Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Harvard Bioscience, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Dave Sirois. Thank you. Please go ahead, sir.

Thank you, Dilem, and good morning, everyone. Thank you for joining us for the Harvard Bioscience First Quarter 2020 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 Q1 2020 HBIO quarterly earnings presentation and can be 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 Mike Rossi, 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, 2019, 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 differences between our GAAP and non-GAAP results are outlined in the earnings release and the slide presentation. These documents be found on our website under Investor Overview, Events and 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. A replay of this call will also be available for one week at the same location on our website at harvardbioscience.com. I will now turn the call over to Jim. Jim, please go ahead.

Thank you, Dave. Let me start by saying that we are really proud to see our products playing their part in the fight against COVID-19. Many of our Cellular and Molecular Technologies, such as our BTX Electroporation gene splicing products are helping develop new treatments and our multi-well plates are helping detect antibodies. Our preclinical products play a major role also in any new treatment or vaccine before use in humans. And our recent advances in inhalation are just in time for research and development for fights against any airborne virus. So let’s go ahead and move to Slide 3 of the presentation and take a look at the highlights. Revenue from the combination of CROs and pharma was up modestly in the quarter. Academic labs were down significantly as labs shut down due to the COVID-19 pandemic. Our strict cash and cost control in the first quarter helped maintain strong cash flow and also helped pay down our debt principal by approximately $5 million. As we look forward, we’re expecting further revenue decline in Q2, recovering as the academic labs reopen in the second half. We rapidly implemented significant expense reductions to support margins and cash flow for Q2 and beyond, we continue to move to a leaner organization and operation and we will continue to maintain strict cash and cost discipline as we continue to meet our debt obligations. Let’s move to Slide 4, presentation, take a look at the details of Q1. We were significantly impacted by COVID-19 pandemic. Q1 revenue came in at $23.8 million, down $4.4 million or 15.7% from Q1 last year. Gross margin on a GAAP basis measured 54.6%, that’s 2.7% worse than last year. Non-GAAP adjusted gross margin was 54.6%, down 2.9%. This quarter had GAAP operating income of negative $3.3 million.…

Thanks, Jim. On the full P&L for the quarter, as noted, revenue was down 16% due to the impact of COVID-19. This impact was felt equally across geographies in Q1 with Asia impacted through February followed by a significant impact to business in Europe and North America in March with the onset of the virus. The main driver of our growth in our original 2020 expectations was via strength in our CRO customer base, and while these customers were impacted, we are seeing strength with this customer base a month into Q2. Turning to profitability. The volume impact noted had a significant drop-through effect on gross and operating margins, given the speed and severity of the change in revenue trends. However, our continued focus on leaning out our cost base is reflected in the $1.2 million reduction in OpEx reported, and the impact of our previously announced restructuring actions will sequentially increase from Q1 given most employee notifications were within the quarter. On top of these committed actions are the additional roughly $3 million of savings in response to COVID-19, Jim noted. We reported a $0.01 loss per diluted share due to the volume impact noted, with cash interest expense declining approximately $200,000 on the continued reduction in debt. The reported tax benefit on a non-GAAP basis is 32.6%, while cash taxes remained very low in 2020. The GAAP loss per share of $0.01 included – the GAAP loss for the quarter included a $1.5 million onetime cost to affect the ongoing restructuring that we announced in December. Turning to the balance sheet. As noted, we paid down $4.8 million of debt in Q1, contributing to a $12 million reduction in debt since the end of 2018. Cash flow from operations improved to $2.9 million from $2 million in the prior year. We have enhanced our processes around working capital and overall cash management practices, which is benefiting us now and will support our ability to manage through the trough in revenue we expect in Q2. And we continue to make payments needed to execute our ongoing restructuring and get the cost structure right. With that, I will turn it back to Jim to review the outlook for 2020. Jim?

Okay. Thanks, Mike. Let me just also, first, quickly say, over the last few weeks, we took a hard look at our liquidity and looking at what we had to run with, we felt like we had – we were in good enough shape with our current cash reserves and the way the business is running and the actions that we’re taking that we really didn’t need the additional $6 million as part of the PPP loan. So we’ve already returned that to the bank. I’m glad to say that in returning that, we think we’re doing our duty and helping other companies that really do need access to that capital now. So why don’t we go ahead now and we’ll move to Slide 11 and take a look forward for the business. We expect the combined CROs and pharma revenues to continue to grow. With the COVID-19 impact, we’re expecting second quarter revenue to decrease 20% to 30% year-over-year and to begin recovering as academic labs reopen in the second half. I’m very glad that we took immediate action to offset Q2 margin impacts and continue to move to a leaner organization and operation. We expect improving gross margins and operating margins as academic revenues recover. Finally, we will maintain cash flows and meet our debt obligations while we build a leaner, more profitable business platform. Thank you, and I’ll turn it over to the operator for questions and answers. Thank you. Question-and-Answer Session

Thank you sir. [Operator Instructions] I show our first question comes from Paul Knight from Janney. Please go ahead.

