SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-K/A
(Amendment No. 1)10-K
☒ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 20202022
or
☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 001-33957
___________________________
HARVARD BIOSCIENCE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 04-3306140 |
(State or other jurisdiction of | (I.R.S. Employer |
Incorporation or organization) | Identification No.) |
84 October Hill Road, Holliston, Massachusetts 01746
(Address of Principal Executive Offices, including zip code)
(508) 893-8999
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | HBIO | The Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☒ |
Non-accelerated filer ☐ | Smaller reporting company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒
The aggregate market value of shares of voting common equity held by non-affiliates of the registrant as of June 30, 20202022 was approximately $116.0$141.8 million based on the closing sales price of the registrant’s common stock, par value $0.01 per share on that date. At March 5, 2021,1, 2023, there were 39,825,53342,190,043 shares of the registrant’s common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement in connection with the 20212023 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days after the end of the Registrant’s fiscal year, are incorporated by reference into Part III of this Form 10-K. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
EXPLANATORY NOTE
Harvard Bioscience, Inc. (the “Company”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “Original Filing”) with the Securities and Exchange Commission on March 12, 2021. Due to a technical filing error, certain paragraphs in “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Original Filing were inadvertently omitted from the as-filed version of the Original Filing. The Company is filing this Amendment No. 1 to its Annual Report on Form 10-K/A (this “Amendment No. 1”) solely to insert such paragraphs and to add a conformed signature to the Consent of Grant Thornton LLP, the Company’s independent registered public accounting firm, which was inadvertently omitted from the Original Filing. Further, as required by Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended, new certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 by the Company’s principal executive officer and principal financial officer are filed herewith as exhibits to this Amendment No. 1. Accordingly, Item 15 of Part IV of the Original 10-K has been amended and restated in its entirety to include the certifications as exhibits.
Except as described above, this Amendment No. 1 speaks as of the original filing date of the Original Filing and does not amend or update any other information contained in the Original Filing to reflect events that may have occurred subsequent to the original filing date. The Company has included a complete copy of the Original Filing, as amended per above, in this filing.
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 20202022
INDEX
This Annual Report on Form 10-K contains statements that are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), each as amended. The forward-looking statements are principally, but not exclusively, contained in “Item 1: Business” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about management’s confidence or expectations, our business strategy, our ability to raise capital or borrow funds to consummate acquisitions and the availability of attractive acquisition candidates, our expectations regarding future costs of product revenues, our anticipated compliance with the covenants contained in our credit facility, the adequacy of our financial resources and our plans, objectives, expectations and intentions that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “seek,” “expects,” “plans,” “aim,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “think,” “strategy,” “potential,” “objectives,” “optimistic,” “new,” “goal” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in detail under the heading “Item 1A. Risk Factors” beginning on page 7 of this Annual Report on Form 10-K. You should carefully review all of these factors, as well as other risks described in our public filings, and you should be aware that there may be other factors, including factors of which we are not currently aware, that could cause these differences. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. We may not update these forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to previously disclosed information. Harvard Bioscience, Inc. is referred to herein as “we,” “our,” “us,” and “the Company.”
Business. |
Overview
Harvard Bioscience, Inc., a Delaware corporation, is a leading developer, manufacturer and seller of technologies, products and services that enable fundamental advances in life science applications, including research, pharmaceutical and therapy discovery, bio-production and preclinical testing for drugpharmaceutical and therapy development. Our products and services are sold globally to customers rangeranging from renowned academic institutions and government laboratories to the world’s leading pharmaceutical, biotechnology and contract research organizations. With operations in North America, Europe and China, we sell through a combination of direct and distribution channels to customers around the world.
Recent Developments
Global Supply Chain and Economic Environment
The global supply chain has experienced significant disruptions due to electronic component and labor shortages and other macroeconomic factors which have emerged since the onset of COVID-19, leading to increased cost of freight, purchased materials, and manufacturing labor costs, while also delaying customer shipments. We expect these supply chain trends to continue into 2023. These conditions, in addition to the overall impacts on the global economy, have negatively impacted our results of operations and cash flows.
Additionally, during 2022 the global economy has experienced high levels of inflation, rising interest rates, significant fluctuations in currency values, and increasing economic uncertainty, particularly in Europe. Our results of operations have been negatively impacted by higher costs of raw materials, labor and freight resulting from inflationary pressures. These factors and global events including the ongoing military conflict between Russia and Ukraine, a softening economy in Europe, and rising interest rates on our debt have had a negative impact on our results of operations.
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic. The COVID-19 pandemic has had a negative impact on our operations to date and the future impacts of the pandemic and any resulting economic impact areremain largely unknown and rapidly evolving. Since the COVID-19 outbreak in the United States, Europe and elsewhere, many customers, particularly academic research institutions, have been unable to maintain laboratory work which has negatively impacted, and will continue to negatively impact, our sales. Additionally,evolve. Many countries worldwide continue to ensure business continuity while maintaining a safe environment for employees aligned with guidance from government and health organizations, we transitionedissue COVID-19 related restrictive orders in an attempt to control the majorityeffects of our workforcethe pandemic. In particular, during the beginning of 2022, China implemented area-wide shutdowns in order to work-from-home while implementing social distancing requirements and other measurescontrol the spread of COVID-19, which continued in factories to allow manufacturing and other personnel essential to production to continue work within our facilities. Business travel was significantly reduced during this period. While we have maintained operations under these conditions, these measures represent disruptions which can impact productivity including sales and marketing activities. Accordingly, these conditions in addition to the overalldifferent parts of China throughout 2022. Such shutdowns had an adverse impact on our financial results for fiscal 2022.
If business interruptions resulting from the global economy has negatively impacted ourcurrent macroeconomic conditions or COVID-19 described above were to be prolonged or expanded in scope, the Company’s business, financial condition, results of operations and cash flows.flows would likely be negatively impacted. If the impacts of the supply chain disruptions are more severe than we expect, it could result in longer lead times and further increased costs, all of which could materially adversely affect our business, financial condition and results of operations.
Our History and Strategy
Our business began in 1901 under the name Harvard Apparatus. It was founded by Dr. William T. Porter, a Professor of Physiology at Harvard Medical School and a pioneer of physiology education. We have grown over the years with the development and evolution of modern life science research and education. Our early inventions included ventilators based on Dr. Porter’s design, the mechanical syringe pump for drug infusion in the 1950s, and the microprocessor-controlled syringe pump in the 1980s.
In March of 1996, a group of investors acquired a majority of the then existing business of our predecessor, Harvard Apparatus, Inc. Following this acquisition, our focus was redirected to acquiring complementary companies with innovative technologies while continuing to grow the existing business through internal product development. Since 1996, we have completed multiple business or product line acquisitions related to our continuing operations. Harvard Bioscience, Inc. was incorporated in the State of Delaware in September 2000 and became the successor entity to Harvard Apparatus, Inc. by merger in November 2000.
In the first quarter of 2018, we completed two transactions to improve the overall customer and product mix of our business. In January 2018, we acquired Data Sciences International, Inc. (DSI) for approximately $71.1 million. DSI,(“DSI”), a St. Paul, Minnesota-based life science research company, is a recognizedglobal leader in physiologic monitoring focused on delivering preclinical products, systems, services and solutions focused on preclinical testing. The DSI product portfolio, which is largely complementary to its customers. Its customers includeour cellular and molecular technology (“CMT”) product portfolio, expanded our product portfolio to address the continuum from research and discovery to preclinical testing with principal application in pharmaceutical and biotechnology companies, as well as contract research organizations, academic labstherapy testing.
In 2019, we initiated a restructuring program to improve operational efficiency and government researchers.reduce costs which entailed consolidating and downsizing several sites and reducing headcount in Europe and North America. This acquisition diversifiedprogram was completed in 2021.
During 2022, we completed a review of our customer base deeper into the biopharmaceuticalbusiness and contract research organization markets. The acquisition also providedproduct portfolio and identified opportunities to generate meaningfulrationalize our product portfolio, improve our cost structure and optimize our sales organization. In connection with this review, we identified certain non-strategic products for discontinuation and further reduced our headcount in Europe and North America. We believe that these actions, which were completed in 2022, will allow us to focus on product opportunities that drive sustainable revenue synergies. Also during the first quarter of 2018, we sold substantially all the assets of our wholly owned subsidiary, Denville Scientific, Inc. (Denville). Denville was a laboratory products distributorgrowth with lower averageattractive gross margins and deemed no longer core to our strategy.improved profitability.
On July 8, 2019, we announced the departure of the previous President and Chief Executive Officer and the appointment by the Board of Directors of James Green as President and Chief Executive Officer. In addition, on July 18, 2019 we announced the appointment of Michael Rossi as Chief Financial Officer.
Immediately after the appointment of Mr. Green and Mr. Rossi, we began a process to identify opportunities to improve profitability, increase cash flow and enhance internal capabilities to position the business for organic growth. As a result of this assessment, in September 2019 we announced a strategic action plan which included:
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In December 2019, we implemented the 2019 Restructuring Plan to deliver significant cost savings beginning in 2020 and to support delivery of the strategic action plan we announced in September 2019. The 2019 Restructuring Plan includes consolidation of our Connecticut manufacturing plant to our existing Massachusetts site, downsizing of operations in the United Kingdom and a reduction in force across the business equal to approximately 10% of our headcount. The initial initiatives under the 2019 restructuring plan were completed in the second half of 2020.
