Hello. My name is Mallory, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2023 BioLife Solutions, Inc. Earnings Conference Call. [Operator Instructions]. Thank you. I would now like to turn the conference over to Troy Wichterman, Chief Financial Officer. Please go ahead.

Thank you, Mallory. Good afternoon, everyone, and thank you for joining us. With me on today's call is Mike Rice, Chairman and Chief Executive Officer. Earlier today, we issued a press release announcing our financial results and operational highlights for the first quarter of 2023, which is available at biolifesolutions.com. As a reminder, during this call, we will make certain projections and other forward-looking statements regarding future events or the future financial performance of the company. These statements are subject to risks and uncertainties that may cause actual results to differ materially from expectations. For a detailed discussion of the risks and uncertainties that affect the company's business and that qualify as forward-looking statements, I refer you to our periodic reports and other public filings filed with the SEC. Company projections and forward-looking statements are based on factors that are subject to change, and therefore, these statements speak only as of the date they are made. The company assumes no obligation to update any projections or forward-looking statements, except as required by law. During this call, we will speak to non-GAAP or adjusted results. Reconciliations of GAAP to non-GAAP or adjusted financial metrics are included in the press release we issued this afternoon. These non-GAAP or adjusted financial metrics should not be viewed as an alternative to GAAP. However, in light of our historic M&A activity, we believe that the use of non-GAAP or adjusted metrics provides investors with a clearer view of our current financial results when compared to prior periods. Now I'd like to turn the call over to Mike Rice, Chairman and CEO of BioLife Solutions.

Thank you, Troy. I'd like to begin our call by discussing our announcement today that we are actively exploring strategic alternatives for our Stirling ULT and Custom Biogenic Systems Cryogenic Freezer businesses, which could include out-licensing our proprietary IP, changing our go-to-market approach, and outright divesting these assets. As you know, we had high expectations for the benefits of scale the acquisitions could bring to BioLife and for the potential to cross-sell our core high-margin biopreservation media solutions with CBS and Stirling Differentiated Freezers. We built BioLife organically and inorganically with acquisitions like Stirling and CBS and while we certainly realized many benefits of scale, after much analysis and consultation with external advisers, we've now come to a decision to explore our options for these businesses. The capital intensity and a lower margin volatile sales cycle business has not been beneficial to our core growth rate and corporate profitability and has not placed us in the peer group where we belong. With the global supply chain negative impact still ongoing and the volatile market dynamics in play, the expected merits of these 2 acquisitions have failed to materialize to the extent we expected. I take my job responsibility to create shareholder value very seriously and with support of the Board and our leadership teams to let the decision to explore a course change. To support these explorations, we've engaged a strategic advisory firm to manage outreach to and inbound inquiries from parties interested in licensing our IP and/or acquiring these businesses. To be clear, our strategic decision is to explore options, one of which is to potentially put our innovative CBS and Stirling businesses in the hands of other parties that can better leverage their operations, supply chain and cost structure to maximize their business model. If divesting is ultimately…

Thank you, Mike. Total revenue for the first quarter of 2023 was $37.7 million, representing a 4% increase over Q1 of 2022 and excluding COVID-related revenue from Q1 2022, growth was 16%, which was driven by a 28% increase in biopreservation media revenue. There was no COVID-related revenue in Q1 2023 compared to 10% of total revenue in Q1 2022. Cell Processing platform revenue was $19 million, up 27% over the same period in 2022. Storage and Storage Services platform revenue was $5.7 million, down 5% over the same period in 2022. Excluding COVID-related revenue from Q1 2022, revenue in Q1 2023 increased 98%. Freezers and Thaw Systems platform revenue was $13 million, down 15% over the same period in 2022. Excluding COVID-related revenue from Q1 2022, revenue in Q1 2023 decreased 12%. Adjusted gross margin for the first quarter of 2023 was 37% compared with 33% for the first quarter of 2022 and 32% for the fourth quarter of 2022. The positive impact sequentially when compared to prior year was primarily due to product mix and lower inventory write-off charges, partially offset by lower gross margins at SciSafe due to the decrease in COVID-related revenue without an associated decrease of infrastructure costs. GAAP operating expenses for Q1 2023 were $51.3 million versus $44.2 million in Q1 2022. Adjusted operating expenses for Q1 2023 totaled $25.5 million compared with $20.1 million in Q1 2022. The increase in operating expenses was primarily driven by increased headcount, consulting fees and infrastructure costs to support our long-term growth objectives. Our adjusted operating loss for the first quarter of 2023 was $11.4 million compared with $8.3 million in Q1 2022. Adjusted EBITDA for the first quarter of 2023 was negative $1.9 million compared with negative $1.1 million for the first quarter of 2022. In…

