Thank you for standing by and welcome to the Harvard Biosciences Third Quarter 2023 Earnings Conference Call. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Dave Sirois, Director of SEC Reporting.

Thank you, Jonathan, and good morning, everyone. Thank you for joining the Harvard Bioscience third quarter 2023 earnings conference call. Before we begin, I would like to suggest that you take a moment and download a copy of the presentation that will be referred to during this call. The file is entitled Q3 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, 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 is 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 & Presentations. Additionally, any material, financial, or other statistical information presented on the call that 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, everybody. Let's start by moving to Slide 3 of the presentation and take a look at the highlights for the quarter. First, I want to say that I'm pleased to see strong growth in North America. However, similar to numerous life cycle tools companies, we were impacted by post-COVID lower demand in China and Asia Pacific. Going to the numbers; revenue for the quarter was $25.4 million, down 6% from last year on an as-reported basis. This revenue includes a net effect of $1.3 million from discontinued products compared to the prior year period. Q3 revenue saw a net positive FX effect of $700,000. Adjusting for both FX and discontinued products, our underlying core revenue was down roughly 3.5%. Gross margin improved to $14.7 million or 58% of revenue, up from 45% in the same period of FY '22. However, this prior period included inventory write-downs that impacted FY '22 comparable by about 5%. Adjusted operating profit improved $1.8 million or 7.3% of revenue, up from $700,000 last year, an improvement of $1.1 million or nearly 5 percentage points. Adjusted EBITDA measured $2.2 million or 8.9% of revenue, also up 5 percentage points from the prior year. GAAP earnings per share was a loss of $0.03, an improvement from a loss of $0.08 last year. Adjusted EPS measured a positive $0.01 per share, up from a $0.01 loss last year. Cash flow from operations was $4.4 million versus $600,000 last year. In the appendix, you'll find the bridge from GAAP measurements to adjusted or non-GAAP measurements. Now let's move to the next slide, Slide 4, to look at the revenue by quarter by product family and with an improved regional view. Starting with the Americas. Revenue was up 5.9% as reported and included a 5.2% net reduction of discontinued products. So considering discontinued, our underlying core revenue grew by about 11%. Pre-clinical had strong growth in our core tech telemetry and Penema enterprise software though somewhat held back by post-COVID lower needs for respiratory products. Cellular molecular products were down primarily on discontinued low-margin products and some slowness in cell-based testing systems. Moving to EMEA, overall, EMEA revenue was down 1.4% as reported and included a 6.2% net reduction from discontinued products but also had a positive FX impact of 7.7%. Adjusting for FX and discontinued products, EMEA was down roughly 3.5%. Now moving to China and Asia Pacific. Q3 reported revenue was down 30%, and FX and discontinued products had a modest negative effect of approximately 4.5%. The primary impacts were twofold. Preclinical saw a big drop in demand for preclinical respiratory products where during the COVID years, including 2022, China had significantly purchased for COVID research. However, our core telemetry and Penema enterprise software remained close to flat. CMT saw a measurable drop in cellular molecular products where, again, during COVID, China had strong demand in academic research. We now move to Slide 5 of the presentation. I would like to tell you a little about some of our exciting new products and new introductions that we'll be showcasing next week at the Society for Neurology Conference. Over the last 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 pharma discovery, while at the same time, adapting these technologies to further penetrate larger industrial applications with our customers in pharma, CROs, and biotech. Following this strategy, we will be showcasing several of these offerings, and I'll discuss three in particular here. First, we'll highlight our new mesh microelectrode array platform. These new mesh MEAs are targeted for use in organoids, which are small tissue segments or cultures that we believe can represent a proxy for many organs such as the brain and heart. Organoids are a promising growth area for academic research and discovery as well as safety pharmacology and toxicology. Our new mesh MEAs build on our recognized leadership position in single well high-density microelectrode arrays used heavily today, enabling precise signal measurement from within the organoid. We're excited to present early research results using this novel technology on brain organoids at next week's Society for Neurology. Next, we'll highlight our new VivaMARS high-capacity behavior monitoring systems. We first announced our initial customer order last April. The VivaMARS system is specifically adapted to high-volume multi-animal model in vivo testing and formal reporting required for preclinical regulatory clearance. VivaMARS leverages our industry-leading Panema software platform as well as our Panlab activity monitoring expertise. It is an excellent example of how we're able to leverage our expertise across all Harvard Bioscience family. This system was developed with our CRO and pharma customer needs in mind and also meets their business needs to increase operating efficiencies, lower costs, and more importantly, reduce test cycle times to expand capacity and support their revenue growth. We're expecting our first VivaMARS shipment to a CRO customer later this year. Finally, we'll be showcasing our new SoHo small animal model telemetry platform. SoHo is based on our industry-leading telemetry and Panema enterprise software platform and extends our leadership position with expanded capabilities such as concurrent multi-model testing in a more natural shared housing environment. As with VivaMARS, this platform is designed to meet customer challenges for lowering operating costs and shorter test cycle times to expand test capacity and drive more of their revenue growth. Now I'll turn the call over to Jennifer, our CFO, for a look at key financials. Jennifer?