We continued to execute the 2019 Restructuring Plan during the COVID-19 pandemic and expanded the scope of the restructuring by realigning our organizational structure to reduce management layers and accelerated our efforts to move to a leaner organization and operation. As a result of this expanded scope, we eliminated additional headcount during 2020, and in the first quarter of 2021, communicated to employees our plan to consolidate certain engineering operations and eliminate two small facilities in Europe.
A portion of the savings generated from these actions is expected to be reinvested to drive profitable growth. We believe these strategic actions will significantly improve our financial performance.
Our Products
Our products support research in 6 different classes of laboratory use: (1) molecular, (2) cellular, (3) tissue, (4) organ, (5) organisms or preclinical and (6) clinical. Historically,As noted above, our products were marketed and soldservices enable fundamental advances in three different product families: PCMI (Physiology, Cellular, Molecular Instruments), DSI (Data Science International)life science applications, including research, pharmaceutical and Ephys (Electrophysiology).therapy discovery, bio-production and preclinical testing.
In 2019, as part ofWe have organized our strategic action plan, we consolidated the products in classes (1), (2), (3), (4)product line activities into two product families, CMT and some products in class (5) into a singlePreclinical.
Our CMT product family Cellularis primarily composed of products supporting research related to molecular, cellular organ and Molecular Technologies (CMT), that includes 14 individual business lines supporting new drug discoveryorganoid technologies, with additional application in the emerging field of bio-production of pharmaceuticals and development. We also consolidated certain oftherapeutics. The principal customers for our CMT products in class (5) into ourinclude academic and government laboratories, biotechnology and pharmaceutical companies, and contract research organizations.
Our Preclinical product family which includes 4 individualfour business lines supportingthat support the preclinical research and testing phase for drug development. CMT products are primarily solddevelopment, and in particular testing related to academicdata collection and government labsanalysis for safety and institutions.regulatory compliance. Preclinical products are primarily sold to pharmaceutical, biotechnology and contract research organizations.organizations, as well as larger academic labs.
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We primarily sell our products under several brand names, including Harvard Apparatus, DSI, Ponemah, Buxco, Biochrom, BTX, MCS.Heka, Hugo Sachs, Multichannel Systems MCS GmbH (“MCS”), and Panlab.
Our solutions range from simple to complex, and generally consist of hardware/firmware/firmware and software products, augmented with consumables, options, upgrades and post-sales (scientific)(scientific, installation and data) services. Sales prices of these products and services range typically from under $100$1,000 to over $100,000. Our products include spectrophotometers that analyze light to detect and quantify a wide range of molecules as well as cell analysis and electroporation and electrofusion systems to influence and/or analyze cellular processes. Other products and services focus on tissue and organ responses to new drugs and encompass wireless monitors, and signal acquisition and analysis functionality. We also feature products that monitor physiologyphysiological processes in living organisms to study behavior. Many of our proprietary products are leaders in their field.fields.
In addition to our proprietarily manufactured products, we sell factoreddistribute products fromdeveloped by other manufacturers. These re-distributeddistributed products accounted for approximately 15% and 16 %14% of our revenues for the years ended December 31, 20202022 and 2019,2021, respectively. Re-distributedResale of such products enableenables us to act as a single source for our customers’ research needs. They consist of a large variety of complementing instruments or accessories as well as consumables used in experiments involving fluid handling, molecular and cell analysis and tissue, organ and animal research. Following
Below is a description of each product family.
Cellular and Molecular Technologies Product Family
Our CMT product family includes products designed primarily to support the discovery phase of new drug development. CMT products include:
● | High precision syringe and peristaltic infusion pump product |
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● | precision scientific measuring instrumentation and equipment in the field of electrophysiology such as: data acquisition systems with custom amplifier configurations for cellular analysis, complete micro electrode array solutions for in vivo recordings and in vitro systems for extracellular recordings. |
Our CMT product family made up approximately 57%51% and 63%47% of our global revenues for the years ended December 31, 20202022 and 2019,2021, respectively.
Preclinical Product Family
Our Preclinical product family provides a complete platform to assess physiological data from organisms for research ranging from basic research to drug discovery, and drug development services. The Preclinical product family consists of the DSI and Buxco brands. It includes:
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● | behavioral products; isolated organ and surgical products, a broad range of instruments and accessories for tissue, organ-based lab research, including surgical products, infusion systems, and behavior research systems; | |
● | turn-key respiratory system solutions encompassing plethysmograph chambers, data acquisition hardware, physiological signal analysis software, and final report generation; |
● | inhalation and exposure systems providing precise, homogenous aerosol delivery for up to 42 subjects, while integrating respiratory parameters for the ultimate delivered dose system; and |
● | powerful GLP-capable data acquisition and analysis systems, capable of integrating third party sensors for a more comprehensive study design. |
DSI’s direct sales force supports North America, Europe, and China, with distributors supporting the rest of the world. Our Preclinical productsproduct family made up approximately 43%49% and 37%53% of our global revenues for the yearyears ended December 31, 20202022 and 2019,2021, respectively.
Our Customers
Our end-user customers are primarily research scientists at pharmaceutical and biotechnology companies, universities, hospitals, government laboratories, including the United States National Institutes of Health (NIH)(“NIH”), and contract research organizations (CROs)(“CROs”). Our pharmaceutical and biotechnology customers have included pharmaceutical companies and research laboratories such as Pfizer, Amgen, Inc., AstraZeneca plc, Genentech, Inc. and Johnson & Johnson. Our academic customers include major colleges and universities including Harvard University, Cambridge University, Johns Hopkins University, Massachusetts Institute of Technology, Yale University, the University of California system, Baylor College of Medicine, and the University of Texas - MD Anderson Center.and Imperial College London. Our CRO customers include Covance andLabcorp, Charles River Laboratories.Laboratories and Wuxi AppTec. We have a wide range of diverse customers worldwide and no customer accounted for more than 10% of our revenues in 2020.2022.
Sales
We conduct direct sales in the United States, the United Kingdom, Germany, France, Italy, Spain, Sweden, CanadaChina and China.major European markets. We sell primarily through distributors in other countries. For the year ended December 31, 2020,2022, revenues from direct sales to end-users represented approximately 65%63% of our revenues; and revenues from sales of our products through distributors represented approximately 35%37% of our revenues.
Direct Sales
We have a global sales organization managing both direct sales and distributors. Our websites and catalogsmarketing collateral serve as the primary sales tool for our product lines, which includes both proprietary manufactured products and complementary products from various suppliers. Our reputation as a leading producer of many of our manufactured products creates traffic to our websites, enables cross-selling and facilitates the introduction of new products.
Sales through Distributors
We engage distributors for the sales of our own branded and private label products in certain areas of the world and for certain product lines.
Marketing
We have a centralized marketing group, which encompasses product management, field-marketing and market communications and application science.communications. Marketing maintains value -propositionvalue-proposition based product roadmaps, collaborates with research and development on timing and investment for new products, supports direct and distributor sales activities, sets the global pricing of our products and conceives the storylines on how to sell our products. Marketing also maintains digital presence across the web and social media platforms, creates electronic leads and analyzes opportunities for new product portfolio extensions.
Research and Development
Our principal research and development mission is to develop products that address growth opportunities within the life science research process as well as to maintain and optimize our existing product portfolios. We maintain development staff in many of our manufacturing facilities to design and develop new products and to re-engineer existing products to bring them to the next generation. Our research and development expenses were approximately $8.7$12.3 million and $10.7$10.8 million for the years ended December 31, 20202022 and 2019,2021, respectively. We anticipate that we will continue to make investments in research and development activities to advance our position in the industry as we deem appropriate.a provider of life science equipment, software and services. We plan to continue to pursue a balanced development portfolio strategy of originating new products from internal research and acquiring products and technologies through business and technology acquisitions.acquisitions or collaborations, as appropriate.
Manufacturing
We manufacture and test the majority of our products in our principal manufacturing facilities located in the United States, Sweden, Spain and Germany. We have considerable manufacturing flexibility at our various facilities, and each facility can manufacture multiple products at the same time. We maintain in-house manufacturing expertise, technologies and resources. We seek to maintain multiple suppliers for key components that are not manufactured in-house, and while some of our products are dependent on sole-source suppliers, we do not believe our dependence uponhave made investments in new talent in procurement and other functions to reduce exposures related to sole-source suppliers, and are accelerating these suppliers creates any significant risks.efforts given the dynamics of the global supply chain in 2022. Our manufacturing operations primarily involve assembly and testing activities along with some machine-based processes. Going forward we will continue to evaluate our manufacturing facilities and operations in order to optimize our manufacturing footprint.
See “Part I, Item 2. Properties” of this report for additional information regarding our manufacturing facilities.
Competition
The markets into which we sell our products are highly competitive, and we expect the intensity of competition to continue or increase. We compete with many companies engaged in developing and selling tools for life science research. Many of our competitors have greater financial, operational, sales and marketing resources and more experience in research and development and commercialization than we have. Moreover, our competitors may have greater name recognition than we do, and many offer discounts as a competitive tactic. These competitors and other companies may have developed or could in the future develop new technologies that compete with our products, which could render our products obsolete. We cannot assure youprovide assurance that we will be able to make the enhancements to our technologies necessary to compete successfully with newly emerging technologies. We believe that we offer one of the broadest selections of products to organizations engaged in life science research. We have numerous competitors on a product line basis. We believe that we compete favorably with our competitors on the basis of product performance, including quality, reliability, speed, technical support, price and delivery time.
