Good day, and welcome to the Third Quarter 2024 Harvard Biosciences Inc. Earnings Conference Call. As a reminder, this call may be recorded. I would like to turn the call over to Kathryn Flynn, Corporate Controller. Please go ahead.

Thank you, Michelle, and good morning, everyone. Thank you for joining the Harvard Bioscience Third 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, and 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 of 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 facts and other risks and uncertainties are described in the company's filings with the Security and Exchange Commission. Harvard Bioscience assumes no obligation to update or revise any forward-looking statements publicly and management statements are made as of today. During the call, management will also reference certain non-GAAP financial 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 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.

Thanks, Kathryn. Good morning, everybody. Let's go ahead and move to Slide 3 of the presentation and take a look at our quarterly results. Revenue in the third quarter came in at $22 million. That's 13% below Q3 last year. On a sequential basis, we were down about 5%, impacted primarily by weakness in China and Asia Pacific. Taking a minute now on the market environment, Americas and Europe seem to be stabilizing with three sequential revenue quarters that were roughly flat. China and APAC saw further weakness in Q3, but we expect it to flatten or improve modestly going forward. Despite the delayed market recovery, overall, we believe we have a stable base revenue run rate that we will build on with new products now going into production. Gross margin came in at $12.8 million or 58.1%, close to our 60% target despite a low revenue quarter. On a GAAP basis, we reported an operating loss of $1.9 million. On an adjusted basis, our operating income measured $800,000 or 3.8% of revenue and adjusted EBITDA came in at $1.3 million or 6% of revenue. It's worth mentioning a major operating milestone. During Q3, we successfully transitioned and merged all U.S. operations onto one modern ERP system. This enterprise tool set enables significant improvement in both inventory and supply chain management, and we are already seeing early Q4 improvements in supply chain-related delayed shipments, which have plagued us for well over a year. In addition, with our continued focus on efficiencies and operating costs, we took additional actions during Q3 and early Q4, which are expected to reduce operating expenses by an additional $1 million a quarter, beginning here in the fourth quarter. These reductions are designed to structurally and long-term optimize the overall cost of our business and enable self-funding from operations, even on low revenue quarters. Operating cost reductions combined with new product introductions now shipping are expected to further improve gross margins, and with strong operating leverage, significantly improve EBITDA in the fourth quarter and beyond. I'll provide some more color on our new product commercializations later in the presentation. But first, let me turn it over to Jennifer Cote, our CFO, to discuss our third quarter financial results in more detail. Jen?

