Harvard Bioscience, Inc.

Good day and welcome to the first quarter 2025 Harvard Bioscience, Inc. Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Start key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Catherine Flynn, the Corporate Controller. Please go ahead.

Thank you, Betsy, and good morning, everyone. Thank you for joining the Harvard Bioscience First Quarter 2025 Earnings Conference Call. Leading the call today will be Jim Green, President and Chief Executive Officer, and Mark Frost, the incoming Interim 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 Investor 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 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 Mark. Mark, please go ahead.

Thank you, Catherine. Good morning, everyone. I'm Mark Frost, the interim CFO for Harvard Bioscience, effective tomorrow. With us is Jennifer Cote. the current CFO for Harvard Bioscience. We'd like to thank Jen for her support of the company the last three years and her willingness to spend the last month helping me in the transition. Now, for those of you who are not familiar with my background, I spent the first half of my career at General Electric in a wide variety of businesses, including GE Capital and healthcare. After GE, I transitioned to the healthcare space and have been a public CFO at four companies including when I worked with Jim at Analogic. I'm excited to be here and look forward to working with the team at Harvard Bioscience. I'll now move to our first quarter 2005 results on slide three. Now, revenue at 21.8 was below 24.5 million in the prior year. This result was aligned with the higher end of our guidance communicated in March for Q1. I'll go through color on the revenue in the next slide. Gross margin was 56% versus 60.3% in 2024, and I will provide detail later as well. Now, excluding a non-cash goodwill impairment charge, which I'll discuss in a moment, operating expense declined $3.2 million from prior year, driven by the operating actions we took in 2024, as well as further actions in the first quarter. The operating loss of $49.7 million versus a $2.3 million loss in Quarter 1-24 was caused primarily by the goodwill impairment charge. Now, without the goodwill charge, our adjusted operating income was $0.3 million below prior year's $1.2 million, reflective of the cost actions we executed to offset anticipated lower revenue. Quarter 1 adjusted EBITDA was $0.8 million versus $1.6 million in Quarter 1-24, with a major driver being lower revenue, partially offset by our cost actions. Now, turning now to the goodwill impairment, we had noted indicators of a possible impairment as we exited 2024. Due primarily to the decrease in our market capitalization in Quarter 1, we performed additional impairment testing as we exited the quarter. As a result, our quarter one results include a non-cash goodwill impairment charge of $48 million, which is reflected in operating expense. More detail is provided in the 10-Q. Now I'll move next to slide four and revenue results for the quarter by product family and region. So overall revenues in the first quarter showed an expected seasonal decline from quarter four finishing at $21.8 million compared to $24.6 million in the prior quarter, quarter four. Year-over-year revenue was down from $24.5 million last year's quarter one. Now let's now break it down to look at regional results. So starting with the Americas, revenue in the first quarter declined sequentially by 5.4% from quarter four, and we're down 9.4% versus revenues in the first quarter of last year. As shown in the light blue, CMT did not see the typical quarter four seasonal bump and continued to stay slow in quarter one, which we attribute to the lack of budget clarity for academics and NIH funding. Our preclinical sales declined sequentially mid-single digits, driven by lower CRO sales. Now, moving on to Europe, overall revenue in Europe in the first quarter declined 29% sequentially as we exited 2024 with a strong seasonal end-of-year bombing. Now, compared to last year, Q1, Europe revenues were down 9%. Cellular and molecular sales declined sequentially and year-on-year, but we continue to see growth in cell-based testing and are excited to see the impact of early adopters of our new MEA systems. Now, our preclinical sales were down sequentially in Q1, following the quarter four bump with lower CRO and academic sales, but stayed relatively consistent with the middle quarters of 2024. Now, moving to China and the Asia Pacific, overall in the first quarter, APAC revenue was sequentially up by 6.6 percent over the previous quarter, though APAC revenue was down 17 percent compared to the prior year, quarter one. The APAC market has been especially difficult this past year. Quarter one was our second sequential quarter of improvement, but we don't see this continuing in quarter two, given the immediate softening of revenue in China following the tariff announcements in early April. We have considered this in our guidance for quarter two. Now, cellular and molecular APAC products showed some minor declines in the third quarter, sequentially and year over year. Preclinical APAC sales in quarter one saw sequential growth over sales in quarter four, but we're down compared to quarter one of the prior year, which is a strong quarter for shipments. I'll now move to slide five to discuss further financial metrics. Now, looking at gross margin first, gross margin during quarter one 2025 was 56% compared to 60.3% in quarter one 2024. During last year, we had a change in accounting methods that benefited our gross margins by 1.6 points. The gross margin decline compared to last year quarter one was also impacted by lower absorption of fixed manufacturing overhead and nominally by mix. Now if you refer to the top right graph, our adjusted EBITDA during quarter one finished at $0.8 million compared to $1.6 million in last year's first quarter. Compared to the prior year quarter one, reduced gross profit of $2.6 million was partially offset by lower operating expenses of $1.8 million. Now, moving to the bottom left, where we show both reported and adjusted loss earnings per share. Now, as mentioned in the past, I'll remind you of the typical differences between GAAP EPS and adjusted EPS is the impact of stock compensation, amortization, and depreciation. Now, as I mentioned earlier, during quarter one, we also recorded an impairment in our goodwill balance. These differences between net income loss and adjusted EBITDA are highlighted in the reconciliation tables on slide 10 and are all non-cash items. Now, moving to the bottom middle graph, cash flow from operations were $3 million during quarter one 2025 compared to $1.4 million in quarter one last year. The primary driver for the improved cash flow from operations was improvements in our working capital management. Now, net debt is down $1 million from quarter one 2024 and $2.4 million from year-end 24, from $33.2 million to $30.8 million. This reflects our quarterly principal payment of $1 million and improved operating cash flow. I'll now turn from our liquidity commentary to an update on our efforts to refinance our debt facility. We are making progress, and we have received indications of interest from multiple providers. We are in process of evaluating the proposals and are moving forward with the intention to close per our amendment timing. So I'll now turn it back over to Jim to discuss our new product introductions. Jim?

