modest additional investments in capital expenditures during the second half of 2023 as we invest in the consolidation of certain business tools and also invest in tooling and capital equipment related to new products. We are solidly executing against the financial targets we laid out at the start of the year, and I'm now happy to hand things back to Jim to cover our 2023 guidance.

All right. Thank you, Jen. Now moving to our summary on Slide 9 and a look to what we see for the year 2023. New product introductions and expanding service offerings are expected to continue to fuel new growth. For the year 2023, we expect reported revenue in the $116 million to $120 million range, inclusive of approximately 4 percentage points of discontinued product revenue compared to 2022. We expect gross margin to remain strong at around 60%. We expect adjusted EBITDA margin in the 15% to 17% range. With expanded EBITDA combined with improving working capital driving strong cash flows, we plan to continue significantly paying down our debt and expect to further reduce our net leverage ratio to approximately 2x by the end of 2023. Finally, as I think about the remainder of 2023, I'm encouraged by our start of the year as our recent product launches are gaining traction and we realized the benefits of last year's restructuring actions. We're also mindful of reports of possible headwinds affecting our industry and the broader economy that could affect us. That said, our company is in a much stronger position than we were just a year ago, and we look forward to continuing our progress. Thank you. Now I'll turn the call over to the operator to open the line for questions.

Our first question comes from the line of Paul Knight of KeyBanc.

Jim, on the guidance you provided regarding product headwind, minus 4% headwind. Is that changed or kind of going to plan in terms of what you were phasing out of?

Yes. The results are aligning with our expectations based on last year's revenue from the discontinued products compared to this year's revenue from the same discontinued products; the net difference is approximately 4%. We anticipated this outcome, and it has been confirmed. This represents a headwind due to the transition, but as you can see, we are largely offsetting that as we move forward. This is facilitating a transition to a new and improved product line.

And the DSI sales force, can you say they're part of the way there, all the way there in terms of selling the legacy Harvard Bio product?

I would say part of the way. We've been selecting which products really make sense. Our strategy is to take these products that historically have sold into academic research and into discovery and pharma companies and adapt them for a much higher level of commercial operations. So you see the introduction and now the traction with the new behavioral product which, as you know, historically, behavioral product sales in academic research were about $8,000 to $10,000 as a capital purchase. The first unit we're selling here this year to a large CRO is $850,000, and they'll ship and recognize in the year. And that's certainly not the last of it. That's just the start of a new product offering. So clearly, we're seeing great traction with our sales force being able to bring the behavioral-type technologies into the CROs. As you know, anything that sells into the CROs like this has to be GLP-compliant, so it has to meet all the regulatory requirements to generate the regulatory report for the FDA and other regulatory agencies. So this was, I think, the first instance we see that happening, and there are more coming now. And as we've said, this is something I can package into higher-volume industrial use. Again, you'll notice on this call, I introduced the concept that we've introduced the very first organoid-type system that's initially selling in a place where we have a great reputation and we're the market leader with these high-density MEA systems. Historically, that's always been in research and with academic researchers and in the discovery parts of the industry. But we think that as we start to combine that with a larger, higher-volume, multi-well configuration, that's going to open new growth opportunities for us with CROs and pharma companies. They will increasingly move toward testing at the cellular level and now at the organoid level where you can do so much more and you don't have to use full organs or as many animal models as were historically used. So this aligns with our strategy. I feel like the adoption is happening, and our force is doing pretty well at adopting that.

With the MEA technology, will it be appropriate for small molecules, large molecules, cell and gene-based therapies? What's it most applicable for, Jim?

If we look at past methods like patch clamp, which tested one cell at a time, and compare it to historical MEA use with clusters, we now have the potential to utilize organoids. This shift allows us to assess more than just a few liver cells during drug testing. Every drug undergoes cardiac testing to ensure cellular responses are appropriate. With organoids, we can create a heart proxy to observe reactions, assess metabolic changes, and determine if the drug affects QT segments. This is essential for anything intended for human use and forms part of the core toxicity and safety testing. I believe this presents a significant opportunity for high-volume toxicological and regulatory testing. By using organoids, we effectively get a representation of each organ. Initially, we will focus on neuro testing and then move to cardiac. These areas are crucial for high-volume testing since organoids provide a more efficient and quicker means of obtaining results compared to traditional animal models or full organs.

How long do you think before it would be an animal model replacement or a reduction of?

It's a good question. I think in theory, you could start to reduce animal testing fairly quickly. On the other hand, it's just as likely that there'll be a much higher ramp-up of the early testing at the cellular or organoid level, so that you avoid taking drugs that, at some point, still have to go through the next sets of animal models. You want to identify toxicity right away. If you can find it out in 30 days versus 6 months, that's a real advantage for you. That actually allows for a much higher yield of drugs that go through the regulatory cycle to get through the full preclinical phase. So again, I think that's going to be one of those choices. They will either be able to test things faster and achieve much higher yields without risking more animals for early testing that can be done at the cellular level.