Thank you, Jim, and hello, everyone. Let's dive into further details on our financials. If you can move to Slide 4 where we will look at revenue for the quarter by product family and region. Starting with the Americas, revenue in the third quarter was down 12% from Q3 last year and is stabilizing sequentially, as you can see compared to Q2 and Q1. We are pleased to see these signs of stabilization in the Americas. Preclinical sales saw a 26% decline compared to the prior year quarter, primarily due to COVID-related respiratory products and telemetry system software. Sequentially, preclinical sales have leveled off since Q2, down slightly. Cellular and Molecular showed revenue growth of 15% compared to Q3 of last year, and sequentially, CMT showed modest growth. Pharma and CROs are still keeping a tight hold on spending, but there is optimism as we listen to industry updates. Moving on to Europe. Overall, revenue was down about 12% compared to Q3 last year, but has also stabilized sequentially. Revenue has remained effectively flat for the last three quarters. We are experiencing overall stabilization in our European sales. Preclinical sales were down 21% year-over-year and remained challenged on a sequential basis compared to Q2 of this year. Cellular and Molecular sales were down 7% compared to the prior year. Compared to Q2, CMT saw sequential growth driven primarily by increases in cell-based testing. While budgets remain tight as a result of the general economic environment in Europe, overall revenue has stayed flat, and we are starting to see improvements in orders at the start of Q4. Moving to China and Asia Pacific, overall APAC revenue was down 20% against prior year Q3 and 20% sequentially to Q2. The APAC market has been especially difficult this past year, which has affected sales in both preclinical and CMT. Preclinical sales in Q3 saw a further erosion, down 32% compared to the prior year and down sequentially from Q2 due to a continued lower spend by CROs. Cellular and Molecular products are down 5% compared to the prior year and down sequentially from Q2 16%. We are expecting flat to moderate improvement sequentially starting in Q4. What is encouraging is when we look at our global trailing 3-month order profile, we see a clear inflection point to growth at the end of June, that has now been increasing for four months. Our booking trend is on its way up. We are growing. We are also on track with revenue shipments to early adopters of our new Mesh MEA products, and I know Jim is excited to speak about that shortly. If you can please refer to Slide 5, we'll share some additional financial metrics. Please refer to the top middle of the slide. As Jim mentioned, gross margin during Q3 was 58.1% in both 2024 and 2023. We continue to see strong product margins but experienced lower absorption of fixed manufacturing costs during Q3. We stay encouraged that our gross margins remain close to our target of 60% despite a tough revenue quarter. We continue to make improvements in our cost structure, and that should drive increased margin drop-down with expected improvements in revenue. If you refer to the top right graph on the slide, our adjusted EBITDA during Q3 was down from $2.2 million last year to $1.3 million this year. The primary driver for reduced adjusted EBITDA was the drop-down of lower gross margin dollars of approximately $2 million, offset by reduced operating expenses of $1 million as a result of the cost reduction actions we took in Q2. We initiated additional cost actions in Q3 and early Q4 primarily related to employee expenses, that we expect to drive additional quarterly run rate savings of approximately $1 million. As Jim mentioned, we completed an impactful project during the second quarter. We successfully consolidated our U.S. ERP systems and went live on Labor Day weekend. We expect this migration to one ERP environment in the U.S. will allow us to mature our sales and operations planning, supply chain management, and will enable inventory reductions. This will also enable automation and efficiency improvements throughout the operation. We continue to manage through market headwinds and have made additional cost reductions, which positions us for improved profitability going forward. We also stay focused on prioritizing our spending toward the critical areas of growth for our business. Moving to the bottom left, where we show both reported and adjusted loss earnings per share. First, I will describe the primary differences between GAAP EPS and adjusted EPS. The differences between these results are highlighted in the reconciliation tables on Slide 11, but the primary drivers continue to be stock compensation, amortization, and depreciation, all of which are noncash items. Together, these items impacted both years by approximately $0.05 to $0.06 per share. During Q3, we settled a defined benefit plan in the U.K., which will remove a future annuity payment to former employees of the company. Pension assets were used to acquire annuities for the participants, and this did not require any incremental cash funding by the company. Our GAAP loss per share included an impact of approximately $0.03 per share from the noncash realized loss on the closure of the pension plan of $1.2 million. Adjusted EPS declined $0.03 compared to last year, primarily on the gross margin declines from lower revenue, partially offset by lower operating expenses. Please refer to the graph in the middle of the bottom row. Cash flow used in operations was $0.8 million for Q3 2024 compared to cash provided by operations of $4.4 million in the same period last year. This decline is largely driven from the drop-down impact of lower sales during the quarter. Our net debt at the end of Q3 2024 was slightly above our net debt at the end of the year. As we discussed last quarter, during the first half of 2024, we received a cash benefit net of commissions of $2.6 million for the employee retention tax credit provided by the CARES Act. And also, 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, which has minimized our net borrowings against our revolver to $1.2 million since the end of 2023. As previously disclosed, we amended our credit agreement earlier in Q3. While we are in compliance with our financial covenants, we are currently unable to make additional borrowings under our revolver facility due to net leverage ratio limitations under the credit agreement. This limitation will continue until we report our annual financials in March 2025. Based on our current plans, including the cost reduction actions I discussed earlier, we expect that our available cash and cash flow from operations will be sufficient to finance operational and debt service needs for the next 12 months. That said, our ongoing cash flows and ability to meet our debt covenants are dependent on our ongoing revenue and operating performance. So we'll be keeping a close eye on our liquidity situation. Further details on the above items can be found in the non-GAAP reconciliation tables included in our press release and in our appendix to this presentation, and will be available in our 10-Q. I am now happy to hand things back to Jim.