Thank you, Jim. Let's jump into our Q3 financial results in greater detail. If you can please refer to Slide 7. As a reminder, in addition to our reported GAAP results, we also include discussion about our adjusted or non-GAAP financial results, which align with information we use to internally manage the business. Our slide deck includes a reconciliation between our adjusted results and the corresponding GAAP financial measures on Slide 11. Jim has already taken you through our revenue performance, and I will take you through some of our other key financial metrics in more detail. If you can please refer to the top middle of the slide, on a reported basis, our Q3 gross margin was 58.1% compared to 45.2% in Q3 FY '22. I would like to point out two factors that impacted our gross margin results for the quarters. A reminder that last quarter, we mentioned that we aligned our global process for capitalizing our inventory overhead costs. This had an unfavorable impact on gross margin during this quarter of approximately 1 percentage point. We do expect the roll-off of that change to complete during the middle of Q4. Additionally, last year, our Q3 gross margin was unusually low as a result of an inventory charge of $1.3 million related to the discontinuance of non-strategic products, which unfavorably impacted last year by about 5 percentage points. Taking into account both of these impacts, we are seeing substantial improvement in our gross margins with underlying gross margin improvement of about 9% over the prior year quarter. Please refer now to the top right graph where we'll discuss operating expenses and adjusted EBITDA. Our adjusted EBITDA during Q3 was $2.2 million compared to $1 million last year. Our reported operating expenses were slightly reduced during the quarter compared to last Q3. We continue managing our overall operating expenses, with this year's OpEx reflecting merit increases and bonus accruals for our employees. Please refer to the bottom left where we will show both reported and adjusted loss earnings per share. On a reported basis, we improved our diluted loss per share for the quarter from a loss of $0.08 to a loss of $0.03. On an adjusted basis, Q3 showed diluted earnings per share of $0.01 compared to a loss of $0.01 in Q3 of last year. We saw strong improvements due to the combined flow-through of our stronger margin dollars and lower operating expenses. When looking at last Q3, our results included a restructuring charge and inventory write-offs, which together were $2 million, which are excluded from our adjusted reporting. Income tax expense during the quarter related to adjusting our provisions for state and foreign jurisdictions, adjustments to our valuation reserves, and the normal annualization of our forecasted taxable income by entity. The provision recorded this quarter resulted in an unfavorable impact to our reported EPS of approximately $0.02. Now if we switch gears to highlights on cash flow and liquidity. Please refer to the graph in the middle of the bottom row, where we show another solid quarter with $4.4 million in cash flow from operations compared to $600,000 last Q3. This enabled us to pay down an additional $2.8 million against our credit facility during the quarter, bringing our year-to-date pay down to $8.3 million. Net debt at third quarter end compared to the prior year is down $11 million. These improvements position us to achieve our targeted debt reduction goals for the year. We have typically run lean on capital investments, but we do expect to see increases in CapEx primarily to support investments in tooling and equipment for our new product introductions as we enter 2024. Further details on the above items are available in our 10-Q and non-GAAP reconciliation tables included in our press release and in the appendix to this presentation. And I'm now happy to hand back to Jim to cover 2023 guidance.

Thank you, Jen. Now moving to our summary on Slide 9. Let's take a look at what we see for the full year 2023. We now expect 2023 full year reported revenue to be roughly flat compared to the prior year, and that includes 5 percentage points of discontinued products as compared to the prior year. We expect gross margin to remain strong in the 60% range, and we expect adjusted EBITDA margins in the 13% to 14% range. We expect our improved EBITDA and cash flow from operations to support significant debt paydown in FY 2023. We continue to reduce net leverage to approximately the 2x level by the end of 2023. Overall, our core business remains strong, and this team continues to focus on exciting new product introductions and expanding service offerings to fuel new growth and a bright future. Thank you. Now, I'll turn the call over to Jonathan, our operator, to open the line for questions. Thank you.

And our first question comes from the line of Bruce Jackson from Benchmark.

First on the gross margins, nice job. I wanted to know how sustainable you think those are going forward? And could we see any further expansion in 2024?