We compete with several companies that provide instruments for life science research including, Lonza Group Ltd., Becton Dickinson, Eppendorf AG, Kent Scientific Corporation, Razel Scientific Instruments, Inc., Ugo Basile, Danaher Corporation, Bio-Rad Laboratories, Inc., PerkinElmer, Inc., Thermo Fisher Scientific, Inc. Notocord,Instem plc, Emka Technologies and TSE Systems.
We cannot forecast if or when these or other companies may develop competitive products. We expect that other products will compete with our products and potential products based on efficacy, safety, cost and intellectual property positions. While we believe that these will be the primary competitive factors, other factors include, in certain instances, availability of supply, manufacturing, marketing and sales expertise and capability.
Seasonality
Sales and earnings in our third quarter are usually flat or down from the second quarter primarily because there are a large number of holidays and vacations during such quarter, especially in Europe. Our fourth quarter revenues and earnings are often the highest in any fiscal year compared to the other three quarters, primarily because many of our customers tend to spend budgeted money before their own fiscal year ends.
Intellectual Property
To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality provisions in our contracts. Patents or patent applications cover certain of our new technologies. Most of our more mature product lines are protected by trade names and trade secrets only.
We have implemented a patent strategy designed to provide us with freedom to operate and facilitate commercialization of our current and future products. Our success depends, to a significant degree, upon our ability to develop proprietary products and technologies. We intend to continue to file patent applications as we developcovering new products and technologies.technologies where it is appropriate to do so taking into account factors such as the likely scope of coverage, strategic value, and cost.
Patents provide some degree of protection for our intellectual property. However, the assertion of patent protection involves complex legal and factual determinations and is therefore uncertain. The scope of any of our issued patents may not be sufficiently broad to offer meaningful protection. In addition, our issued patents or patents licensed to us may be successfully challenged, invalidated, circumvented or unenforceable so that our patent rights would not create an effective competitive barrier. Moreover, the laws of some foreign countries may protect our proprietary rights to a greater or lesser extent than the laws of the United States. In addition, the laws governing patentability and the scope of patent coverage continue to evolve, particularly in areas of interest to us. As a result, there can be no assurance that patents will be issued from any of our patent applications or from applications licensed to us. As a result of these factors, our intellectual property positions bear some degree of uncertainty.
We also rely in part on trade secret protection of our intellectual property. We attempt to protect our trade secrets by entering into confidentiality agreements with third parties, employees and consultants. Our employees and consultants also sign agreements requiring that they assign to us their interests in patents and copyrights arising from their work for us. Although many of our United States employees have signed agreements not to compete unfairly with us during their employment and after termination of their employment, through the misuse of confidential information, soliciting employees, soliciting customers and the like, the enforceability of these provisions varies from jurisdiction to jurisdiction and, in some circumstances, they may not be enforceable. In addition, it is possible that these agreements may be breached or invalidated and if so, there may not be an adequate corrective remedy available. Despite the measures we have taken to protect our intellectual property, we cannot assure youprovide assurance that third parties will not independently discover or invent competing technologies or reverse engineer our trade secrets or other technologies. Therefore, the measures we are taking to protect our proprietary rights may not be adequate.
We do not believe that our products infringe on the intellectual property rights of any third party. We cannot assure, you, however, that third parties will not claim such infringement by us or our licensors with respect to current or future products. We expect that product developers in our market will increasingly be subject to such claims as the number of products and competitors in our market segment grows and the product functionality in different market segments overlaps. In addition, patents on production and business methods are becoming more common and we expect that more patents will be issued in our technical field. Any such claims, with or without merit, could be time-consuming, result in costly litigation and diversion of management’s attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. Moreover, such royalty or licensing agreements, if required, may not be on terms advantageous to us, or acceptable at all, which could seriously harm our business or financial condition.
“Harvard” is a registered trademark of Harvard University. The marks “Harvard Apparatus” and “Harvard Bioscience” are being used pursuant to a license agreement entered into in December 2002 between us and Harvard University.
Government Regulation
We are generally not subject to direct governmental regulation other than the laws and regulations generally applicable to businesses in the domestic and foreign jurisdictions in which we operate. In particular, other than our amino asset analyzer product, our current products are not subject to pre-market approval by the United States Food and Drug Administration (“FDA”) for use on human clinical patients. In addition, we believe we are materially in compliance with all relevant environmental laws.
Employees
As of December 31, 2020,2022, we employed 459455 employees, which includes 428included 436 full-time employees. Some of our employees in Europe have statutory collective bargaining rights. We have never experienced a general work stoppage or strike, and management believes that our relations with our employees are good. Additional information about our employees follows:
Employees by country:
Country | Full time | Part time | Full time | Part time | ||||||||||||
United States | 257 | 8 | 271 | 10 | ||||||||||||
Germany | 76 | 20 | 73 | 9 | ||||||||||||
United Kingdom | 35 | 1 | 32 | - | ||||||||||||
Spain | 24 | 2 | 28 | - | ||||||||||||
China | 16 | - | 15 | - | ||||||||||||
Rest of World | 20 | - | 17 | - | ||||||||||||
Total | 428 | 31 | 436 | 19 |
Employees by business function:
Function | Full time | Part time | Full time | Part time | ||||||||||||
Manufacturing | 149 | 4 | 178 | 6 | ||||||||||||
Sales and marketing | 158 | 9 | 141 | 4 | ||||||||||||
Research and development | 69 | 7 | 61 | 2 | ||||||||||||
General and adminstrative | 52 | 11 | ||||||||||||||
General and administrative | 56 | 7 | ||||||||||||||
Total | 428 | 31 | 436 | 19 |
We make employment decisions without regard to age, color, national origin, citizenship status, physical or mental disability, race, religion, creed, gender, sex, sexual orientation, gender identity and/or expression, genetic information, marital status, status with regard to public assistance, veteran and military status or any other characteristic protected by federal, state or local law. We take steps to employ and advance in employment qualified protected veterans and qualified individuals with disabilities.
Geographic Area
Financial information regarding geographic areas in which we operate is provided in Note 16 to the Consolidated Financial Statements included in “Part IV, Item 15. Exhibits, Financial Statement Schedules” of this report.
Available Information and Website
Our website address is www.harvardbioscience.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and exhibits and amendments to those reports filed or furnished with the Securities and Exchange Commission pursuant to Section 13(a) of the Exchange Act are available for review on our website and the Securities and Exchange Commission’s website at www.sec.gov. Any such materials that we file with, or furnish to, the SEC in the future will be available on our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information on our website is not incorporated by reference into this Annual Report on Form 10-K.
Risk Factors. |
The following factors should be reviewed carefully, in conjunction with the other information contained in this Annual Report on Form 10-K. As previously discussed, our actual results could differ materially from our forward-looking statements. Our business faces a variety of risks. These risks include those described below and may include additional risks and uncertainties not presently known to us or that we currently deem immaterial. If any of the events or circumstances described in the following risk factors occur, our business operations, performance and financial condition could be adversely affected, and the trading price of our common stock could decline.
Risks Related to Our Industry
The life sciences industry is very competitive.
We expect to encounter increased competition from both established and development-stage companies that continually enter the market. These include companies developing and marketing life science instruments, systems and lab consumables, health care companies that manufacture laboratory-based tests and analyzers, diagnostic and pharmaceutical companies, analytical instrument companies, and companies developing life science or drug discovery technologies. Currently, our principal competition comes from established companies that provide products that perform many of the same functions for which we market our products. Many of our competitors have substantially greater financial, operational, marketing and technical resources than we do. Moreover, these competitors may offer broader product lines and tactical discounts and may have greater name recognition. In addition, we may face competition from new entrants into the field. We may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. In addition, we face changing customer preferences and requirements, including increased customer demand for more environmentally friendly products.
The life sciences industry is also subject to rapid technological change and discovery. The development of new or improved products, processes or technologies by other companies may render our products or proposed products obsolete or less competitive. In some instances, our competitors may develop or market products that are more effective or commercially attractive than our current or future products. To meet the evolving needs of customers, we must continually enhance our current and planned products and develop and introduce new products. However, we may experience difficulties that may delay or prevent the successful development, introduction and marketing of new products or product enhancements. In addition, our product lines are based on complex technologies that are subject to change as new technologies are developed and introduced in the marketplace. We may have difficulty in keeping abreast of the changes affecting each of the different markets we serve or intend to serve. Our failure to develop and introduce products in a timely manner in response to changing technology, market demands, or the requirements of our customers could cause our product sales to decline, and we could experience significant losses.
We offer, and plan to continue to offer, a broad range of products and have incurred, and expect to continue to incur, substantial expenses for the development of new products and enhancements to our existing products. The speed of technological change in our market may prevent us from being able to successfully market some or all of our products for the length of time required to recover development costs. Failure to recover the development costs of one or more products or product lines could decrease our profitability or cause us to experience significant losses.
A portion of our revenues are derived from customers from the pharmaceutical and biotechnology industries and are subject to the risks faced by those industries. Such risks may adversely affect our financial results.
We derive a significant portion of our revenues from pharmaceutical and biotechnology companies. We expect that pharmaceutical and biotechnology companies will continue to be a significant source of our revenues for the foreseeable future, including in our Cellular and Molecular Technologies and Preclinical product families. As a result, we are subject to risks and uncertainties that affect the pharmaceutical and biotechnology industries, such as government regulation, ongoing consolidation, uncertainty of technological change, and reductions and delays in research and development expenditures by companies in these industries.