Thank you, Jen. I'm just going to take a quick second and reflect on Jen's comment about the trailing 12-month or the trailing 3-month trend on our order intake that we're now seeing an inflection back to growth. It's very exciting. I do want to mention though that the first thing that happens with order growth is there is a timing between order, shipment, and sale. It takes a while for that to turn into revenue growth. But it is a prime indicator. And it also gives us good comfort that, now, as we start to look toward our expectations and outlook, we should expect to do a much better job than we've done during the recent few months and recent few quarters, where we had this kind of falling situation that was hard to predict, especially driven even lately by China. But now that we see that stabilizing and we look at the fundamental three-month or four-month trend, it's a very key indicator for us to underpin what we see as our base run rate revenue that we'll be building on with the new products. So it's very good timing for us. I think it's a great thing to see. I don't know that I would call it a return of the market, but certainly, from our perspective, we see things stabilizing and something really strong that we can build on and much better predict. So if we go to Slide 6, I do want to take some time to go through and discuss our considerable progress that we've seen on some of these new product introductions. If you look at the table, the first row of the table on the slide highlights the commercial status of two new products we consider part of our base, or 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 and concurrently during behavioral testing. Together, we believe this new capability will lead to additional demand starting now in large government labs and then expanding globally in 2025. Also, as part of our base business, late last year, we announced the initial delivery of our groundbreaking highly automated VivaMARS neurobehavioral monitoring system to one of our largest CRO customers. This customer, and it's no secret that it’s Labcorp, has adopted our system as part of their preclinical testing offering. In Q4, we expect to ship additional VivaMARS products to this customer as they expand their use of these systems to more locations. We're encouraged by the initial response to VivaMARS and are seeing strong interest from other CROs and biopharma customers and expect expanding sales in 2025 and beyond. Now the second row of the table highlights the commercial status of our products targeted to high-growth electroporation and bioproduction. This year, we began the selling process in the bioproduction segment. Late in 2023, we announced that a large pharma company had adopted our BTX electroporation system configured for bioproduction. Looking at the commercial status, we’re now pleased to see that the consumable revenue from this particular customer has grown to approximately $1 million annually at a run rate, and it’s in line with our original expectations. This customer is now exploring the use of BTX for the bioproduction of an additional mRNA drug application. We're also very encouraged by the number of new customers considering our BTX as a bridge to bioproduction for their new generation drugs. Also, in Q3, we began shipping our new cGMP-compliant amino acid analyzer system for bioproduction applications. Our AAA is an adaptation of our leading Biochrom AAA system currently operating in clinical labs around the world and is expected to do well in bioproduction applications. The first couple of shipments were in Q3, and we expect to ship another handful of systems in this quarter. The third row of the table highlights the commercial status of our emerging new high-growth Mesh MEA organoid platforms. We've adapted our market-leading MEA electrophysiology systems to be the industry's first in vitro organoid data acquisition and analysis system capable of supporting long-life longitudinal analysis of organoids. We see these new systems well-positioned to support emerging fundamental research by academic customers initially in neuro disease applications. In addition, we believe biopharma and CRO companies can streamline safety and toxicology testing as well as reduce costs, reduce test time, and expensive animal model usage for new drug development and safety assessment. As for the commercial status, at this time, we have five operating beta sites, three academic sites, including the University of Texas, Tampere University in France, and the University of Michigan, and expect to install at the NIH in Q1. Synaxys, an advanced CRO in France, is focusing on safety and toxicology applications, and a leading biopharma company with operations in Cambridge and throughout California is focusing on longitudinal viability testing for neuro and cardiac organoids. As for academics and biopharma early adopters, the first couple of units shipped in Q3, and we expect to have up to 10 installed and operating by the end of Q4. Finally, we're now positioning for the initial production ramp for the consumable Mesh-chips in preparation for higher volume shipments in 2025. I'd like to point out that each of these new revenue streams is based on leveraging our well-established technologies and adapting them to significantly larger biopharma applications with high pull-through recurring revenues. Okay. Now, let's go ahead and move to the summary on Slide 8, take a look at what we see for the year and the fourth quarter. Given the continued delay of market recovery and the difficulty predicting China and Asia Pacific more recently, we're taking a more conservative approach and reducing our full year 2024 revenue guidance to $93 million to $96 million. We expect Q4 revenue to range from $23 million to $26 million, sequentially up from Q3 on incremental growth from our new product introductions. There could be a seasonal Q4 bump, though we're not counting on it. We expect Q4 and the full year gross margin to be in the 59% to 60% range. Finally, with an incremental $1 million savings in operating expense, combined with gross margin improvement on increased revenue over Q3, we expect Q4 adjusted EBITDA margins in the mid-teens. So doing the math, we continue to expect full year EBITDA margin in the high single digits. Thank you. Now, I'll turn the call over to the operator and open the line for questions. Thank you.