Thank you, Mark. Good morning, everybody. Mark, it's good to be back working with you again. Let's go ahead and move to slide six, and let me update you on progress on our key new product launches in a little more detail. The new product introductions are aligned into three categories. The base business, which makes up approximately 76% of total revenue, And this is from FY24 from last year. Also, we break out and look at electroporation and bioproduction-related systems, which is about 16% of last year's revenue, and MEA and organoid-related systems, which was about 8% of FY24 revenue. Now, the top section of the table on this slide highlights the commercial status of two new products we consider part of our base business. We've long been a leader in implantable telemetry for preclinical safety and tox testing. Late in 2024, we began production shipments of our new SOHO family of implanted telemetry devices, which allow animal models to live in shared housing environments. Our initial launch was focused on measuring activity and temperature. In 2025, we're expanding the SOHO platform to also now cover cardiac and neural monitoring. We launched these expanded capabilities at the Society for Toxicology show in March, and we see strong pipeline of industrial customers and academics alike. We plan to begin production shipments in Q3. The second row of our base section is the Viva Mars system. The first delivery of this new system, which automates, it's called Viva Mars, and it automates neurobehavioral monitoring systems. And the first system went to LabCorp, one of our large customers. We've been working with LabCorp to tune the system and to support the integration into their testing network. We're now in discussions with LabCorp to add additional sites. Now the middle section of the table highlights the commercial status of our products targeted to high growth opportunities of electroporation and bioproduction. Bioproduction applications are especially attractive because consumable usage scales with our customer's production volume. Turning first to our BTX systems, we were pleased to see that we reached approximately $1 million in consumable revenue from our first large bioproduction customer. Looking to 2025, this same customer is in the process of launching a second bioproduction application in Europe. Finally, we're exploring a new opportunity with a large biotech to adopt our BTX for bioproduction of a CAR T therapy, which they used in development of the therapy. As a result, I guess I should say, as an aside, our BTX Agile Pulse is a leader in peer-reviewed literature on CAR T applications in the research and discovery phase. With respect to AAA systems, also in 2024, we began shipping our new CGMP-compliant amino acid analysis system to pharma companies for bioproduction applications. For 2025, we're working to expand adoption of our AAA systems for bioproduction applications. Now, the bottom section of the slide highlights our exciting new MeSH-MEA organoid platform. This system is the industry's first in vitro data acquisition and analysis system capable of monitoring neuro and cardiac organoids over much longer time periods measured in months, not days. This new system includes both instrumentation and MeSH-MEA consumable chips, and it's designed to help identify new drug candidates more likely to successfully make it through preclinical testing which can improve yields and reduce time and reduce costs going to market. In 2024, we initiated beta testing and also had numerous early adopters, including sites such as Stanford and the Mayo Clinic. Now, recent policy changes in Washington are encouraging a move to new alternative methods called NAMs for improved efficiencies in new drug development. Specifically mentioned is advancing the use of human-derived organoids. This new policy is driving increased interest from industrial customers and we believe presents a great opportunity for expanded adoption of our MeSH-MEA organoid systems for higher volume applications in both drug discovery and in safety toxicology testing. This year we see expanding adoption to more leading academic sites plus government labs in the US, the UK, and Europe. We're focusing on potential high growth industrial applications in biopharma, And finally, we see growing interest for in vitro to in vivo studies targeted to safety and toxicology with CROs. Now why don't we move to slide eight, take a look at our outlook. With uncertainty around NIH and academic research funding and the China tariff situation, we now expect second quarter revenue in the range of $18 to $20 million. And we expect gross margin to be in the 55% to 57% range. Finally, we're going to focus on expanding adoption of our new products while we continue to lower costs. As such, cost actions already implemented are expected to reduce operating expense by an additional $1 million a quarter starting in the second quarter here. Thank you. Now I'll turn the call back over to our operator and open for questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Bruce Jackson with The Benchmark Company. Please go ahead.