In particular, the biotechnology industry is largely dependent on raising capital to fund its operations. If biotechnology companies that are our customers are unable to obtain the financing necessary to purchase our products, our business and results of operations could be adversely affected. In addition, we are dependent, both directly and indirectly, upon general health care spending patterns, particularly in the research and development budgets of the pharmaceutical and biotechnology industries, as well as upon the financial condition and purchasing patterns of various governments and government agencies. As it relates to both the biotechnology and pharmaceutical industries, many companies have significant patents that have expired or are about to expire, which could result in reduced revenues for those companies. If pharmaceutical or biotechnology companies that are our customers suffer reduced revenues as a result of these patent expirations, they may be unable to purchase our products, and our business and results of operations could be adversely affected.
Changes in governmental regulations may reduce demand for our products, adversely impact our revenues, or increase our expenses.
We operate in many markets in which we and our customers must comply with federal, state, local and international regulations. We develop, configure and market our products to meet customer needs created by, and in compliance with, those regulations. These requirements include, among other things, regulations regarding manufacturing practices, product labeling, and advertising and post marketing reporting. We must incur expense and spend time and effort to ensure compliance with these complex regulations. Possible regulatory actions for non-compliance could include warning letters, fines, damages, injunctions, civil penalties, recalls, seizures of our products, and criminal prosecution. These actions could result in, among other things, substantial modifications to our business practices and operations; refunds, recalls, or seizures of our products; a total or partial shutdown of production in one or more of our facilities while we or our suppliers remedy the alleged violation; and withdrawals or suspensions of current products from the market. Any of these events could disrupt our business and have a material adverse effect on our revenues, profitability and financial condition.
Risks Related to Our Business
Reductions in customers’ research budgets or government funding may adversely affect our business.
Many of our customers are universities, government research laboratories, private foundations and other institutions who are dependent on grants from U.S. government agencies, such as the NIH, for funding. These customers represent a significant source of our revenue. Research and development spending by our customers may fluctuate based on spending priorities and general economic conditions. The level of government funding for research and development is unpredictable. In the past, NIH grants have been frozen or otherwise made unavailable for extended periods or directed to certain products. Reductions or delaydelays in governmental spending could cause customers to delay or forego purchases of our products. If government funding necessary for the purchase of our products were to decrease, our business and results of operations could be materially, adversely affected. Spending by some of these customers fluctuates based on budget allocations and the timely passage of the annual federal budget. An impasse in federal government budget decisions could lead to substantial delays or reductions in federal spending.
Our business is subject to economic, political and other risks associated with international revenues and operations.
We manufacture and sell our products worldwide and as a result, our business is subject to risks associated with doing business internationally. A substantial amount of our revenues is derived from international operations, and we anticipate that a significant portion of our sales will continue to come from outside the United States in the future. We anticipate that revenues from international operations will likely continue to increase as a result of our efforts to expand our business in markets abroad. In addition, a number of our manufacturing facilities and suppliers are located outside the United States.
Our foreign operations subject us to certain risks, including: effects of fluctuations in foreign currency exchange rates; the impact of local economic conditions; local product preferences and seasonality and product requirements; local difficulty to effectively establish and expand our business and operations in international markets; disruptions of capital and trading markets; restrictions and potentially negative tax implications of transfer of capital across borders; differing labor regulations; other factors beyond our control, including potential political instability, terrorism, acts of war, natural disasters and diseases, including the coronavirusCOVID-19 discussed below; unexpected changes and increased enforcement of regulatory requirements and various state, federal and international, intellectual property, environmental, antitrust, anti-corruption, fraud and abuse (including anti-kickback and false claims laws) and employment laws; interruption to transportation flows for delivery of parts to us and finished goods to our customers; and laws and regulations on foreign investment in the United States under the jurisdiction of the Committee on Foreign Investment in the United States, or CFIUS, and other agencies, including the Foreign Investment Risk Review Modernization Act, or FIRRMA, adopted in August 2018.
A small percentage of our products are subject to export control regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and by the Export Administration Regulations administered by the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”). Based on the nature of the product, its ultimate end use and country of destination, we are sometimes subject to foreign assets control and economic sanctions regulations administered by OFAC, which restrict or prohibit our ability to transact with certain foreign countries, certain individuals and entities identified on the Treasury Department’s “Denied Parties List.” Under the OFAC regulations, the sale or transfer of certain equipment to a location outside the United States may require prior approval in the form of an export license issued by the BIS or the U.S. Department of State’s Directorate of Defense Trade Controls. Some potential international transactions may also be restricted or prohibited based on the location, nationality or identity of the potential end user, customer or other parties to the transaction or may require prior authorization in the form of an OFAC license. Any delay in obtaining required governmental approvals could affect our ability to conclude a sale or timely commence a project, and the failure to comply with all such controls could result in criminal and/or civil penalties. These international transactions may otherwise be subject to tariffs and import/export restrictions from the United States or other governments.
Our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social and political conditions. In order to continue to succeed in our international sales strategy, we must continue developing and implementing policies and strategies that are effective in each location where we do business, which could negatively affect our profitability.
Rising inflation and interest rates could negatively impact our revenues, profitability and borrowing costs. In addition, if our costs increase and we are not able to correspondingly adjust our commercial relationships to account for this increase, our net income would be adversely affected, and the adverse impact may be material.
Inflation rates, particularly in the U.S., have increased recently to levels not seen in years. Increased inflation may result in decreased demand for our products, increased operating costs (including our labor costs), reduced liquidity, and limitations on our ability to access credit or otherwise raise debt and equity capital. In addition, the United States Federal Reserve has raised, and may again raise, interest rates in response to concerns about inflation. Increases in interest rates have had, and could continue to have, a material impact on our borrowing costs. In an inflationary environment, we may be unable to raise the sales prices of our products at or above the rate at which our costs increase, which could reduce our profit margins and have a material adverse effect on our financial results and net income. We also may experience lower than expected sales if there is a decrease in spending on products in our industry in general or a negative reaction to our pricing. A reduction in our revenue would be detrimental to our profitability and financial condition and could also have an adverse impact on our future growth.
We have substantial debt and other financial obligations, and we may incur even more debt. Any failure to meet our debt and other financial obligations or maintain compliance with related covenants could harm our business, financial condition and results of operations.
Our credit agreement provides for a term loan of $40.0 million and a $25.0 million senior revolving credit facility (collectively, the “Credit Agreement”) and will mature on December 22, 2025. As of December 31, 2022, we had outstanding borrowings of $47.7 million under the Credit Agreement.
Pursuant to the terms of the Credit Agreement, we are subject to various covenants, including negative covenants that restrict our ability to engage in certain transactions, which may limit our ability to respond to changing business and economic conditions. Such negative covenants include, among other things, limitations on our ability and the ability of our subsidiaries to:
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● | pay dividends on our capital stock. |
In addition, the Credit Agreement contains certain financial covenants, including a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage ratio, each of which will be tested at the end of each fiscal quarter of the Company.
We were not in compliance with certain financial covenants under the Credit Agreement as of September 30, 2022 but we were able to cure such noncompliance by entering into an amendment to the Credit Agreement, dated November 8, 2022. If we are not able to maintain compliance with the covenants under the Credit Agreement, as amended, or are unsuccessful in obtaining waivers or amendments for any covenant defaults in the future, in addition to other actions our lenders may require, the amounts outstanding under the Credit Agreement may become immediately due and payable. This immediate payment may negatively impact our financial condition. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely harm our ability to incur additional indebtedness on acceptable terms. Our cash flow and capital resources may be insufficient to pay interest and principal on our debt in the future. If that should occur, our capital raising or debt restructuring measures may be unsuccessful or inadequate to meet our scheduled debt service obligations, which could cause us to default on our obligations and further impair our liquidity.
Further, based upon our actual performance levels, our covenants relating to leverage and fixed charges could limit our ability to incur additional debt, which could hinder our ability to execute our current business strategy.
Our ability to make scheduled payments on our debt and other financial obligations and comply with financial covenants depends on our financial and operating performance. Our financial and operating performance will continue to be subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. Failure within any applicable grace or cure periods to make such payments, comply with the financial covenants, or any other non-financial or restrictive covenant, would create a default under our Credit Agreement. Our cash flow and existing capital resources may be insufficient to repay our debt at maturity, in which such case prior thereto we would have to extend such maturity date, or otherwise repay, refinance and or restructure the obligations under the Credit Agreement, including with proceeds from the sale of assets, and additional equity or debt capital. If we are unsuccessful in obtaining such extension, or entering into such repayment, refinance or restructure prior to maturity, or any other default existed under the Credit Agreement, our lenders could accelerate the indebtedness under the Credit Agreement, foreclose against their collateral or seek other remedies, which would jeopardize our ability to continue our current operations.
Ethical concerns surrounding the use of our products and misunderstanding of the nature of our business could adversely affect our ability to develop and sell our existing products and new products.
Some of our products may be used in areas of research involving animal research and other techniques presently being explored in the life science industry. These techniques have drawn negative attention in the public forum. Government authorities may regulate or prohibit any of these activities. Additionally, the public may disfavor or reject these activities.
Foreign currency exchange rate fluctuations may have a negative impact on our reported earnings.