Bruce, great question. We've been focusing on our overall cost of operations. We're confident that, as we have said, this year we would move toward that roughly 60% region. We think we're going to get within spitting distance of that this year. So we expect that going forward, we're going to be not just where we are today but even better. As Jen said, we've made some modifications to how we handle various accounting structures, and that has had a bit of a negative effect. In spite of that, we still are looking at a gross margin of 58% in a quarter that really wasn't all that strong from a revenue perspective. As we look forward, certainly, as we approach Q4 and beyond, our goal has always been to achieve 60% or better. So going into next year, I'm confident that we're going to reach that 60% or better kind of number on the gross margin side.

Okay, great. And then a two-part follow-up question on China. Can you give us a little color on the underlying demand for the products in China from the academic research side? And is that going to bounce back at any point? Secondly, could you give us just a sense of the degree of exposure that particular region has to the respiratory research business? And is it coming back?

Yes, that's a great question. In China and Asia Pacific is where we saw pretty strong demand for the new respiratory products during the entire COVID phase. At this point, I believe that they may have bought more than they need. Moving forward, without the amount of COVID research taking place, we're probably going to see a slightly lower level of demand for respiratory products. That's not a significant part of our product line, but it is measurable for us. So when I think of the two primary factors that held us back in this quarter, they started showing up last quarter and are likely to continue in Q4, they really relate to these respiratory products in China and the general slowing we saw across the CMT line. This is likely because many of those products were purchased at a higher level during 2021 and 2022, especially in Asia, due to the COVID situation. Much of that demand was for academic research. I think for your second question, the outlook for academic research is that it will return to a normalized level; how fast it gets back to or exceeds the COVID highs is uncertain. However, I think we will at least stabilize at a good base and start to grow from there. It's hard to predict what the government might do regarding new funding methods; we are certainly looking forward to it. But the primary headwinds for us have been related to post-COVID conditions in China, limited to a small number of products.

And our next question comes from the line of Frank De Lorenzo from Singular Research.

Following on with the China question, could you discuss interest you might be seeing for some of your newer product offerings, the organoid space and elsewhere? And do you have any visibility on that going forward? I have a follow-on.

I think with SFN, that's our biggest show, the Society for Neurology. It's perfect timing for us with a number of our key core business products. Our telemetry products are expanding, and we are confident that organoids will receive significant attention. It has been a growing area in academic research for a while. We've invested heavily over the last few years to make this more than just an academic product but a real industrial-use product. I think we will learn a lot from this. Additionally, the introduction of the new VivaMARS product is generating a lot of interest worldwide, both in North America, Europe, and Asia. Any place that conducts formal in vivo testing with the behavioral requirements needed for product development will find this valuable. We're very excited about VivaMARS and anticipate significant growth opportunity as we move into next year. This includes China.

Could you also talk a little about the quarter's percentage of revenues that were related to recurring revenues and new product offerings? Are there potential increases in those areas for 2024? What are your thoughts on new products going forward, and will this percentage increase as a part of your total offerings?

Yes, that's a great question. Initially, we began identifying our recurring revenues, which had not been well publicized or measured previously. We found that we're over 35% on the recurring revenue side. Clearly, this is an area where new products and service offerings produce not just capital purchases but also service, consumables, and recurring revenue. I see an opportunity here for us to increase that number from 35% to the mid-40s or even higher. As new products are launched, there are service and consumable components. New Product Initiatives (NPI) are crucial for a technology company like ours. Despite the challenges, we have been diligent in managing costs to continue prioritizing investments in areas that drive growth, such as technology and product development. You will see significant developments at SFN this year that reflect this commitment.

There's been a lot of weakness in the space overall. In light of that weakness, are there opportunities you are beginning to see, whether smaller product lines or private companies that could make sense for you, whether as acquisition opportunities, partnerships, or buying a product line? Is this something you are starting to identify?

Yes, that's a great question. We're very interested in this area. It took us a while, as I was very public about, to indicate that we would not initiate any significant M&A activity until we were fully established. I feel that we have reached that point now. So we have started to investigate where opportunities exist. However, more importantly, we are identifying strategic investments to accelerate new developments. We will continue to invest heavily in areas that meet our business needs, especially technology and core areas like our Panema software and telemetry. We expect to see growth in these segments at or above market growth. We are also looking to accelerate advancements in bioproduction and advanced cell testing with organoids. These are two areas where we would consider the possibility of licensing, acquisition, or partnership opportunities if we believe they can complement our portfolio and help us advance our growth goals. Certainly, there is opportunity, and with our capital structure significantly improved by year-end, we will explore what options are available as we enter Q1.

This concludes the question-and-answer session of today's program. I would now like to hand the program back to Jim Green for any further remarks.

Thank you, Jonathan. Thank you all for joining us. This ends today's presentation. We hope you'll join us in the new year for our year-end report, which will be scheduled for sometime in February or early March. Thank you very much. This ends the presentation.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.