Jim, can you talk to the businesses again as you were moving into – I kind of missed the first part of the call due to busy operators, I guess. And specifically, CROs as they left and entered Q2, pharma and academic.

Okay. Yes, sorry. So I guess the real good news in all of this is that the CROs are – started growing actually in Q1, in spite of the COVID situation. We did see some initial delays while I think everybody was taking stock of what was happening. But the combination of CROs and pharmaceuticals have continued to do well, they’re up and running that business. And I think starting initially in China, as we all saw China starting to erode on the academic side. But – and again, on the pharmaceutical and CRO side, there was some initial hesitancy but it very quickly – they very quickly returned to work and really got up the business and started repurchasing and purchasing or adding demand for our products. So overall, pharmaceutical and CROS, we see – have done well through this and continue to do well and indications from them is they’re going to continue to require more equipment from us. It’s expanding, and we see it’s – of course, the U.S. was very strong in Q1. We see it growing even further throughout the year. China recovered in Q1 in that area and continues – and is expected to continue to grow strongly. Europe, a little bit slower to get started on the CRO pharmaceutical side, but we are seeing them starting to pick up somewhat, too. So all said, those customer segments of pharma and CRO we see as being in very good shape throughout this, and I think many would say probably a tailwind for that business, given what they’re working on and the need to get back to all the existing products that they were working on. On the academic side, as I said, started in China with order activity dramatically dropped off there. We saw…

Okay. And then so basically, you think your academia may be bottoming now, but not necessarily recover.

I think at this point, we saw academia, we saw the order intake drop precipitously in – as you got into mid- and late Q1, we expect that it’s – I believe it’s pretty much at that low level now. And that run rate is what we see going into Q2. We think we’ll see sequential improvement off of that as pretty much lockstep as the labs come back to work. When the folks went home, the labs shut down, order intake really dropped off. Even shipments had to drop off because there was nobody there potentially to unpack the equipment. And I will say that one of the things that – proactive actions that we took right away, even in – by mid-Q1 – later into Q1 is I’d ask that each of our – before anything shipped to an academic lab that we make phone call to make sure that there were people there to receive the product, because the last thing you want is shipping something to somebody who’s not receiving it and then it whips right back on your freight by your freight forward or later on and you got a problem. And regardless of whether you’re FOB on rev rec, it’s a bad situation if you’re shipping and they’re not receiving it, it just goes bad. So what we did is make sure that, especially on when we knew it was going to an academic customer, we wanted to make sure that they were there. I’d rather take the hit and slow down on the shipments now than to have it whip back in Q2. So we’re pretty confident that, that’s where it is. And again, I think to your base question, this lower run rate coming out of Q1 is what we’re modeling into Q2. We do – we have – we believe it’s going to get – we believe it’s going to start to recover here. But we’re saying we’re assuming we’re probably into Q3 for that recovery because we know it’s going to take time people to get back, restart the order process. In the meantime, we have – we took advantage of a lot of digital marketing. We’ve held – we’re holding webcasts with large groups of customers about the newer technologies, getting – even though they’re sitting at home, maybe board, they’re looking for something to do. So being able to work with us and look at the new products coming out so that when they get back to the office, we’ll have already done a lot of the prospecting and they’re ready to start the order process again. So it really just comes down to the calling the timing on the recovery of the academic labs coming back and turning back on.

And can you talk about debt payments that are due this current quarter? I think it’s 2.8 for the year. And then were there negatives associated with these government programs as well like restrictions, et cetera?

Well, I guess, first, on the debt, we have our ongoing interest rate payments, which we certainly have – expect no problem at all. There will be some additional required payments as part of the covenants, which, of course, we’re going to meet and typically, there’s excess cash requirements, but that – we’ll – the main thing is we’re going to make sure we meet our debt obligations. And we’ll work like hell to avoid any kind of covenant issues. As far as the government loan stuff, I would say the government loans that we were able to take advantage of in Europe, there were some really nice programs where they’ll work to help you offset OpEx for someone who’s maybe working part time. That’s very helpful. In the U.S., we just – we looked at it, certainly, originally, when it became available, we looked at it because, well, we just – there was a lack of visibility with things happening so quickly. We thought it made sense to go ahead and get the application in, had no idea if we’d get the loan, we did get the loan. We applied in good faith. And certainly, we feel like we had every reason to use it as it was designed. But as it became clear that they were running out of money, it just made sense for us to – and then I believe that if we could do it without taking money from U.S. taxpayer that could be used elsewhere that somebody who needs it may be more than we do. If we can get by without it by really managing the business, that’s what we’re going to do. So we went ahead and returned it, I think, late last week. I think that came out in an 8-K just recently. But certainly, it was our – we just – the main reason that we decided we just didn’t need it, we can get by without it, we know how to run the business.