And then my last question, Jim, is regarding the business focus on the growth product lines that you want to have in your sales distribution strategy aligned as well. Is it making your view on M&A situations easier? And are we ever going to get M&A targets at a price that makes sense to the public market?

That's a great question. I believe that having a solid year this year and reaching our targets will strengthen our balance sheet significantly for next year, aligning us with our long-term goals. We've managed our debt effectively, which positions us better for potential acquisitions. I'm open to considering not only acquisitions but also licensing agreements for products that can enhance our portfolio as we explore bioproduction, an area that interests me. Whether it's through acquisitions, licensing, or partnerships, I see opportunities for expanding our systems for earlier testing in the pharmacology tox stage. This also allows us to better understand the market and customer needs. I focus on areas where we already have representatives who can connect with clients, leveraging relationships with large CROs and pharma companies. As we approach the end of this year and into Q1, I'll be ready to target opportunities that make sense. We're looking into options now, but I believe in earning the right to utilize our balance sheet before making significant investments. I want to complete our goals for this year, and by Q1, we'll be in a stronger position to identify and pursue those opportunities affordably.

Our next question comes from the line of Bruce Jackson of Benchmark.

Jim, I wanted to talk about the discontinued product impact. So you put out an estimate for the year. How much of that have we seen so far? And how is that going to roll off over the remainder of 2023?

Sure. When we looked at the year-to-date view, it was approximately $2.8 million for the first half of the year, and we expect the total for the year to be between $5 million and $5.5 million. Is that correct, Jen?

That's correct. That's correct. It's about $1.5 million a quarter, and it will roll through pretty evenly.

Yes. So that will roll off pretty quickly here at the end of this year, and you'll see that again, fairly linear each quarter, up and down a little bit, like $1.6 million was this quarter. And again, about another $2.5 million or so to go.

How is this affecting both business units? Is one unit experiencing a significantly larger impact from the discontinuation of the products?

Yes, it's really predominantly in the cellular and molecular side. These are more of the lower individual products that typically sold through distribution, not really part of what I would call our strategic selling proposition. So again, predominantly on the cellular and molecular side, I mean, probably 95-plus percent of it there, I'm guessing, but it's really predominantly CMT.

Okay. And then, a follow-up question on the new product front. So you talked about the MEA launch. Last quarter, you discussed the BTX for bioproduction, and in previous quarters, you talked about glucose monitoring. Are those still growth drivers for you?

Yes, they certainly are because they represent new opportunities for us, including new areas and customers that provide additional growth. We have experienced some challenges in bioproduction, as many are discussing, but since we are starting from a small foundation and moving towards significant numbers, it doesn't impact us greatly. However, we are optimistic that things will improve in the long run. We believe we have a strong offering and will be showcasing it at the bioproduction show in Boston later this month. I'm excited about being prepared for this event, especially as we already have actual deals and customers embracing our solutions. I feel confident about our case and selling proposition.

Our next question comes from the line of Christopher Sakai of Singular Research.

This is Sean for Chris. Just wanted to see if you can give us a little bit more color on gross margins, which decreased from the first quarter to 58% from 61.2%. What were the drivers?

Yes. First of all, we observed a few factors. There will always be variations in mix and volume. We also launched a new product, the multi-well, which involves some startup costs and associated inefficiencies that impact us. Looking ahead, we've analyzed our situation and Jen noted some accounting changes in how we report our manufacturing processes. Given our long history and multiple sites, there were inconsistencies in accounting practices that needed alignment to avoid discrepancies in depreciation and other factors. I'm not an expert in this area, so I leave the complex numbers to our finance team. Overall, this realignment affected our gross margin, and we've taken all of this into account as we consider our outlook for the remainder of the year.

On the cellular and molecular products, if you can give us more color in terms of the weakness in North America and also what's happening in EMEA.

Yes. It's interesting because they operate differently this year. Last year, EMEA was weak; the U.S. was strong. This year, EMEA is very strong, and we're talking about growth across the board. Especially in the preclinical side, that really picked up nicely in EMEA. Asia is very strong this year. The U.S. was a little slower in that. Now again, when I look at something slowing down a little bit, I analyze what has slowed down and what we saw was some slowness in inhalation-related products. Now that could be because we had a larger year last year in the U.S. with inhalation products, so this might just be tougher to compare. It seems to be a narrow issue in product. Again, it could very well be a harder comparison level since last year a lot was purchased that was COVID-related, and inhalation was a key product area that we introduced at just the right time. We've passed the COVID era, and I think that will lead us to a standard operating level. But again, the growth we're seeing in Europe and China is encouraging, just not so much here, and it's limited to one product line. At this point, I'll take any more questions if the operator has them.

No, sir.

Great. Well, then, I think that this will end the call. Let me thank you for joining us. This ends today's presentation. I hope you'll come join us in the fall for our third quarter results of fiscal '23. Thank you very much; this ends the presentation.

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