Thanks, Troy. I'd like to summarize 4 key takeaways from Q1 and today's call. First, BioLife Solutions is a critical, highly trusted tools and services provider to the cell and gene therapy industry. We've built a valuable portfolio of solutions that's helped CGT developers increase their likelihood of success by reducing risk in their manufacturing, storage and distribution workflows. Number two, demand for our portfolio of class-defining bioproduction tools and services remain strong. And it's important to remember that we're still in the early phase of CGT approvals and the growth of this exciting industry. We are very well entrenched and intent on securing and maintaining a position as a premier enabling CGT tools and services provider. Number three, our decision to explore strategic alternatives for our 2 Freezer businesses was made carefully after much analysis and consultation with our Board and external advisers. We're keenly focused on options to reposition our portfolio only on the high-margin, high-growth recurring revenue streams that define us. And number four, order volume to date so far in Q2 is strong across our portfolio. For the rest of 2023, we will focus on running the business efficiently, and managing the exploration of strategic alternatives for our Freezer businesses. Now I'll turn the call back over to the operator to take your questions. Mallory?

[Operator Instructions]. Your first question comes from Jacob Johnson with Stephens.

Mike, maybe starting where you started on the call today, just on the strategic alternatives for the Freezer businesses. You outlined a couple of options, but it seems like a potential sale top of mind. So can you just talk about how you think the potential outcomes from the strategic review? And maybe any kind of thoughts on the time line around that?

Yes. Thanks, Jacob. Well, I want to be really clear that it's not a foregone conclusion that divesting is the only thing we're looking at or the only outcome that could materialize. We have a number of things we're looking at, and it's still pretty early, but we've got a great advisory firm helping us navigate this. And for us, it's just early, and we're all about obviously picking the best option that creates the most shareholder value. Too soon to tell you in terms of a time line when something might happen.

Got it. Fair enough. And then maybe the other question just around that in the press release, you reiterated the $250 million of revenue, 50% gross margin, 30% EBITDA targets. Obviously, if you were to divest the Freezer business, that would be a chunk of revenue that would probably make that difficult. But I guess I'm more curious on the other side of things. You highlighted the profitability of the underlying business. Kind of any kind of commentary you could give us on just kind of how much the Freezers are weighing on profitability right now?

Yes. It's a really good question, Jacob. I appreciate you asking. Well, clearly, if we were to invest one or both, we'd have to issue some updated not only guidance, but also some mid- to long-term financial aspirational goals, which we would do once we had a clear vision of how things would shake out. To the last comment that you made to the extent the Freezers are weighing down the profitability, it is material. I mean I'll just say that with full potency it’s a material way down relative to the other parts of the business.

Okay. And then, Mike, maybe last question. Some other companies have reported this earnings season obviously, the macro has been a headwind, you talked about that with regard to Freezers. But as it pertains to China, I think that's an area where maybe you saw some traction from -- on the distributor side of things. Have you seen anything from your distributors that would suggest any weakness out of China as it maybe relates to the media business?

Not at all yet. In fact, if I just think about the last, I don't know, a couple of clinical support engagements that Dr. Mathew, our CSO is involved in, they are from China. And so I don't have any read-throughs from Marcus or the sales team that the indirect sales in that part of the world and APAC are soft sequentially or year-over-year. So no to the contrary.

The next question comes from Thomas Flaten with Lake Street Capital Markets.

I'm thinking with the concept -- sticking with the concept of the macro, given the softness in Freezer sales in the first quarter, just wanted to get -- or maybe you can help us contextualize some of those macro headwinds, given that you're keeping the guide as it is for that segment of the business?

Right, Thomas, and that's a great place to go to. We certainly were looking at a lot of factors relative to the guide for this year. And I'm happy to tell you that, just to expand a little bit of a comment I made on my prepared remarks that when we look at the pipeline of mostly ULT Freezers that are classified as high confidence to close this year, it's a significant number. I mean it's a big, big number. It's much bigger than I thought, and that's not all the opportunities. Those are just the ones that have made it to the stage where it's considered high confidence to close. So -- and we're not even halfway done through the year. So on the basis of that, with one soft quarter, it would not have been prudent for us to cut the guide in the Freezers and hence, the overall guide. So as we stand here right now on this call on May 10, I'm confident we're going to hit that number, and we're going to come into the range of the total revenue. But yes, if not for the latter, if that not have materialized, we'd probably be having a different conversation.

