Good day, and thank you for joining us. Welcome to the Q2 2024 Harvard Bioscience, Inc. Earnings Conference Call. All participants are currently in listen-only mode. Please note that this conference is being recorded. Following the speaker's presentation, we will have a question-and-answer session. I will now turn the conference over to your speaker today, Kathryn Flynn, Corporate Controller.

Thank you, Josh, and good morning, everyone. Thank you for joining the Harvard Bioscience second quarter 2024 earnings conference call. Leading the call today will be Jim Green, President and Chief Executive Officer; and Jennifer Cote, Chief Financial Officer. In conjunction with today's recorded call, we have provided a presentation that will be referenced during our remarks that is posted to the Investors section of our website at investor.harvardbioscience.com. Please note that statements made in today's discussion that are not historical facts, including statements or expectations or future events or future financial performance, are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied. Please refer to today's press release for other disclosures on forward-looking statements. These factors and other risks and uncertainties are described in the company's filings with the Securities and Exchange Commission. Harvard Bioscience assumes no obligation to update or revise any forward-looking statements publicly, and management's statements are made as of today. During the call, management will also reference certain non-GAAP income measures, which can be useful in evaluating the company's operations related to our financial condition and results. These non-GAAP measures are intended to supplement GAAP financial information and should not be considered as a substitute. Reconciliations of GAAP to non-GAAP measures are provided in today's earnings press release. I will now turn the call over to Jim. Jim, please go ahead.

Thank you, Kathryn. Hello, everybody. Let's move to Slide 3 of the presentation and look at our quarterly results. We had a tough first half of the year, and Q2 was more challenging than expected. Revenue in the second quarter came in at $23.1 million. That's down $5.7 million from last year. Taking a minute on the market environment, as expected, slower sales to China and Asia Pacific continued through our second quarter. Q2 also saw the effects of reduced capital spending by our CRO and biopharma customers in Europe and in the U.S., which primarily affected our preclinical product shipments. And I'll mention, we're still seeing the impact of some of the supply chain issues, which we do expect to be able to resolve over the course of the second half of this year. Our gross margin came in at 57.2%, but remained strong with primary differences to our target of lower absorption of fixed expenses. On a GAAP basis, we reported an operating loss of $2.1 million. On an adjusted basis, our operating profit measured $800,000 or 3.5% of revenue, and adjusted EBITDA came in at $1.3 million or 5.5% of revenue. All of that said, we continue to focus on our operating cost structure and our new product initiatives, which we weather during the challenging market environment. As we announced in April, we took advantage of operating synergies to reduce our operating cost structure and support our ongoing investments in new products. We're seeing these investments come to fruition and expect them to add new revenue streams starting in the second half and help underpin our long-term double-digit revenue growth goal. I'll give some more color to our new product commercializations later in the presentation. But first, let me turn it over to Jennifer Cote, our CFO, to discuss our second quarter financial results in more detail. Jen?