We are subject to the risks of fluctuating foreign currency exchange rates, which could have an adverse effect on the sales price of our products in foreign markets, as well as the costs and expenses of our foreign subsidiaries. A substantial amount of our revenues is derived from international operations, and we anticipate that a significant portion of revenues will continue to come from outside the United States in the future. As a result, currency fluctuations among the United States dollar, British pound, euro and the other currencies in which we do business have caused and will continue to cause foreign currency translation and transaction gains and losses. We have not used forward exchange contracts to hedge our foreign currency exposures. We attempt to manage foreign currency risk through the matching of assets and liabilities. In the future, we may undertake to manage foreign currency risk through hedging methods, including foreign currency contracts. We recognize foreign currency gains or losses arising from our operations in the period incurred. We cannot guarantee that we will be successful in managing foreign currency risk or in predicting the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposure and the potential volatility of currency exchange rates. We cannot predict with any certainty changes in foreign currency exchange rates or the degree to which we can address these risks.
Failure or inadequacy of our information technology infrastructure or software could adversely affect our day-to-day operations and decision-making processes and have an adverse effect on our performance.
We depend on accurate and timely information and numerical data from key software applications to aid our day-to-day business, financial reporting and decision-making and, in many cases, proprietary and custom-designed software is necessary to operate our business.
Disruption caused by the failure of these systems, the underlying equipment, or communication networks could delay or otherwise adversely impact day-to-day business and decision making, could make it impossible for us to operate critical equipment, and could have an adverse effect on our performance. Although we maintain disaster recovery procedures for our critical systems, our disaster recovery plans may not fully mitigate the effect of any such disruption. Disruptions could be caused by a variety of factors, such as catastrophic events or weather, power outages, or cyber-attacks on our systems by outside parties.
We review our information technology (“IT”) systems regularly to assess and implement opportunities to improve or upgrade our enterprise resource planning (“ERP”) or other information systems required to operate our business effectively. Our ERP systems are critical to our ability to accurately maintain books and records, record transactions, provide important information to our management and prepare our financial statements. The implementation of any IT systems, including ERP systems, has required in the past, and may continue to require, the investment of significant financial and human resources. In addition, we may not be able to successfully complete the implementation of the ERP systems without experiencing difficulties. Any disruptions, delays or deficiencies in the design and implementation of any IT system, including ERP systems could adversely affect our ability to process orders, ship products, provide services and customer support, send invoices and track payments, fulfill contractual obligations or otherwise operate our business.
An information security incident, including a cybersecurity breach, could have a negative impact to our business or reputation.
To meet business objectives, we rely on both internal IT systems and networks, and those of third parties and their vendors, to process and store sensitive data, including confidential research, business plans, financial information, intellectual property, and personal data that may be subject to legal protection. The extensive information security and cybersecurity threats, which affect companies globally, pose a risk to the security and availability of these IT systems and networks, and the confidentiality, integrity, and availability of our sensitive data. We continually assess these threats and make investments to increase internal protection, detection, and response capabilities, as well as ensure our third-party providers have the required capabilities and controls, to address this risk. To date, we have not experienced any material impact to the business or operations resulting from information or cybersecurity attacks; however, because of the frequently changing attack techniques, along with the increased volume and sophistication of the attacks, there is the potential for us to be adversely impacted. This impact could result in reputational, competitive, operational or other business harm as well as financial costs and regulatory action. Additionally, the California Consumer Privacy Act of 2018 (the “CCPA”), which became effective on January 1, 2020, provides private rights of action for data breaches and requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices and allow consumers to opt out of certain data sharing with third parties. Compliance with the CCPA and other current and future applicable privacy, cybersecurity and related laws can be costly and time-consuming. Significant capital investments and other expenditures could also be required to remedy cybersecurity problems and prevent future breaches, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. These costs, which could be material, could adversely impact our results of operations in the period in which they are incurred and may not meaningfully limit the success of future attempts to breach our information technology systems.
We may incur additional restructuring costs or not realize the expected benefits of our initiatives to reduce operating expensesin the future.
We may not be able to implement all of the actions that we intend to take in the restructuring of our operations, and we may not be able to fully realize the expected benefits from such realignment and restructuring plans or other similar restructurings in the future. In addition, we may incur additional restructuring costs in implementing such realignment and restructuring plans or other similar future plans in excess of our expectations. The implementation of our restructuring efforts, including the reduction of our workforce, may not improve our operational and cost structure or result in greater efficiency of our organization; and we may not be able to support sustainable revenue growth and profitability following such restructurings.
If we are not able to manage our growth, our operating profits may be adversely impacted.
Our success will depend on the expansion of our operations through organic growth, and we may execute acquisitions in the future to augment this growth. Effective growth management will place increased demands on our management team, operational and financial resources and expertise. To manage growth, we must optimize our operational, financial and management processes and systems, and information technology infrastructure and hire and train additional qualified personnel. While we are currently in the process of evaluating potential improvements to and consolidation of many of our processes and systems, we may not be able to implement these changes in an efficient or timely manner. Failure to manage our growth effectively, including failure to improve our systems and processes timely or efficiently, could impair our ability to generate revenues or could cause our expenses to increase more rapidly than revenues, resulting in operating losses or reduced profitability.
We may incur a variety of costs in connection with acquisitions we may seek to consummate in the future, and we may never realize the anticipated benefits of our acquisitions due in part to difficulties integrating the businesses, operations and product lines.
Our business strategy has historically included the acquisition of businesses, technologies, services or products that we believe are a strategic fit with our business. If we were to undertake future acquisitions, the process of integrating the acquired business, technology, service and/or product(s) may result in unforeseen operating difficulties and expenditures and potentially absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may fail to realize the anticipated benefits of an acquisition as rapidly as expected, or at all. Such transactions are inherently risky, and any such recent or future acquisitions could reduce stockholders’ ownership, cause us to incur debt, expose us to future liabilities and result in amortization expenses related to intangible assets with definite lives, which may adversely impact our ability to undertake future acquisitions on substantially similar terms. We may also incur significant expenditures in anticipation of an acquisition that is never realized.
Our ability to achieve the benefits of acquisitions depends in part on the integration and leveraging of technology, operations, sales and marketing channels and personnel. Integration is a complex, time-consuming and expensive process and may disrupt our business if not completed in a timely and efficient manner. We may have difficulty successfully integrating acquired businesses, and their domestic and foreign operations or product lines, and as a result, we may not realize any of the anticipated benefits of the acquisitions we make. We cannot assure that our growth rate will equal the growth rates that have been experienced by us, and these other acquired companies, respectively, operating as separate companies in the past.
We have substantial debt and other financial obligations, and we may incur even more debt. Any failure to meet our debt and other financial obligations or maintain compliance with related covenants could harm our business, financial condition and results of operations.
On December 22, 2020, we entered into a Credit Agreement (the “Credit Agreement”) with certain financial institutions party thereto as lenders (the “Lenders”), Citizens Bank, N.A., as the administrative agent, and Citizens Bank, Wells Fargo Bank, National Association and Silicon Valley Bank, as joint bookrunners, joint lead arrangers and syndication agents. The Credit Agreement provides for a term loan of $40.0 million and a $25.0 million senior revolving credit facility (collectively, the “Citizens Credit Facility”). The Citizens Credit Facility replaces our prior credit facility with Cerberus Business Finance, LLC, as agent and lender (the “Prior Credit Facility”), and in connection with the entry into the Credit Agreement, we paid off all outstanding borrowings under the Prior Credit Facility. As of December 31, 2020, we had outstanding borrowings of $49.4 million under the Credit Agreement. The Citizens Credit Facility will mature on December 22, 2025.
Pursuant to the terms of the Credit Agreement, we are subject to various covenants, including negative covenants that restrict our ability to engage in certain transactions, which may limit our ability to respond to changing business and economic conditions. Such negative covenants include, among other things, limitations on our ability and the ability of our subsidiaries to:
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In addition, the Credit Agreement contains certain financial covenants, including a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage ratio, each of which will be tested at the end of each fiscal quarter of the Company.
If we are not in compliance with certain of these covenants, in addition to other actions the Lenders may require, the amounts outstanding under the Credit Agreement may become immediately due and payable. This immediate payment may negatively impact our financial condition. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely harm our ability to incur additional indebtedness on acceptable terms. Our cash flow and capital resources may be insufficient to pay interest and principal on our debt in the future. If that should occur, our capital raising or debt restructuring measures may be unsuccessful or inadequate to meet our scheduled debt service obligations, which could cause us to default on our obligations and further impair our liquidity.
Further, based upon our actual performance levels, our covenants relating to leverage and fixed charges could limit our ability to incur additional debt, which could hinder our ability to execute our current business strategy.
Our ability to make scheduled payments on our debt and other financial obligations and comply with financial covenants depends on our financial and operating performance. Our financial and operating performance will continue to be subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. Failure within any applicable grace or cure periods to may such payments, comply with the financial covenants, or any other non-financial or restrictive covenant, would create a default under our Credit Agreement. Our cash flow and existing capital resources may be insufficient to repay our debt at maturity, in which such case prior thereto we would have to extend such maturity date, or otherwise repay, refinance and or restructure the obligations under the Credit Agreement, including with proceeds from the sale of assets, and additional equity or debt capital. If we are unsuccessful in obtaining such extension, or entering into such repayment, refinance or restructure prior to maturity, or any other default existed under the Credit Agreement, our lenders could accelerate the indebtedness under the Credit Agreement, foreclose against their collateral or seek other remedies, which would jeopardize our ability to continue our current operations.