Got it. And I don't know how much you can say about the large pharma customer that you guys highlighted in the press release. But I'm curious, maybe you could walk us through kind of some of the, I guess, the wins you had, I'm sure there was more than one factor that allowed them to flip from the incumbent to you guys. But any color you can give us on that sales process and kind of what -- what feedback they provided to you?

Yes. In a word, I'd say thorough or another word, I'd say vigorous. Not to -- not to the pipe cleaner [ph] process we went through a couple of years ago with the other leading CGT company with a couple of true therapies. But yes, this one is pretty intense, and we're at the right place in the organization in terms of the decision makers on their side. And we've got, as you can imagine, an army of folks on our side who are meeting with this customer, not weekly, but almost. And there's a project plan that's being marched against in a series of go/no-go sort of e-valve validation steps. But when pressed specifically, and I asked our team, hey, if this does go well in our way, what would we expect in terms of the split of shipments and the direct feedback from the customer was up to 100%, which is much higher than we anticipated because as I mentioned a few minutes ago, we just -- we modeled 50-50 as sort of a modest assumption. But if this goes, that's going to be very meaningful for us and now obviously very meaningful for the incumbent in terms of the impact on them.

Got it. And then one quick final one for me. Now that you're -- and I think you said 14 approved cell and gene therapies now that you guys are involved with. Has that allowed you to validate the revenue range of the $500,000 to $2 million that we've talked about for a few years? Any suggestion that, that might not be the right range of revenues for commercial products?

Well, I appreciate you asking. I still think it's probably a little low on the high end, but it's still early because, again, the ones we're in there really with a couple of exceptions, they're pretty recently approved. So we just need a few quarters of their track record to see what's going to happen.

The next question comes from Chad Wiatrowski with TD Cowen.

Just one on OpEx. How do we think about OpEx sort of the cadence throughout the rest of the year? And maybe how the strategic alternatives of the Freezer business could impact that?

Yes. So as far as OpEx for the rest of the year, I did mention some nonrecurring charges in Q1. If you were to back those out and then grow it, not quite in line with the revenue growth, but again, growing to support our revenue growth, that's a good way to look at the OpEx...

Just on the macro headwinds, again, obviously seeing sort of the CapEx issues from biotech and pharma. But on the R&D side, are you seeing like any delays in clinical trial time lines or potential headwinds on that front?

Fair question, Chad. And I can't speak specifically to it, but I would certainly support that we are seeing some of that. But the thing to remember is in the early stages, these aren't meaningful revenue contributors. So it's not really an impact. They don't buy that much in the early days because the trial enrollment is pretty small, right?

Your next question comes from Paul Knight with KeyBanc.

Now I know with the Stirling and CBS, one of the intentions was to create some cross-selling synergy. What are your thoughts now? Have you -- are you changing -- will you change the way the Cell Processing platform products and the services products are sold? So what are you planning to do on any channel marketing modifications? That's my first question.

Good place to start, Paul. Yes. Well, I think what we've learned, one of the key learning takeaways is that despite our deep contacts and the C-suite in that, there are different decision makers, folks who buy capital equipment, particularly downstream to the folks that were closer to, which are in the processing upstream side of the house. And our assumption was that we could leverage those relationships. But my sense is now just to be practical about it, Freezers are seen maybe inappropriately, but they're largely seen as commodities. And then those are sort of relegated to the domain of the procurement people as opposed to technical buyers or scientific buyers. And that just kind of is what it is. So with respect to what will we do to change it, well, we really have to think about the current distributors, how productive they are, where are their strengths, where do they lie? Are there alternative distributors? If we think about a potential to divest the businesses, what's the channel those companies have and how strong are they and whatnot? And then there's also this idea to out-license the technology to someone who just embeds our IP in their own freezers. So there's a lot of stuff swirling, and I'm just thankful we've got some really smart folks here and on the outside helping us navigate the options.

And then the other part, I'm sure, is going on is Sexton and the services side seem to have exceeded your expectations here over the last couple of years. Can you talk to Sexton and the potential there, specifically for therapy again? And what's the magic sauce at services?