Our first question comes from Paul Knight with KeyBanc.

Could you discuss the dynamics of the CROs? Are they roughly half of the company's revenue? What led to the current situation? We all recognize that biotech financing declined by about 30% in 2022 and 20% in 2023. Now we're observing that CROs are facing tighter budgets, but there is also an uptick in capital being raised. Is this reflected in your order flow, and what are your thoughts on this? Additionally, how significant are CROs for the overall company?

Sure, CRO revenue is approximately one-quarter of our global revenue. Is that correct, Jen?

Yes.

CRO revenue represents approximately one-quarter of our total global revenue. It's been somewhat inconsistent because we serve all the major CROs and are recognized as the gold standard in the industry. Some of these CROs have publicly acknowledged an improvement in their output and have more new drugs entering their production lines. While there isn’t significant growth, they have described a return to a normalized run rate in their safety assessments. We found Charles River's last call somewhat confusing, but we expect to observe similar developments there. Overall, looking to the second half of the year and specifically Q3 and Q4, we anticipate more normalized demand from these companies. It’s true that large biopharma and pharmaceutical companies have been tightening their budgets, with several layoffs occurring throughout the year. We are uncertain if this trend is ongoing, but we have noticed a slowdown in this activity. We believe this may be influenced by the upcoming election cycle, as there are always uncertainties regarding how pharmaceutical companies will manage reimbursements and pricing. Nevertheless, our business with pharma companies has remained stable for the past few quarters, particularly in the Americas, which accounts for half of our business, and EMEA, which has also shown stability for the last three quarters. As noted by Jen, we are seeing a positive trend with orders over a three to four-month outlook. Biotechs and pharma companies appear to be in decent shape and are planning to increase their orders of our equipment. They generally expect 2025 to be the year when the market will truly rebound. While we have been patiently awaiting that return, we focus on our current product sales. We believe we now have a stable order rate and positive inflection in our growth. Our new products are designed to generate incremental growth across four key areas, which we expect will support high single-digit or close to double-digit growth relative to our base. If the base remains relatively flat, the new products should provide significant additional growth, starting in Q4. China has been challenging, but we are seeing improvements in the academic sector there, and budgets appear stable. However, we have seen reduced demand from large pharma, biopharma, and CROs over the past few quarters. Looking forward, we expect some stabilization in China, and we are hopeful for positive developments with the new budgeting cycle, which could improve conditions for the CRO and pharma sectors. While we have noted a tightening in CROs, we believe that will begin to ease, resulting in stable business rather than big growth. The pharmaceutical sector seems to be performing adequately, with a shared optimistic outlook for 2025. In the meantime, we are managing our resources efficiently and have adjusted our business size to be self-funding even in low quarters. This approach allows us to operate effectively while planning for growth. We expect every new dollar of growth to contribute significantly to our EBITDA. Overall, we remain optimistic about 2025 and the slight growth we project for Q4, recognizing we need to prepare for the possibility of a slower rebound while ensuring strong bottom-line results.

Jim, on Slide 6, you have these new products. Looking at electroporation and Mesh MEA, I think most people can kind of understand the promise there. How big are those businesses? Or can you talk to the range on percent of revenue? And then I guess you're saying those should be high single-digit growers, double-digit growers? That's kind of what you're saying there?

Yes. I view the base business as expected to align with market conditions, assuming stability. We're significantly focused on the equipment side, and any downturns, like the spending reduction we've seen over the past year, have impacted equipment more than recurring revenue streams. With the introduction of new products, we believe our base business will grow in line with market trends, at least maintaining stability. Regarding electroporation and bioproduction, this area represents about 10% of our business, and we anticipate solid growth, likely in the 20% range or higher for this segment, contributing positively to our overall business. As for the Mesh MEA, currently valued at approximately $6 million or $7 million in electrophysiology and MEA systems, we expect it to grow at an impressive rate, potentially over 50% CAGR, possibly even reaching 100%. I would be disappointed if it didn't contribute at least 4 or 5 points to our total compound growth. We are seeing rapid adoption, with plans to install around 10 systems in the fourth quarter, each priced between $78 million and $100 million, designed for significant recurring revenue from biotissue chips. This sector has considerable growth potential, and we are prepared to scale production. I anticipate multiple points of additional growth from this new capability. There is strong interest from early adopters, particularly in biopharma and biotech sectors, indicating a promising opportunity for this technology. This growth rate is expected to accelerate year after year.