Okay, thanks Jim.

Thank you, Paul.

Our next question comes from Lisa Springer from Singular. Please go ahead.

Durning your comments, you mentioned that you’re seeing some interest in your insulation-type products. Could you give us some more color around that? Like what are the insulation-type products and from what customer segments are you seeing that demand?

Sure, sure. It’s – we were working on this for a while, and it’s kind of opportunistic that we were able to launch the product just before this was starting – just before COVID comes out. In the past, there’s – the way you measure inhalation load, there’s essentially a way you try to get a track – you try to – you understand how much you’ve delivered to somebody, but you can’t really tell – and by the way, this is what you do is you – they’re designed to inject aerosols into the lungs of the test subjects. And in the past, all you could do is measure how much you thought you put in. Well, the new designed product is able to not only very clearly measure exactly what was delivered, it also – we can also measure the response to it. So when you think about a disease that works its way into the lungs, knowing at what point how much of a viral load is going to actually infect and then how the lung is going to respond after that in terms of the lungs’ efficiency and then how that viral load works its way into the subject. So this – the timing on this was – there really wasn’t any way to do anything like this in the past to in real time understand and quantify viral load or we call it – because at the time, we don’t know for sure what they’re going to be using, but whatever that aerosol is, we’ll – we’re measuring the aerosol. We can respond and correlate that with whatever measurements they’re taking associated with that subject. So perfect timing for that. The company is – immediately, we started to see an interest from China. We’re selling them now. They’re up and running and their interest – the interest is across the board. Since we don’t have – since many of the academic labs are still shut down, the interest there has been more telephones and e-mails and verbal. But when it comes to the pharmaceuticals and CROs, they’re up and buying, and some of the early academic labs that are running are also buying now. And we think this is going to be – we’ve already seen quite a bit of growth in those shipments, and we expect that to continue to grow.

Okay. Great. And a big part of the Q4 story was the impact from low-margin portfolio rationalization. Is that process essentially complete?

It pretty much is. It’s close. We’re – much of these – yes, I think, yes, it’s pretty well through. I mean we’re at the portfolio that we believe is going to be successful going forward. We’re putting more investment into certain areas that we know are going to have tailwinds, things like our – anything CRISPR-related with the BTX line. We’re adding a new line to that to be able to go after multiple uses of it. We’ll be looking to more higher volume versions on the cellular side, some of the things that we’re doing on how to use the multi-well plates. I mean that’s highly used in antibody detection. So we see that growing. We’re going to be making more investments there. And then, of course, just the general preclinical side, I mean just everything has to go through the preclinical testing phases, that means utilization of our implantable telemetry devices and systems and expansion of that space. So in many ways, this is going to – it forces us to really look at where the tailwinds are, invest there, look at where the – maybe where there’s not a lot of strategic value going forward and look to create savings there.

Okay. Great. And actually, that leads to another question. The implantable telemetry devices you were going to start shipping in Q1. Did that actually happen? And did that impact Q1 revenues?

Yes, it did. We did start shipping in Q1. We were held up with – it took a while to get production lines up to full rate. At this point, I think we’re running along at rate. I don’t know that we’re – I think we’re beating all the demand. But anyway, there’s no real problems with it. It did launch, and it’s a great, new, exciting product.

Yes, for sure. Okay. And one last question, which might be more for Mike. If we go with the assumption that second quarter revenues are going to be down between 20% and 30% and given the expense reductions you talked about, how should we think about gross margins in the second quarter? Will they be similar to Q1?

There’ll be a little bit of downward pressure there. A lot of the savings that we’re taking is going to go through the OpEx line. So just with that type of volume decline, there’ll be a little bit of negative pressure on gross margin. But net-net, you’ll see our operating margins and just operating profit get back to kind of normal run rate levels that we’ve been at recently because we’ve taken such aggressive cost actions.

Yes. Lisa, we tried to size. We looked hard at what we thought the potential operating profit impact might be on a revenue reduction, if that were to occur and we were to see some further erosion. And so that’s how we – so we have a target of what kind of expected savings we felt we really needed to generate to maintain our ability to have good gross margins and operating margins and continue to cash flow properly and keep the business running well. And as we come out of Q2, we’re going to know if things are – how fast things are coming back. And we’ll figure out – and certainly, we can – if there’s one thing we know how to do is to manage our cost structure and to manage it well within the revenue we have. And with Q1 happening so quickly, there’s not a whole lot you could do in a matter of a few weeks, but even with a few weeks’ notice, we were able to put things in place to make sure that we preserve Q2 and are in a position to improve and lean the business going forward.