Hi, good morning. Can you tell us a little bit more about the impairment charge?

Sure. This is Mark. I'll start and Jen may add in some points. So, you know, it's a normal process of assessing your goodwill. You usually do it annually. But because of our drop, Bruce, in our market cap, we're forced to take further measures to evaluate the valuation of that goodwill. And there's a number of methodologies. We selected a DCF approach. And one of the key aspects of doing that is you have to reconcile to your market cap. And that, in the end, led to the $48 million charge, which is non-cash, Bruce, but we needed to take that charge, unfortunately. And it was recorded this quarter.

Okay. And then, if I could ask a little bit more about the bioproduction business and the CAR-T in particular. Is that something that's being considered for a domestic product? or is it international?

Yeah, hi, Bruce. This is a domestic customer of ours. Our BTX system, and especially the Agile Pulse system, is one of the leading technologies that's used for creating a number of these new forms and new types of therapies, and CAR-T is one of the leaders. So if you look in the peer-reviewed literature, you'll see our system referenced many, many times throughout the industry and in academic research. So this particular customer is an advanced biotech. They've been working on this new technology, this new CAR-T related therapy, and they were using our Agile Pulse to create the new therapy. So what we've done is we're working with them toward adopting the system for bioproduction of this same therapy. So again, it would be a new expansion for us into, um, you know, again, one of these advanced drugs for here, uh, designed and man, it would be manufactured here in the United States and, and targeted to, uh, to human populations and going into, I believe at this point there are, they're in, um, various late, various stages of, um, of, uh, um, of the testing, uh, on humans. So it's, again, I believe it's still in, in first stage, uh, first clinical, first, first stage clinical.

Okay. And then, um, Last question for me is on the SMA product line. So we've got some cross-currents here. HHS, of course, with their NAM pronouncement is a positive for this space. NIH funding has been kind of unpredictable. How do you see this all netting out and what's the inbound interest on the product given that environment?

Well, the interest on the product came in very strong, and you even saw it last year with early adopters picking up the system, starting with academic researchers and then researchers in certain biopharma companies. But academics really led the way and with really heavy emphasis on neurodevelopment and then also with cardiac. So as far as what we saw happening there, there has been a slowing just in general in with academic research and with NIH-funded. Now, it certainly, you know, the interest has gone up. In fact, we see the funnels growing for opportunities to place this technology into academic research sites, but it's taking longer to get through the cycle. We met with the NIH a couple weeks ago at their facilities, and what we were told by them was the budgets are there, but that there were a number of, there was quite a large... reduction in fours, but really targeted to the folks who are involved with purchasing. So it's kind of slowed up the purchasing process. So in academics, the demand is certainly there and growing, and growing big. And we know we still see, I would say, you know, if you look at our academic research revenues this quarter, you know, it started late in Q4, but it slowed down some, but it's running consistent. So it's still moving along, and we think that's going to get better. But the other big push, as you suggested with the announcement from the government, is this push toward the use of NAMs and specifically organoids and neuro-organoids in testing and in development. And that's causing a lot more interest for us with the biopharma companies. We now have a lot more inbound calls even with the CROs that are much more interested in looking at this technology knowing that the government's expecting them to start to move to some of these newer methods. So overall, you're right, this is going to be a good long-term driver for us for adoption of organoids into the development cycle.

Okay, great. That's it for me. Thank you. Thanks, Bruce.

The next question comes from Paul Knight with KeyBank. Please go ahead.