Ethical concerns surrounding the use of our products and misunderstanding of the nature of our business could adversely affect our ability to develop and sell our existing products and new products.
Some of our products may be used in areas of research involving animal research and other techniques presently being explored in the life science industry. These techniques have drawn negative attention in the public forum. Government authorities may regulate or prohibit any of these activities. Additionally, the public may disfavor or reject these activities.
If we are not able to manage our growth, our operating profits may be adversely impacted.
Our success will depend on the expansion of our operations through organic growth, and we may execute acquisitions in the future to augment this growth. Effective growth management will place increased demands on our management team, operational and financial resources and expertise. To manage growth, we must optimize our operational, financial and management processes and systems, and hire and train additional qualified personnel. Failure to manage this growth effectively could impair our ability to generate revenues or could cause our expenses to increase more rapidly than revenues, resulting in operating losses or reduced profitability.
Foreign currency exchange rate fluctuations may have a negative impact on our reported earnings.
We are subject to the risks of fluctuating foreign currency exchange rates, which could have an adverse effect on the sales price of our products in foreign markets, as well as the costs and expenses of our foreign subsidiaries. A substantial amount of our revenues is derived from international operations, and we anticipate that a significant portion of revenues will continue to come from outside the United States in the future. As a result, currency fluctuations among the United States dollar, British pound, euro and the other currencies in which we do business have caused and will continue to cause foreign currency translation and transaction gains and losses. We have not used forward exchange contracts to hedge our foreign currency exposures. We attempt to manage foreign currency risk through the matching of assets and liabilities. In the future, we may undertake to manage foreign currency risk through hedging methods, including foreign currency contracts. We recognize foreign currency gains or losses arising from our operations in the period incurred. We cannot guarantee that we will be successful in managing foreign currency risk or in predicting the effects of exchange rate fluctuations upon our future operating results because of the number of currencies involved, the variability of currency exposure and the potential volatility of currency exchange rates. We cannot predict with any certainty changes in foreign currency exchange rates or the degree to which we can address these risks.
Failure or inadequacy of our information technology infrastructure or software could adversely affect our day-to-day operations and decision-making processes and have an adverse effect on our performance.
We depend on accurate and timely information and numerical data from key software applications to aid our day-to-day business, financial reporting and decision-making and, in many cases, proprietary and custom-designed software is necessary to operate our business. We are upgrading our disaster recovery procedures for our critical systems. However, any disruption caused by the failure of these systems, the underlying equipment, or communication networks could delay or otherwise adversely impact our day-to-day business and decision making, could make it impossible for us to operate critical equipment, and could have an adverse effect on our performance, if our disaster recovery plans do not mitigate the disruption. Disruptions could be caused by a variety of factors, such as catastrophic events or weather, power outages, or cyber-attacks on our systems by outside parties.
We review our IT systems regularly to assess and implement opportunities to improve or upgrade our enterprise resource planning (ERP) or other information systems required to operate our business effectively. Our ERP systems are critical to our ability to accurately maintain books and records, record transactions, provide important information to our management and prepare our financial statements. The implementation of any IT systems, including ERP systems has required in the past, and may continue to require, the investment of significant financial and human resources. In addition, we may not be able to successfully complete the implementation of the ERP systems without experiencing difficulties. Any disruptions, delays or deficiencies in the design and implementation of any IT system, including ERP systems could adversely affect our ability to process orders, ship products, provide services and customer support, send invoices and track payments, fulfill contractual obligations or otherwise operate our business.
An information security incident, including a cybersecurity breach, could have a negative impact to our business or reputation
To meet business objectives, we rely on both internal information technology (IT) systems and networks, and those of third parties and their vendors, to process and store sensitive data, including confidential research, business plans, financial information, intellectual property, and personal data that may be subject to legal protection. The extensive information security and cybersecurity threats, which affect companies globally, pose a risk to the security and availability of these IT systems and networks, and the confidentiality, integrity, and availability of our sensitive data. We continually assess these threats and make investments to increase internal protection, detection, and response capabilities, as well as ensure our third-party providers have required capabilities and controls, to address this risk. To date, we have not experienced any material impact to the business or operations resulting from information or cybersecurity attacks; however, because of the frequently changing attack techniques, along with the increased volume and sophistication of the attacks, there is the potential for us to be adversely impacted. This impact could result in reputational, competitive, operational or other business harm as well as financial costs and regulatory action. Additionally, the California Consumer Privacy Act of 2018 (the “CCPA”), which became effective on January 1, 2020, provides private rights of action for data breaches and requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices and allow consumers to opt out of certain data sharing with third parties. Compliance with the CCPA and other current and future applicable privacy, cybersecurity and related laws can be costly and time-consuming. Significant capital investments and other expenditures could also be required to remedy cybersecurity problems and prevent future breaches, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. These costs, which could be material, could adversely impact our results of operations in the period in which they are incurred and may not meaningfully limit the success of future attempts to breach our information technology systems.
We may incur additional restructuring costs or not realize the expected benefits of our initiatives to reduce operating expenses to date and in the future.
We may not be able to implement all of the actions that we intend to take in the restructuring of our operations, and we may not be able to fully realize the expected benefits from such realignment and restructuring plans or other similar restructurings in the future. In addition, we may incur additional restructuring costs in implementing such realignment and restructuring plans or other similar future plans in excess of our expectations. The implementation of our restructuring efforts, including the reduction of our workforce, may not improve our operational and cost structure or result in greater efficiency of our organization; and we may not be able to support sustainable revenue growth and profitability following such restructurings.
Failure to raise additional capital or generate the significant capital necessary to implement our acquisition strategy, expand our operations, and invest in new products, or pursue acquisitions or other business development opportunities could reduce our ability to compete and result in less revenues.
We anticipate that our financial resources, which include available cash, cash generated from operations, and debt and equity capacity, will be sufficient to finance operations and capital expenditures for at least the next twelve months. However, this expectation is premised on the current operating plan, which may change as a result of many factors, including market acceptance of new products and future opportunities with collaborators. Consequently, we may need additional funding sooner than anticipated. In addition, our borrowings under the Citizens Credit FacilityAgreement may not be sufficient to fundsupport our acquisition strategy.pursuit of potential acquisitions or other business development opportunities. In such case, our inability to raise sufficient capital on favorable terms and in a timely manner (if at all) could seriously harm our business, product development, and acquisition efforts. In addition, our Credit Agreement contains various negative covenants that, among other things, restrict our ability to incur additional indebtedness and make acquisitions for aggregate consideration in excess of $5.0 million. If future financing is not available or is not available on acceptable terms, we may have to alter our operations or change our business strategy. We cannot assure you that the capital required to fund operations, or our acquisition strategy will be available in the future.
If we fail to retain key personnel and hire, train and retain qualified employees, we may not be able to compete effectively, which could result in reduced revenue or increased costs.
Our success is highly dependent on the continued services of key management, technical and scientific personnel. Our management and other employees may voluntarily terminate their employment at any time upon short notice. The loss of the services of any member of the senior management team, including the Chief Executive Officer James Green; theor Interim Chief Financial Officer Michael Rossi; or any of theour managerial, technical or scientific staff may significantly delay or prevent the achievement of product development, our growth strategies and other business objectives. Our future success will also depend on our ability to identify, recruit and retain additional qualified scientific, technical and managerial personnel. We operate in several geographic locations where labor markets are particularly competitive, including the Boston, Massachusetts and Minneapolis, Minnesota metropolitan areas, England, and Germany where demand for personnel with these skills is extremely high and is likely to remain high. Additionally, the COVID-19 pandemic and other macroeconomic factors have exacerbated these challenges, contributed to a sustained labor shortage, and increased turnover rates. As a result, competition for qualified personnel is intense, particularly in the areas of general management, finance, information technology, engineering and science, and the process of hiring suitably qualified personnel is often lengthy and expensive, and may become more expensive in the future. If we are unable to hire and retain a sufficient number of qualified employees, our ability to conduct and expand our business could be seriously reduced.
Our success will depend partly on our ability to operate without infringing on or misappropriating the intellectual property rights of others.
We may be sued for infringing on the intellectual property rights of others, including the patent rights, trademarks and trade names of third parties. Intellectual property litigation is costly, and the outcome is uncertain. If we do not prevail in any intellectual property litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity, or obtain a license to or design around the intellectual property in question. If we are unable to obtain a required license on acceptable terms, or are unable to design around any third-party patent, we may be unable to sell some of our products and services, which could result in reduced revenue.
AsThe shares of Series E Preferred Stock of Biostage held by the Company could fluctuate considerably in value and could become worthless.
In connection with the Biostage Settlement, Biostage issued shares of its Series E Convertible Preferred Stock (the “Series E Preferred Stock”) to the Company on June 10, 2022 in satisfaction of $4.0 million of Biostage’s total indemnification obligations to the Company. The Series E Preferred Stock is convertible at any time at the option of the Company into such number of shares of Biostage common stock determined by dividing (a) the $1,000 face value of the Series E Preferred Stock plus all accrued and unpaid dividends thereon by (b) the average of the volume weighted average trading prices of Biostage’s common stock, which is currently quoted on the OTCQB Marketplace, for the 60 consecutive trading days prior to the conversion. In the event Biostage has a resultsubsequent qualified offering of our spin-offits common stock, (which is defined as an offering of Harvard Apparatus Regenerative Technology, Inc.Biostage common stock that coincides with its uplisting onto Nasdaq, the first subsequent public offering by Biostage, or the first subsequent private placement by Biostage resulting in gross proceeds to Biostage of at least $4,000,000), now knownthe Series E Preferred Stock is mandatorily converted into Biostage common stock at the applicable qualified offering price.