Our next question comes from Bruce Jackson from Benchmark. Please go ahead.

I wanted to talk about the academic market here briefly. So a lot of schools sent their students home for the rest of the year. There’s still some debate as to whether things are going to open up again in the fall. Can you tell us a little bit about your customer base? And do these researchers have projects that are fully funded? Do you think that they’re likely to start up again with their projects in the fall? Can you give us kind of a sense of how stable that revenue stream might be and how fast it might come back?

Sure. Yes, I can tell you that, certainly, as we all – as you all know, the budgets had already been set. So the researchers and the labs had pretty good budgets coming in. We also know that NIH has expanded the amount of budget sent and spendable by these academic research labs. So we’re excited to see them get back to work. As far as the school year and such, the bigger impact for us is that the researchers come back, that’s not so much their helpers and students, but the actual academic researchers as soon as they – we believe, and the indications we get from them is as soon as they’ll let them, they want to be back in their labs, and then they’ll be able to – then we’ll start to see the – in each of these areas, a ramp-up of order activity. Again, we’ve already seen it start in China. We’re seeing some shoots in Europe. U.S., we think, starts to come back here fairly quickly, too. And you know it’s going to come back by state. But as long as the actual researchers are back in the lab, that’s the main gating item for us, and then it will just be a matter of time and sequence as they come online.

Okay. That’s great. That’s very helpful. And then just a quick question on the income statement. Where do you think you can get the G&A expense down to over the remainder of the year?

That’s a good question. I think if you – it’s kind of hard to answer at this point specifically. I can tell you that if you look at the cost reductions that we’ve loaded in, and we will – we expect to see throughout Q2 because that will be – it’s the culmination of – combination of the RIF actions, the restructuring actions that started last year. Much of that now will be in our run rate spend for Q2, along with these, additional $3 million of actions we’ll be in. So as we come out of this, we’re going to be careful to make sure that we don’t add spend unless there’s adding – unless there’s additional revenue that demands the added spend. There are some things we’ll look to do as people start to come back full time, that will also be timed with growth in revenue. So we’ll be matching that to make sure that we keep our drop down and our ability to run the business, our ability to generate solid operating profits and operating margins. So – and specifically in G&A, as we – there are – I always saw as we continue to turn this into a more leaner business, certainly, G&A is a piece that improves there, too. When you have – as you have less sites, you have – you end up with more cost centers at some of these smaller sites where you really just have your engineering and maybe some product marketing kind of folks. You don’t really need a lot of G&A overhead associated with that at that point. So we’re going to – you’re going to continue to see us move those numbers down as we can. So I think main thing is we’re managing the costs along with the revenue we know is coming in and make sure that we’re building a much leaner platform as a business.

Okay. And then last question for me. Do you have any other new products that are set to launch later this year?

Actually, there’s a series of new ones that have been in work and we’ll be launching. We’re adding – with the advent of the what’s happening with – and the known need to search for antibodies, we think that’s going to be moving forward, and that’s going to be a long term need, not just for this particular disease, but for a lot more. Some of our products that are associated with that with the plate readers and the multi-well products that you use that – for isolating and measuring the actual load of antibodies, that we see as a growth area. That’s an area that we’re putting a lot of effort and thought into now, reinvigorating the Biochrom side of the products. There we think – even on the clinical side, there’s a real room for that to grow. Everything associated with electroporation and CRISPR, we’ll be expanding that product line to be able to do more outside of just – typically, we tended to be very heavily penetrated in academic research labs and not quite so much in the CROs and pharmaceuticals. But now that we have a really strong relationship, strategic relationships with the largest CROs and pharmaceuticals, you’re going to start to see some of those products also be tailored and tuned for expansion into higher volume and be able to be more applicable into those spaces. So I think those are probably the main areas where you’ll see more movement.

Okay, great thank you very much.

Thank you. I show no further questions in the queue. At this time, I’d like to turn the call back to Mr. Jim Green, CEO, for closing remarks.

Okay. Well, thank you again for joining us. It’s been a tough few weeks, a couple of months. But I hope you know that this team – we have the right team in place here to manage this business. The turnaround continues. I think as we get – as we see our customer labs come back online, that will continue to drive sequential growth in revenue as we manage our spend rate of the cost of the business. As that – as we keep that down and we get that additional – and revenue starts to grow, you’ll see better operating leverage. We’re excited about this. I think the future, we’re excited to be in a position to play a part in what’s happening here and to be able to help. And our belief is as we exit this year, we’re going to be right back on track to make this the kind of highly profitable platform that’s run well, that’s highly – that’s right in the space of where this business should be. So we’re excited about taking this business to the next level and, again, getting through this year and into 2021. So thank you very much for your time. Have a good evening. And everybody, please be safe.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.