Thank you, Jim, and hello, everyone. Let's dive further into our financial statements. As Jim mentioned, this was a challenging quarter. Please move to Slide 4, where we'll look at revenue for the quarter by product family and region. Starting with the Americas, revenue was down 12% as reported from last Q2 and slightly down sequentially 3% from Q1 2024. Preclinical sales were down compared to prior year Q2 and also sequentially to Q1. Pharma and CROs are still delaying spending on capital equipment, and going forward, we are starting to see signs of market optimism with increases in biotech-related capital raises and increased drug development activity. But as we learned from recent announcements, the CROs, while optimistic, are challenged over the course of the rest of the half of the year. As this recovers, we expect to see improvements cascade to our business as things get better. While Cellular and Molecular was down slightly 5% compared to Q2 of last year, CMT showed sequential growth of 9% compared to Q1 2024. So we're encouraged to start to see some return to growth in our academic markets. Moving on to Europe. Overall, revenue was down 29% as reported versus last year Q2 and was essentially flat sequentially to Q1. Both Preclinical and Cellular and Molecular saw large declines versus last year but are essentially flat sequentially to Q1. We attribute the year-over-year decline in Europe to the overall economic environment, including higher interest rates, energy costs, and the Ukraine war, resulting in tighter spending by CROs, pharma companies, and the government. Moving to China and Asia Pacific. Overall APAC revenue was down 22% against prior year Q2 and 16% sequentially to Q1. Preclinical sales in Q2 saw further erosion compared to prior year and sequentially from Q1 due to continued lower spending by pharma and CRO companies. Cellular and Molecular products are down compared to the prior year Q2, but appear to be stabilizing with improvements sequentially from Q1. Specific to China, market information suggests that the impact of stimulus is shifting into 2025 as companies apply for these funds but are delaying orders until funding is received. We are seeing increasing levels of quoting activity consistent with what others in the industry have shared. If you can please refer to Slide 5, we will share additional financial metrics. Please refer to the top middle of this slide. Gross margin during Q2 2024 was 57.2% compared to 58% in Q2 last year. As Jim mentioned earlier, the year-over-year decrease is mainly driven by lower absorption of our fixed manufacturing costs and a lower mix of higher-margin preclinical products sold to CROs. We are encouraged that our gross margin remains close to our target of 60% despite a challenging revenue quarter. This reflects the impact of the improvements we've made to our operating structure and provides room for increased margin drop-down with expected improvements in revenue. If you refer to the top right graph of the slide, our adjusted EBITDA during Q2 was down from $3.9 million last year to $1.3 million this year. The primary driver for reduced adjusted EBITDA was a drop-down of lower gross margin dollars. As Jim spoke about earlier, we continue to stay focused on investing in new product development and commercialization of our growth areas while actively managing our costs. We implemented actions during early Q2 to reduce our operating expenses and take advantage of efficiencies in our operating structure and to fund our ongoing investments in growth. We realized savings from these actions of approximately $700,000 during Q2, and we expect these actions to support annual run rate savings of approximately $4 million. We will continue to manage through these market headwinds and drive operational improvements while investing in the critical areas of growth for our business. Moving to the bottom left, where we show both reported and then adjusted loss earnings per share. First, I will describe the primary differences between our GAAP EPS and our adjusted EPS. The differences between our GAAP and adjusted are highlighted in the reconciliation tables on Slide 11, but primary drivers continue to be stock compensation and amortization and depreciation, both of which are non-cash items. Together, these items impact both years by $0.06 per share. During Q2, the remaining difference of $0.01 is attributed to a loss on the sale of investments and the impact of restructuring costs incurred with the cost reduction actions earlier in the quarter. Adjusted EPS declined $0.04 compared to last year, primarily on gross margin declines from lower revenue, which was partially offset by lower interest expense and an income tax benefit. Switching gears to cash flow and liquidity. If you refer to the graph in the middle of the bottom row, cash flow from operations was $0.6 million for the first half of 2024 compared to $5.4 million in the same period last year. This decline is largely, again, driven by the drop-down of the impact of lower sales during the quarter. As we discussed last quarter, in February 2024, we received cash benefit net of commissions of $2.6 million for the employee retention credit provided by the CARES Act. Also during the first half of 2024, we were able to sell all of our investment in HRGN stock for $1.9 million, which is included in our cash flow from investing activities. These additional sources of cash helped support our cash position and net debt is down $0.7 million compared to the end of 2023. As we return to stronger revenue quarters, we expect to continue on our path towards paying down our debt and improving our leverage. Further details on the above items can be found in the non-GAAP reconciliation tables included in our press release and in the appendix to this presentation and will be available in our 10-Q. I'm now happy to hand things back to Jim.

Thank you, Jen. Let's move on to Slide 6. I'm not going to drain this whole slide, but I do want to take a minute to remind you how we think of our base business and investments for expanding into high-growth applications with significant consumable and recurring revenues. Our base business is designed to deliver long-term better-than-market growth. New base product revenue combined with new high-growth revenue streams from bioproduction and MEA Organoid applications will begin in the second half and underpin our long-term double-digit growth target going forward. Now let's move to Slide 7 to discuss our considerable progress on our key new product launches in more detail. The first row of the table highlights the commercial status of two new products we consider part of our base bread-and-butter business. Early in Q3, we began production shipments of our new SoHo family of telemetry devices, which now enable real-time telemetry measurements in a shared animal housing environment. This will lead to additional demand, especially in Europe, though likely starting really in 2025. Late last year, we announced the initial delivery of our groundbreaking VivaMARS neurobehavioral monitoring system to one of our largest CRO customers. This CRO has adopted the system as part of their preclinical testing offering. Later in the second half, we expect to ship additional VivaMARS products to this customer as they expand their use of these systems to more locations. As an aside, we expect to see posters describing the initial results of testing using the VivaMARS system at this September Safety Pharmacology Society show. We're also encouraged by the initial response to VivaMARS, which supports our optimism as we are seeing strong interest from other CRO and biopharma customers and expect expanding sales in 2025 and beyond. The second row of the table highlights the commercial status of our products targeted to electroporation and bioproduction. This year, we began the selling process in the bioproduction segment. Last year, we announced that a large pharma company adopted our BTX Electroporation system configured for bioproduction. We're pleased to see the consumable revenue with this customer has now grown to approximately $1 million annual run rate, in line with our original expectations. This customer is now exploring the use of BTX for bioproduction for an additional drug application, which could be as big as the current application. We're also very encouraged by the number of new customers considering our BTX as a bridge to GMP bioproduction applications. Also in Q3, we began shipping our new CGMP-compliant amino acid analysis system for bioprocessing applications. Our AAA is an adaptation of our leading Biochrom AAA system currently in operation in clinical labs around the world and is expected to do well in bioproduction applications. The third row of the table highlights the commercial status of our exciting new Mesh MEA Organoid platform. We have adapted our market-leading MEA electrophysiology systems to be the first in-vitro organoid data acquisition and analysis system capable of supporting long-life longitudinal analysis of organoids. We believe these new systems are well positioned to support fundamental research by our academic customers in addition to biopharma companies to streamline safety and toxicology testing as well as reduce costs, reduce test time, and reduce expensive animal usage needed in the new development drug programs and developments today. In the first half of this year, we installed and began beta usage at four customer sites focusing on neuro and cardiac and toxicology applications. For the second half of this year, we're well on our way to 10 or more additional installations with early adopters, including well-known biotech and large pharma companies and leading academic research institutions and the NIH. We're planning full production launch in Q1 of 2025. I'd like to point out that each of these new revenue streams are based on leveraging our well-established technologies and adapting them to significantly larger biopharma applications with high pull-through recurring revenues. Now let's move on to our outlook summary on Slide 9 and take a look at what we see for the full year. In light of a weaker second quarter and the market recovery expected to be delayed until later in the second half, we're reducing our full year 2024 revenue outlook to approximately $97 million to $102 million. We expect sequential growth in the second half supported by new product shipments, which will be heavily back-end loaded. In spite of lower expected revenue, we expect 2024 full year gross margin of approximately 59% to 60%, reflecting our continued focus on expense management. We now expect adjusted EBITDA margin in the high single digits. Like many in the industry, we've faced challenges from a difficult market environment. Through it all, we've remained focused on fielding exciting new products designed to meet the needs of academic researchers, CROs, and the drug development market, and to support our goal of long-term double-digit revenue growth. Thank you. Now I'll turn the call back over to the operator to open the line for questions.