Hi, Jim. Hi, Paul. Thanks for the time today. The BTX technology, I think you've been talking about certainly getting traction. Will it ever be, do you think, able to compete in the sector that MaxSight participates in?

That's a great question. We figure certainly we could get into that level, but MaxSight tends to focus really on high-volume applications, and they use a licensing structure. We felt like, for us, the value proposition was for us to use the razor-razor blade method, but also to go after these early adopters. So we don't have such a high cost of entry as some of the biotechs and the pharma companies are exploring these new drugs. So we think that's a good space for us. If it made sense for us to go to much higher volume, we would certainly have to put some real work into that. But the initial real value proposition for us, we felt, was time to market and the ability to bridge, especially if somebody used us, like in CAR-T therapies, if they used us to create the drug, that now they can use us for the initial bioproduction. And then depending on the volume needs, that determines whether or not we could be the long-term solution for bioproduction or not. But either way, it's a great place for us to start. And many of the biotechs, they really just need to know Can they produce the product in a GMP environment so that they can get through their preclinical phases and get through at least their early through late stages of human testing? Again, and then it comes down to what's the volume needs. But you've also noticed with the release of the product that's already now reaching a million dollars a year on the application that we have already up and running, That says that we can certainly get into some reasonable sizes of volume. And, you know, it really just depends on the number of doses and the amount of, in each dose, whether or not it's required to go through a transfection and the use of electroporation or electrofusion.

And then regarding the MeSH MEA product line, did the The announcement seems like the NIH wants to focus on it. Would you not agree that there's no way animal testing really slows down for a long time? It'll be just a co-development process. Wouldn't you agree with that?

Yeah, I do. And if you look at where our technology is used, we're used in the later stages, the formal stages of safety and tox, and that's when the animals are really used for verification that it's safe and effective. Nobody believes that's going to stop. Now, we do know with the new therapies for monoclonal antibodies, and by the way, our BTX system is used by one of the leaders there, Regeneron, in creating those monoclonal antibodies. So for us, that's a positive thing. Now, you could argue whether or not long-term testing should be necessary on a drug that's like this that is really primarily targeted late-stage cancer. So it makes sense that they may want to not have to take on the cost of long-term effects of a drug that really is only used in palliative care in late stages. So that we don't see as an issue, but for the vast majority of new drugs, They're going to be used on children and people chronically for years and years. You do have to do, we believe you have to do the full testing. And we just can't see any real pharma company introducing a drug where they haven't done that level of safety and toxin to be able to correlate that back to data for years. And our systems have been used for safety and tox telemetry for many years with most of the main drugs that have come through. We just can't see you know, a major pharma company saying we're now going to stop that level of testing. But we do think the move toward things like organoids might help in the use of getting the early testing so that you don't maybe have to go through large volumes of large populations of small animals to filter out in a very inefficient way and a costly way. But once you get through that phase, there's no question we believe you have to do the safety and tox testing with implantable telemetry, and that really means using our technology.

Mark, I missed the first question. I think you were talking about the refinance, or if you didn't, my question is, what kind of rate are you looking at? Somewhere around, what, 12%-ish?

It's going to be higher than a commercial rate. We are still in the negotiation process. to finalize that, but yeah, it will be more expensive than commercial debt, to answer your question.

Okay. And what is it, what kind of term, is it five-year out, or is it payments as you go through it, or what's the structure of that?

Yeah, we're still in the process of negotiating all that, so that kind of detail I can't really share at this point in time. We will, obviously, as we get closer to to finalizing deals, but not at this point in time.

But I think we do, I think it's fair to say we're going to be looking at multiple years.

Yeah, yeah. Yes, it will be four or five years out for sure.

Okay. All right. Thank you.

Yeah. Thanks, Paul.

This concludes our question and answer session. I would like to turn the conference back over to Jim Green, CEO, for any closing remarks.

Well, thank you, everybody, for joining us today. You know, we're certainly glad to hear the news that just came out this morning about the U.S. and hopefully reaching some kind of an agreement with China. As you know, China for us is, you know, it's probably somewhere around 10% of our revenue. You know, we were coming into this thinking that we might be looking at a $2 million a quarter kind of headwind. You know, hopefully that's not the case now. So, again, this is good news for us because, you know, we were assuming that – you know, with the tariffs as they are, that it was certainly expected to be a real problem for us this year. So I do think there's some good news there. But again, thank you for your time today. This ends today's presentation. We hope you'll join us again in August when we discuss the fiscal 2025 second quarter results. Thank you, and this ends the call for today. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.