And then lastly, I believe the core growth rate aligns with what we see from standard services, which is around 2.6%, indicating a low single-digit growth rate in biopharma R&D. Do you think that's a fair assessment?

Yes. I think, assuming things have stabilized now, that's even though we're all kind of looking at a lower base rate. But yes, we certainly would expect that to be sitting in the low to mid-single-digits in normalized years. That's why I like to look at that base rate and then the new high-growth areas. You'll also notice that each one of these new areas are really targeted to drive substantially more consumable recurring revenue than we've tended to do in the past. That's been our strategy: to adapt these technologies, test them out in academic research, and adapt them to much higher volume, much higher consumable recurring revenue-based applications with our customers in biopharma and CROs.

Our next question comes from Bruce Jackson with The Benchmark Company.

So I'd like to get back to your comments about China. This has been kind of an ongoing issue in terms of trying to predict what's going to happen. So you think that it's stabilizing. My question to you is, why couldn't this get worse? And maybe you could give us some of the market indicators that you're keeping an eye on?

Yes, certainly, you never know; it could get worse. Given the political situation in China, we're hearing from our team there, they have just navigated the election, which might bring some positive stability. Overall, the challenges in China have been noticeable, particularly due to the lack of budget allocations for academic research, which was the initial issue. However, we've started to see a reversal, with growth returning in academic-oriented products, mainly in cellular technologies. We have unique technology, and it’s common knowledge that if a product can be easily replicated, it won't last long in China. We focus on products that boast technological advantage and pricing power, as they are essential for competing with the West in new drug development. We believe the academic sector is stabilizing and will see modest growth in China. The real setback over the past few quarters has been the capital availability for CROs and pharmaceutical companies, which has led to delays in purchasing, including in Q3, where we noticed some further decline. Everything else has stabilized. Despite the erosion in China, we have a pretty solid outlook on incoming orders. Quote rates have improved, and we anticipate Q4 to remain stable, with possibly slight growth from Q3, which isn’t exceptional but is better than continued decline. We expect budgetary issues to be resolved. I wouldn’t anticipate that China will return to representing 25% of our business again, but I do see it stabilizing and modest growth from this lower level. Our focus remains on technologies that are in demand. If they want to pursue organoid work, we view that as a significant opportunity for us, and there is a growing interest there. So, we believe it will at least remain stable. I hope that addresses your question.

Yes, that’s surely helpful. The other question I have is around the order patterns for the Mesh MEA and organoids. So what's the lag time between getting an order and then shipping it? I'm just trying to gauge what the lift might look like in 2025.

I want to ensure that I can meet the demand, but we've intentionally kept our product scarce while we complete all the beta site testing. We have developed a reliable product that fulfills demand, and the indications are promising. The beta site testing is progressing well, and we now have the data and applications ready to begin onboarding early adopters, who are ramping up quickly. This could potentially translate to $1 million to $2 million in new growth each quarter. For these systems, if one costs $100,000, we can expect to achieve a similar amount in consumable sales moving forward. Academics generally do not require many consumables, but as we integrate our product with biopharma companies or for safety assessments, the ratio of consumables to product revenue could change significantly. To answer your question about ramping up production, we are currently limited by the number of biochips we can manufacture. We are working towards increasing production capacity by ten-fold by the second quarter, which I would consider a significant improvement. However, we must be cautious about how many we can distribute to different operations until we fully enhance our production capabilities. The systems are not entirely new; we have been producing MEA systems for years. This is essentially a customization of our existing systems to accommodate these long-life organoids. Our focus now is on the new Mesh MEA chip and its consumption. We understand how to manage semiconductor-based systems, and I don’t foresee limitations in production capacity, but there is a timeline involved in scaling from 50 chips per month to 500 and beyond. As we approach the second quarter next year, this has the potential to significantly drive our growth.

I'm showing no further questions. I'd like to turn the call back over to Jim Green, CEO, for closing remarks.

Okay. Well, thank you very much for joining us today. This ends today's presentation. We hope you join us in March for our fourth quarter results for fiscal 2024. Thank you so much, and have a good day. Thank you.

Thank you. This does conclude the program. You may now disconnect. Good day.