Our first question comes from Paul Knight with KeyBanc Capital Markets. You may proceed.

Hi Jim, regarding APAC, I guess you say in the release that China is most of it. What total APAC exposure as a percentage of revenue at this time?

Historically, Asia Pacific has been about a quarter of our total revenue. Predominantly, that’s mostly from China, but it does include a few others like Korea and Japan.

And your outlook there?

We feel like we've pretty much reached the bottom there. Our funnels are growing. Early indications look pretty good. I mean, we've got quote rates going up. We have seen the first recovery in Asia really coming from the academics. We do expect things to have stabilized there, just starting to move back to growth on the academic side. The part that has been a little more challenging was the industrial side with biopharma and CRO type companies in China. The outlook there, again, what we're seeing is the funnels are growing, but the problem we've seen has been the velocity through the funnel. So we measure things like funnel aging, and we look at metrics on things like the quote to order time. That has remained slower. So that’s taken a little more time. As Jen mentioned, we believe it's fairly stable at this point for that revenue stream, but real growth is probably delayed until later in the second half, maybe moving into 2025.

Most of these products are expected to be launched in the second half of '24 and early '25. Are you receiving any orders now? I believe the sales team was set up to handle this a few years ago.

Yes. Great question. We actually introduced these to the market starting at SFN near the end of last year. So we've been selling these products. We're working toward collecting orders in each one of these segments. We've mentioned what we expect in these areas. As I look at the base business, this is targeted overall to be giving us better than market growth. Now of course, the market has been an issue. The new areas in the base business, including the SoHo implantable devices, are going to support our growth. With the VivaMARS system, we'll see announcements at SPS for our first large CRO customer who bought the first unit last year, they're starting to buy more of these now. This will expand revenue growth here in the second half of this year. We have other CROs and biopharma companies lined up, also looking at moving towards this technology for their neuro testing. On the bioproduction side, we've seen great interest as well. It's a longer sales cycle, but that side has been growing quite well. We expect to have another new drug announcement with this same large pharma company that's currently consuming about $1 million of consumables just on that one drug today. We're working with them now to explore adoption for another drug, which could be a very large business added to the bioproduction side. We’re also seeing interest from several biotech customers using us as a bridge to production. For organoid work, I've installed four systems with early adopters who are validating our algorithms. We're targeting to have 10 or more of these new systems shipped this second half, and these could sell for up to $100,000 a piece, plus the associated consumables, which represent a significant revenue stream. This is an exciting time for us.

Jim, last question is if the market goes to 5% growth, which is kind of what most companies in the sector are saying, maybe next year or normalized, if the market is at 5%, what do you think Harvard Bioscience's growth would be?

That's a great question. I expect my new product development in these areas to give me roughly double-digit growth. So if I can get to somewhere around 10% with incremental new business and if the market is growing at 5%, then I should be able to reasonably underpin low double digits for this business. If the market stays flat, then at least I've got my new products driving me arguably up towards double digits on their own. That is the long-term growth vector here. It's not so much that I have to count on the market growth. I can count on the new products coming in. These are exciting new areas where very few, if any, competitors have a position.