Yes, sure. Well, with Sexton, a few minutes ago, I said that we would anticipate that the expected annual revenue range for Sexton for an improved customer therapy is just like it is for biopreservation media. It's $0.5 million to $2 million each annually, and we're in about 140 customer clinical applications with Sexton and in the 3 approved therapies already. So that just fits perfectly. It really does -- and I just got a text from Sean Werner, Dr. Werner, who was running Sexton, who now works for [indiscernible], and he's the CTO of that platform. We've just got a great piece of good news from a large current customer about how they're going to greatly exceed their forecast for this year. So it just could not have come at a better time. And again, Sexton is going to have a banner year if all things hold really, really strong. As far as the secret sauce, well, the CellSeal vial is proprietary design and has its own unique benefits of ease of use in filling and the proprietary event, and it just really lends itself for small volume doses where you have a great alternative versus putting a little bit of fluid in a big bag and everything that goes wrong with that or could go wrong with that. On the HPL media side at Sexton, there are some quality and scientific differentiation relative to the other HPL products that are out there, specific to the way that we make the HPL media in [indiscernible], and then the filling machines are just really cool. And the current next-gen filling machine is agnostic. You can bring your own bags and vials and other final containers to the party and it's really lending itself to ushering that degree of automation. And I think just to put the bar on the whole Sexton thing, you've heard us talk about tooling up or starting up a media manufacturing line in [indiscernible] at Sexton for our non-core current [indiscernible] media products, and that's going really well. And all in all, just the whole team at Sexton is a perfect fit, and I can't say enough good about how that one's really worked out.

Okay. And will a sterile bio be part of Freeze and Thaw?

Yes, but not to divest potentially divest. No, Thaw stays with us regardless, yes, Thaw stays with us.

Your next question comes from Yuan Zhi with B. Riley.

So can you guys clarify what was the internal guidance on Media, Freezer and other business segments? And can you elaborate on what are the factors causing the difference between the reported number and the prior guidance or internal guidance in terms of both revenue and gross margin?

Sorry, just to clarify, are you asking me to tell you what our internal plan was for that platform?

Internal guidance for Media, Freezer and other business segments. What was the reason to cause the difference between these two?

Well, okay. So all we speak to is the external revenue guidance by platform, which you've seen, which Troy reiterated on the call just a few minutes ago, and as it relates to the shortfall in Freezer revenue, that's all the factors we've been talking about. There is this macro, very well understood now, well-appreciated slowdown in biotech funding, hitting capital equipment much harder than disposable or recurring revenue streams. And that in concert with just the general global economic uncertainty is causing these large global pharma companies to really take a look at and in many cases, pause their purchases for large CapEx pieces of year. Those two things alone is clearly how we speak to that miss there on Freezers in Q1. But I have to say, as I did a few minutes ago, on balance, the opportunity pipeline that we have for Freezers for the rest of the year, the high confidence deals, it's a big number. And if that materializes and then we sort of kind of replicate that for the last 6 months of the year, then we're going to be in good shape.

Got it. Thanks for the clarification. And assuming you guys continue to keep Freezer business at the moment, are you still on track to reach 50% adjusted gross margin? And can you clarify which factor had an effect in the last quarter? And what is the gross margin in 1Q without Freezer business?

Yes. We don't do that kind of modeling externally, and clearly, we know that. But we speak to revenue on a platform basis and then we speak to the midterm aspirational goals. So I think I would just -- I would constrain my remarks to what I just said about the downturn in cap equipment funding, coupled with the economic uncertainty that's causing some orders to get delayed. Now with respect to our confidence to hit our midterm aspirational goals, well, so far, as we sit here with just one quarter in the books, yes. But as I mentioned earlier, if we do go down the path and actually consummate the divestiture of one or both of these businesses, then obviously, we're going to remodel internally and remodel guidance externally and reshape whatever midterm financial aspirational goals we might put out there. Okay?

Yes. Got it.

Your next question comes from Carl Byrnes with Northland Capital Markets.

Assuming that you get the divestiture of Stirling and CBS done, would you expect that you'd be able to reaccelerate your M&A strategy, focusing obviously on the high-growth, high-margin segments as you had done very successfully prior to the Stirling acquisition?

Yes. Thanks, Carl. A really good question, and you're getting to a sort of a key dynamic going on here. First of all, I'd say, again, just to remind everybody, it's not divesting is the only option, it's one of several. But if we were to go down that road and complete those from a management bandwidth freeup perspective, you got it, full stop. We would be -- we would be much less encumbered and we'd be focusing on external acquisition targets, obviously, the internal R&D that's going on and the projects that fit would be preserved, but we would certainly have more bandwidth to go and look for other things that look like the way we are now and what we're traditionally really, really good at and what we really understand. So sure, you bet.

We have no further questions at this time. I would now like to turn the call back over to Mike Rice, Chief Executive Officer, for closing remarks.

Thanks, Mallory. I want to thank everyone for your interest in BioLife and your support, and we do look forward to sharing our Q2 numbers and our results with you. Good evening.

This concludes today's conference call. Thank you for joining. You may now disconnect.