Due to Biostage’s limited operating history, their overall financial condition, (including whether it can continue as a going concern without additional capital) and the limited trading volume and liquidity of Biostage’s common stock, the value of the Series E Preferred Stock could fluctuate considerably or become worthless.
Biostage together with certain related transactions, third parties may seek to hold us responsible for Biostage’s liabilities, including liabilities that Biostage has assumed from us.
Third parties may continue to seek to hold us responsible for Biostage’s liabilities, including any of the liabilities that Biostage agreed to retain or assume in connection with the separation of the Biostage business from our businesses, and related spin-off distribution. On April 14, 2017, anticipated representatives for the estate of an individual plaintiff filed a wrongful death complaint with the Suffolk Superior Court, in the County of Suffolk, Massachusetts (the “Court”), against us and other defendants, including Biostage, as well as another third party.party (the “Biostage Litigation”). The complaint seekssought payment for an unspecified amount of damages and alleges that the plaintiff sustained terminal injuries allegedly caused by products, including one synthetic trachea scaffold and two bioreactors, provided by certain of the named defendants and utilized in connection with surgeries performed by third parties in Europe in 2012 and 2013. We continue to vigorously defend this case by counsel provided by our liability insurance carrier from whom we have requested defense and indemnification for losses incurred related to this lawsuit. Any such product liability insurance coverage may not be sufficient to satisfy all liabilities resulting from this claim. If claims against us substantially exceed our coverage, then our business could be adversely impacted. While we believe that claims made in this lawsuit are without merit, we are unable to predict the ultimate outcome of such litigation. Pursuant to our agreements with Biostage, Biostage has agreed to indemnify us for claims and losses relating to certain liabilities that it has assumed from us, including liabilities in connection with the sale of Biostage’s products, intellectually property infringement and other liabilities related to the operation of Biostage’s business. However, if those liabilities are significant and we are ultimately held liable for them, we cannot assure you that Biostage will have the ability to satisfy its obligations to us, in particular due to Biostage having limited revenues, products in early-stage development and a need for additional funds in the future. If Biostage is unable to satisfy its obligations under its indemnity to us, we may have to satisfy these obligations, which could have an adverse impact on our financial condition, results of operations or cash flows.
On September 15, 2021, Biostage’s products liability insurance carrier, which insures us as an additional insured and which had appointed defense counsel and had been defending both Biostage and us on this case, notified us and Biostage that it was denying coverage under the applicable policy for the lawsuit and would no longer be providing a defense to us or Biostage with respect thereto, or covering related legal expenses incurred after September 30, 2021. The insurance carrier also filed a corresponding complaint for declaratory judgment with the Court asking the Court to declare that said insurance provider is not required to defend, indemnify or provide coverage to us or Biostage with respect to the lawsuit.
On January 24, 2022, the Court granted our and Biostage’s jointly filed motion for a preliminary injunction against the insurance carrier requiring that it continue to pay legal expenses incurred by Biostage and us in connection with the underlying lawsuit during the pendency of the insurance coverage lawsuit, as well as awarding reasonable attorneys’ fees and costs incurred by the parties in connection with seeking the preliminary injunction. The insurance carrier has filed a notice of appeal of the preliminary injunction.
On April 27, 2022, the Company and Biostage executed a settlement with the plaintiffs of the Biostage Litigation and Biostage’s products liability insurance carriers (the “Biostage Settlement”), which resolved all claims by and between the parties and Biostage’s product liability insurance carriers and resulted in the dismissal with prejudice of the wrongful death claim and all claims between the Company, Biostage and the insurance carriers. The Biostage Settlement was entered into solely by way of compromise and settlement and is not in any way an admission of liability or fault by the Company or Biostage. Biostage has indemnified the Company for all losses and expenses, including legal expenses that the Company incurred in connection with the Biostage Litigation and the Biostage Settlement.
Risks Related to Our Common Stock
If we raise additional funds through the sale of equity or convertible debt or equity-linked securities, existing percentages of ownership in our common stock will be reduced and these transactions may dilute the value of our outstanding common stock.
We may raise additional funds through the sale of equity or convertible debt or equity-linked securities to repay our existing indebtedness, implement our acquisition strategy, expand our operations and/or invest in new products. If we so raise additional funds through such sales, existing percentages of ownership in our common stock will be reduced and these transactions may dilute the value of our outstanding common stock. We may issue securities that have rights, preferences and privileges senior to our common stock. If we raise additional funds through collaborations or licensing arrangements, we may relinquish rights to certain of our technologies or products, or grant licenses to third parties on terms that are unfavorable.
Our stock price has fluctuated in the past and could experience substantial declines in the future.
The market price of our common stock has experienced significant fluctuations and may become volatile and could decline in the future, perhaps substantially, in response to various factors including, but not limited to:
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| volatility of the financial markets; |
| uncertainty regarding the prospects of the domestic and foreign economies; |
| technological innovations by competitors or in competing technologies; |
| revenues and operating results fluctuating or failing to meet the expectations of management, securities analysts, or investors in any quarter; |
| comments of securities analysts and mistakes by or misinterpretation of comments from analysts, downward revisions in securities analysts’ estimates or management guidance; |
| investment banks and securities analysts becoming subject to lawsuits that may adversely affect the perception of the market; |
| conditions or trends in the biotechnology and pharmaceutical industries; |
| announcements of significant acquisitions or financings or strategic partnerships; |
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| non-compliance with the internal control standards pursuant to the Sarbanes-Oxley Act of 2002; and |
| a decrease in the demand for our common stock. |
In addition, public stock markets have experienced extreme price and trading volatility. The stock market and the Nasdaq Global Market in general, and the biotechnology industry and small cap markets in particular, have experienced significant price and volume fluctuations that at times may have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may further harm the market price of our common stock, regardless of our operating performance. In the past, securities class action litigation has often been instituted following periods of volatility in the market price of a company’s securities. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources.
If we raise additional funds through the sale of equity or convertible debt or equity-linked securities, existing percentages of ownership in our common stock will be reduced and these transactions may dilute the value of our outstanding common stock.
We may raise additional funds through the sale of equity or convertible debt or equity-linked securities to repay our existing indebtedness, implement our acquisition strategy, expand our operations and/or invest in new products. If we raise additional funds through such sales, existing percentages of ownership in our common stock will be reduced and these transactions may dilute the value of our outstanding common stock. We may issue securities that have rights, preferences and privileges senior to our common stock. If we raise additional funds through collaborations or licensing arrangements, we may relinquish rights to certain of our technologies or products, or grant licenses to third parties on terms that are unfavorable
General Risks
We are currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine. Our business, financial condition and results of operations may be materially adversely affected by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical tensions.
U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. On February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions. We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business.
Additionally, Russia’s prior annexation of Crimea, recent recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military interventions in Ukraine have led to sanctions and other penalties being levied by the United States, European Union and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic, including agreement to remove certain Russian financial institutions from the Society for Worldwide Interbank Financial Telecommunication payment system. Additional potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds.
Any of the abovementioned factors could affect our business, prospects, financial condition, and operating results. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial. Any such disruptions may also magnify the impact of other risks described in this Annual Report on Form 10-K.
The COVID-19 outbreak has significantly impactimpacted worldwide economic conditions and has negatively impacted our business, financial condition and results of operations.
The ongoing global outbreak of COVID-19 has caused disruptions to our business andpandemic has had a negative impact on our operations to date. As a resultdate and the future impacts of the outbreak, manypandemic and any resulting economic impact remain largely unknown and continue to evolve. Many countries worldwide continue to issue COVID-19 related restrictive orders in an attempt to control the effects of our customers, particularly academic research institutions,the pandemic. In particular, during the beginning of 2022, China implemented area-wide shutdowns in order to control the spread of COVID-19, which continued for different parts of China throughout 2022. Such shutdowns have had laboratory work negatively impacted,an adverse impact on our financial results for fiscal 2022 and if they continue could have an adverse impact on our future financial results.
Disruptions to the global supply chain and the economic environment have adversely affected our financial results and cash flows.
The global supply chain has experienced significant disruptions due to electronic component and labor shortages and other macroeconomic factors which have emerged since the onset of COVID-19, leading to increased cost of freight, purchased materials and manufacturing labor costs, while also delaying customer shipments. We believe these supply chain trends will continue to negatively impact, our sales. Additionally, to ensure business continuity while maintaining a safe environment for employees, the majority of our workforce continues to work from home. We continue to require social distancing and other measures in factories for our manufacturing and other personnel essential to production to continue work within our facilities. Business travel continues to be significantly reduced. While we have maintained operations under these conditions, these measures represent disruptions which can impact productivity including sales and marketing activities. Accordingly, theseinto 2023. These conditions, in addition to the overall impactimpacts on the global economy, could continue to have a negative impactnegatively impacted our results of operations and cash flows.
Economic conditionsAdditionally, during 2022 the global economy has experienced high levels of inflation, rising interest rates, significant fluctuations in currency values, and regulatory changes caused by the United Kingdom’s (“UK”) exit from the European Union (“EU”) could adversely affect our business.
