Thank you for standing by and welcome to the Harvard Biosciences Third Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 Reportings. Please go ahead, sir.

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 a 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 represents 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 2 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, which is not included in our press release and presentation will be archived and available in the Investor Relations section of our website. I will now turn the call over to Jim. Jim, please go ahead.

Thank you, David. Hello, everybody. Let's start by moving to Slide 3 of the presentation and take a look at the highlights for the quarter. First, I'll say that I'm pleased to see strong growth in North America. However, similar to numerous life cycle tools companies, we did see -- 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. That's down 6% from last year on an as-reported basis. This revenue includes a net effect of $1.3 million of 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-down 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 $0.03 loss, an improvement from an $0.08 loss 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, I 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 5.2% of…

Thank you, Jim. Let's jump into our Q3 financial results in greater detail. And 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'll 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 2 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 to 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 nonstrategic products, which impacted last year, unfavorably 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 by 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…

Thank you, Jan. 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 prior year. and that includes 5 percentage points of discontinued products as compared to 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. I think it's important to note that 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.

[Operator Instructions] 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 do 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 -- and as we have said that this year, we would move toward that roughly 60% region. We think we're going to get within spit and 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. And in spite of that, we still were looking at plus 58% gross margin in a quarter that really wasn't all that strong from a revenue perspective. So as we look forward, certainly, as we look into Q4 and going forward, our goal has always been to get at 60% or better. So going into next year, I'm confident that we're going to be at that 60% or better kind of number on the gross margin side.

Okay, great. And then a 2-part follow-up question on China. Can you maybe 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 endpoint? And then secondly, can you give us just a sense of the degree of exposure that, that particular region has to the respiratory research business? And is it coming back?

Yes, that's a great question. We -- in China and Asia Pacific is where we saw pretty strong demand for the new respiratory products during the entire COVID phase. And they probably, at this point, I would believe that they may be bought more than they need. They may at this point, given moving forward, without the amount of COVID research that was taking place. We're probably going to see more at a slightly lower level on the respiratory product. That's not a great big part of our product line but it's measurable for us. So when I think of the 2 primary things that held us back in this quarter and really, we started seeing it potentially starting last quarter and it's likely to go into Q4 is really limited to these respiratory products in China. And then there's kind of general slowing that we saw in -- across the CMT line. And that, again, is highly likely, we believe to be the fact that a lot of things were purchased at a higher level during 2021, '22, especially in Asia because many of those products were targeted to finding solutions to COVID, things like products like our cell-based testing products and electroporation and transfection products. So -- and much of that did go in -- was in academic research. So I think for your second question, academic research, we -- the outlook is that it's going to get back to a normalized number, how fast it -- will it get back at or above these COVID numbers is, I certainly wouldn't bet on that. But I think if nothing else, we'll at least move to a good stable base and start to grow off of that. It's anybody's guess what the government is going to do there as far as some of these new funding methods that they've been -- we've been hearing about. We're certainly looking forward to it. But again, I think it's good news just to be able to feel like the 2 primary headwinds for us has been really associated with post COVID in China and limited to a fairly 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 talk about interest you might be seeing for some of your newer product offerings, the organoid space and elsewhere? And if you have any visibility on that going forward? And then I have a follow-on.

Well, I think with SFN, that's our biggest show society for neurology. Perfect timing for us with a number of our very key core business products. Our telemetry products, we're expanding the offerings there. We're pretty certain that organoids is going to get a lot of press. It's been something that's been kind of brewing in academic research for a while. We've been investing pretty heavily over the last few years to turn this into something more than just an academic research product but a real industrial level use product. So I think we're going to learn a lot there. And then with the introduction of the new VivaMARS product, that's already getting a lot of interest worldwide, both in North America, Europe and Asia. Every place that does the formal in vivo testing for -- with the behavioral requirements that are required for any product you need to get to this kind of level of product and you need to have high volume, high capacity and it needs to be in a GLP environment. So we're really excited about VivaMARS. We see that developing very quickly. We've already sold the first one. We'll be in shipping the very first unit here next month. And that, as we said publicly, is about $850,000 system. That's just for 1 to 1 customer -- and we see this as really lining up a lot of growth opportunity for us as we move into next year. And that will also include China.

Okay. Could you also talk a little bit about the quarter the percentage of revenues that were related to recurring revenues and also new product offerings and going into 2024, there is a potential for increases in those areas, a larger percentage of recurring revenues as the total. And also, your thoughts on new products going forward, if you're going to see that increase as a percentage of your total offerings and your efforts in that space?

Yes, that's a great question. I think you're right on. We had first started identifying where we were on recurring revenues and I think it was a -- it wasn't known very well because it wasn't publicized much or even measured very well here. But we had found that we're over 35% on the recurring revenue side. And clearly, that's an area where you see the new products coming out and the new service offerings that are coming out, they are designed to not just sell new product and capital purchases but they tend to come with consumables, services, recurring revenues. So I see an opportunity here for us to move that number from 35%, well higher into the mid-40s or maybe better. That would be my longer-term longer term target. But with each of these new products coming out, there is a service and a consumable and a recurring component to it. NPI, NPI is the lifeblood of a company like this and technology is critical for us. So that's why you see in spite of the issues that we've all had to go through, we've been working hard to keep our costs down so that we can continue to put the investment where it really is needed for a company, a technology company that's expecting to really grow and that's a new product development. You'll see that right there in front of you at SFN this year with Society of Neurology. We have to keep investing in these areas. And I suspect -- I certainly expect a fairly substantial percentage of our new business to be driven by these new products.

I guess just 1 other question. There's been a lot of weakness in the space overall, not just using some weakness in China but some of the bigger players. Kind of in light of that weakness, are there opportunities you're starting to see out there, maybe smaller opportunities, whether it's product lines or maybe a smaller private company that might make sense for you going forward as far as, if not an acquisition opportunity, maybe a partnering opportunity or just buying a product line. Is that something you're starting to see in the space?

Yes, that's a great question. It's certainly something that we're very interested in. It took us a while and I was very public about, look, we're not going to make significant structural changes or our M&A type work until we finish getting our act together. And I feel like this is the year that we finished getting our act together. So we have been starting to look at where -- first of all, what kind of opportunities are out there. But even more importantly, where are the places that we would make the investment to accelerate some of our new areas. We're going to continue to invest heavily in what I call the things that really drive the ability of the farm to meet the needs of the business, the base business, that's things like our Panama software, telemetry, those are core businesses and we're going to continue to build on that. And those we expect to see growing at a nice clip at or above market, with the new areas, though. And when you look at bioproduction and you look at some of what we're doing in advanced cell testing with organoids and new advancements there, those are 2 areas that we definitely want to accelerate. So those would be 2 areas that we would be looking to potentially either there's maybe some licensing, some acquisition activity there for acceleration or maybe even some kind of a teaming environment that might make sense if there's something that we feel we just can't get to given all the opportunities we have in our portfolio to invest. But definitely, there's opportunity there. And as with our capital structure being in much better shape at the end of the year here, we get to Q1, we'll be looking a little harder at where and what might be available to help us accelerate at least those 2 areas.

[Operator Instructions] This does conclude the question-and-answer session of today's program. I'd 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 and that will be some time in the February, early March time frame. 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.