Hi. Good morning, and thanks for taking my questions? Jim, if you could just finish your thought on if the market is flat next year, what would your growth be? Would it be like high single digits, low single digits?

When I examine the upcoming products, I anticipate approximately 10% growth from these new offerings, regardless of market conditions. If we analyze the internal growth from emerging sectors like bioproduction and the Mesh MEA Organoid products, even in their initial year, they are expected to contribute 5% to 8% to the total growth of the business, and this should continue to expand. Looking ahead one year, I envision the revenue stream from the organoid products starting from a low base, possibly around $5 million or $6 million today, with a target of achieving a compound annual growth rate of about 50% or more for that stream. In the first year, this could add 3 or 4 percentage points to growth, and in the following year, another 7 or 8 percentage points. This has the potential to significantly impact our overall performance. Even if the core business's growth remains flat, these new products will enable our base business to outperform the market solely due to the addition of the VivaMARS product, which significantly broadens our market opportunity. These drivers are positioned for sustainable growth.

Okay. Got it. And then if we could just go into a little bit more detail about the organoid marketing strategy here. It looks like the strategy here is to get lead users and some publications going. Can you kind of just talk a little bit more about how you intend to build this business and build the market?

Sure, sure. We have great exposure to academic researchers. That's our bread-and-butter customer. This is where we've been used initially for these first beta units to prove the technology, as it results in papers and whether they are peer-reviewed or posters on the use of this technology. Even with the first few beta users, we’re also testing with a small CRO focusing on all of the primary compounds used in safety and toxicity testing. This will be aimed not only at researchers but we’ll also engage neuro and cardiac researchers, which will drive our growth. Adapting toward safety pharmacology and toxicity is critical for us to capture the multibillion-dollar market, moving away from the large volumes of small animals currently in use. If we can show success, we expect to be adopted by the NIH and biopharma companies. I expect to publicly announce some partnerships, but many large pharma companies prefer discretion unless they approve a press release. So you will see some interesting names and exciting progress. The key markets we are targeting are in neuro and cardiac sectors where we're well positioned to succeed in the research community.

Okay. Great. And then last follow-up question on that. Would you expect to see more of these studies coming out later this year or in 2025?

You're going to see some of them. In fact, some have already started to come out. I’d say some of the bigger ones that you'll see at the Safety Pharmacology Society are in September. You'll see papers on our neuro testing with our MEA MR system. We are also working with a large CRO who adopted this technology first. We expect to place more systems into their labs. Then at SFN, Society for Neuroscience, you will see several papers and posters showcasing the use of Mesh MEA and organoids. The American College of Toxicology will also highlight our Mesh MEA. We should be in full production with these systems by then, and these are not cheap systems. They could be around $100,000 each, plus service and software licenses. The consumable costs vary based on customer type but could represent a significant revenue stream. The initial work with beta testers has already begun, and we're actively engaged in multiple upcoming shows.

Hi. Good morning. Can you talk about academic research in China? Is it coming back like you've expected?

Yes. Yes, it is. We saw even in Q2, I think if we look at one slide, we’ll see that the CMT business actually did see some recovery there in Asia Pacific. Is that right, Jen?

Yes. Yes, that's right, Jim. I think we're starting to see more activity in terms of quoting. The delays are more related to those academic groups wanting to take advantage of the funding available. They are going through the application process while also communicating with us about their business.

Yes. So on the academic side, we feel like it's already bottomed out and starting to recover, while the commercial side with CRO and pharma companies is still taking longer. We are seeing larger funnels, so more opportunities, but with budgeting there, we don't expect revenue growth until later in the second half or even into 2025.

Okay. Sounds good. And then regarding recurring revenue, do you have a target for that for the year?

Yes. We started the year at a little above 35%. Given the pressure on capital purchases, right now we are probably closer to 40% recurring. As you would expect, when there's pressure on capital purchases, you'll see less purchase of higher cost equipment, but much of the recurring revenue remains intact. Each of these new products discussed today has heavy pull-through potential, especially in bioproduction. The first customer mentioned has four systems, translating to around $1 million of consumables for just that one drug. So the leverage changes rapidly as the adoption of these products grows.

Okay. Great. And then for the $4 million in cost savings you mentioned, where should we expect to see that on the line items?

It's about $4 million annualized. We saw about $700,000 in Q2. It's overall operational expenses, but it is particularly heavy on the operational side. Some will be in the cost of goods, but most will likely be reflected directly in the operational expense line.

Yes, it's probably about half and half, Chris. The operational piece will bleed through margins over time, while the rest will appear in SG&A and R&D.

Thank you for joining us. This ends today's presentation. We hope you'll join us in November for our third quarter results for fiscal 2024. Thank you very much. This ends the presentation.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.