The UK House of Commons passed a Brexit deal on December 20, 2019 and the UK formally left the EU on January 31, 2020. On December 30, 2020, the EU and UK entered into the EU-UK Trade and Cooperation Agreement. The announcement of Brexit has resulted in significant volatility in global stock market and currency exchange rate fluctuations that resulted in strengthening of the U.S. dollar relative to other foreign currencies in which we conduct business. The withdrawal of the UK from the EU may also create globalincreasing economic uncertainty, particularly in Europe. Our results of operations have been negatively impacted by higher costs of raw materials, labor and freight resulting from inflationary pressures. These factors and global events including an uncertain funding environment for UK customers historically receiving funding from the EU, which may causeongoing military conflict between Russia and Ukraine, a softening economy in Europe, and rising interest rates on our customers to reduce their spending budgets. Sincedebt have had a significant proportionnegative impact on our results of the regulatory framework in the UK is derived from EU directives and regulations, Brexit could materially change the regulatory regime applicable to the approval of any product candidates in the UK. Brexit is likely to lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or replicate. This could adversely affect our business, financial condition, operating results and cash flows.operations.
If business interruptions resulting from COVID-19 or the current macroeconomic conditions described above were to be prolonged or expanded in scope, our business, financial condition, results of operations and cash flows would likely be negatively impacted. If the impacts of the supply chain disruptions are more severe than we expect, it could result in longer lead times and further increased costs, all of which could materially adversely affect our business, financial condition and results of operations.
If we incur higher costs as a result of trade policies, treaties, government regulations or tariffs, we may become less profitable.
There continues to be uncertainty about the relationship between the United States and foreign countries, including with respect to trade policies, treaties, government regulations and tariffs. We are unable to predict whether or when tariffs will be imposed or the impact of any such future tariff increases.
We may be the subject of lawsuits from counterparties to acquisitions and divestitures, including an acquiring company or its stockholders, an acquired company’s previous stockholders, a divested company’s stockholders or our current stockholders.
We may be the subject of lawsuits from either an acquiring company or its stockholders, an acquired company’s previous stockholders, a divested company’s stockholders or our current stockholders. Such lawsuits could result from the actions of the acquisition or divestiture target prior to the date of the acquisition or divestiture, from the acquisition or divestiture transaction itself or from actions after the acquisition or divestiture. Defending potential lawsuits could cost us significant expense and detract management’s attention from the operation of the business. Additionally, these lawsuits could result in the cancellation of or the inability to renew certain insurance coverage that would be necessary to protect our assets.
Rising commodity and precious metals costs could adversely impact our profitability.
Raw material commodities such as resins, and precious metal commodities such as platinum are subject to wide price variations. Increases in the costs of these commodities and the costs of energy, transportation and other necessary services may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies such as in manufacturing and distribution.
Provisions of Delaware law, or of our charter and bylaws may make a takeover more difficult, which could cause our stock price to decline.
Provisions in our certificate of incorporation and bylaws and in the Delaware corporate law may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt, which is opposed by management and the board of directors. Public stockholders who might desire to participate in such a transaction may not have an opportunity to do so. We have a staggered board of directors that makes it difficult for stockholders to change the composition of the board of directors in any one year. These anti-takeover provisions could substantially impede the ability of public stockholders to change our management and board of directors. Such provisions may also limit the price that investors might be willing to pay for shares of our common stock in the future.
Unresolved Staff Comments. |
None.
Properties.
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Our facilities perform manufacturing, research and development, sales and marketing, and administration functions. As of December 31, 2022, we leased the following principal facilities:
Approximate | ||||||
Location | Description of Facility | Square Footage | Expiration | |||
Holliston, Massachusetts | Manufacturing facility and corporate headquarters | 83,000 | 2024 | |||
New Brighton, Minnesota | Manufacturing facility | 75,000 | 2030 | |||
Reutlingen, Germany | Manufacturing facility | 23,000 | 2024 | |||
Barcelona, Spain | Manufacturing facility | 16,000 | 2023 | |||
March-Hugstetten, Germany | Manufacturing facility | 11,000 | 2024 |
We also lease facilities in Cambridge, England; Kista, Sweden; Beijing, China; and Shanghai, China. We believe our current facilities are adequate for our needs for the foreseeable future.
Legal Proceedings.
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For information related to legal proceedings, see the discussion in Note 14 to the Consolidated Financial Statements included in “Part IV, Item 15. Exhibits, Financial Statement Schedules” of this report, which information is incorporated by reference into this Item 3.
Mine Safety Disclosures |
Not Applicable.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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Market Information
Our common stock has been quoted on the Nasdaq Global Market since our initial public offering on December 7, 2000, and trades under the symbol “HBIO.”
Stockholders
There were 93 holders of record of our common stock as of March 1, 2023. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of our common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
Dividend Policy
We have never declared or paid cash dividends on our common stock in the past and do not intend to pay cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements and other factors our Board of Directors deems relevant.
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Not Applicable.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements The following section of this Annual Report on Form 10-K contains statements that are not statements of historical fact and are forward-looking statements within the meaning of federal securities laws. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Factors that may cause our actual results to differ materially from those in the forward-looking statements include those factors described in “Item 1A. Risk Factors” in this Annual Report on Form 10-K. You should carefully review all of these factors, as well as the comprehensive discussion of forward-looking statements on page 1 of this Annual Report on Form 10-K. Overview Harvard Bioscience is a leading developer, manufacturer and seller of technologies, products and services that enable fundamental advances in life science applications, including research, pharmaceutical and therapy discovery, bio-production and preclinical testing for pharmaceutical and therapy development. Our products and services are sold globally to customers ranging from renowned academic institutions and government laboratories to the world’s leading pharmaceutical, biotechnology and contract research organizations. With operations in North America, Europe and China, we sell through a combination of direct and distribution channels to customers around the world. Recent Developments Global Supply Chain and Economic Environment The global supply chain has experienced significant disruptions due to electronic component and labor shortages and other macroeconomic factors which have emerged since the onset of COVID-19, leading to increased cost of freight, purchased materials, and manufacturing labor costs, while also delaying customer shipments. We believe these supply chain trends will continue into 2023. These conditions, in addition to the overall impacts on the global economy, have negatively impacted our results of operations and cash flows. Additionally, during 2022 the global economy has experienced high levels of inflation, rising interest rates, significant fluctuations in currency values, and increasing economic uncertainty, particularly in Europe. Our results of operations have been negatively impacted by higher costs of raw materials, labor and freight resulting from inflationary pressures. These factors and global events including the ongoing military conflict between Russia and Ukraine, a softening economy in Europe, and rising interest rates on our debt have had a negative impact on our results of operations. If business interruptions resulting from the current macroeconomic conditions described above were to be prolonged or expanded in scope, the Company’s business, financial condition, results of operations and cash flows would likely be negatively impacted. If the impacts of the supply chain disruptions are more severe than we expect, it could result in longer lead times and further increased costs, all of which could materially adversely affect our business, financial condition and results of operations. COVID-19 The COVID-19 pandemic has had a negative impact on our operations to date and the future impacts of the pandemic and any resulting economic impact remain largely unknown and continue to evolve. Many countries worldwide continue to issue COVID-19 related restrictive orders in an attempt to control the effects of the pandemic. In particular, during the beginning of 2022, China implemented area-wide shutdowns in order to control the spread of COVID-19, which continued in different parts of China throughout 2022. Such shutdowns had an adverse impact on our financial results for fiscal 2022 and if they continue could have an adverse impact on our future financial results. See Part I, Item 1. “Business–Our History and Strategy” of this report for a discussion of recent significant developments.
Restructuring Activities On an ongoing basis, we review our business, the global economy, the healthcare industry, and the markets in which we compete to identify operational efficiencies, enhance commercial capabilities and align our cost base and infrastructure with customer needs and our strategic plans. During 2019, we initiated a restructuring program to improve operational efficiency and reduce costs which entailed consolidating and downsizing several sites and reducing headcount in Europe and North America. This program was completed in 2021. Restructuring costs under this program were $1.3 million for the year ended December 31, 2021. Substantially all of these costs have been included as a component of general and administrative expenses. During 2022, we completed a review of our business and product portfolio and identified opportunities to rationalize our product portfolio, improve our cost structure, optimize our sales organization. In connection with this review, we identified certain non-strategic products for discontinuation and recorded charges of $1.6 million in cost of revenue. We also incurred $0.9 million in severance expenses in connection with headcount reductions in Europe and North America. Selected Results of Operations
Year ended December 31,
In the table below, we provide an overview of selected operating metrics.
Revenues
Revenues
Gross Gross profit decreased $6.8 million, or 10.1%, to The global supply chain has experienced significant disruptions due to electronic components and labor shortages and other macroeconomic factors, leading to increased costs as noted above. We expect these supply chain trends to continue into 2023.
Sales and marketing expenses
Sales and marketing expenses
General and administrative expenses
General and administrative expenses increased
Research and development expenses
Research and development expenses
Amortization of intangible assets
Amortization of intangible
Settlement of litigation During the year ended December 31, 2022, we recorded a net credit of $0.2 million related to the Biostage Settlement consisting of $5.2 million in settlement and legal expenses accrued during the three months ended March 31, 2022, offset by credits of $4.9 million and $0.5 million during the three months ended June 30, 2022 and September 30, 2022, respectively. The credits consisted of adjustments to the reserve against an indemnification receivable from Biostage to reflect: i) the issuance by Biostage of Series E Convertible Preferred Stock to us on June 10, 2022, in satisfaction of $4.0 million of Biostage’s total indemnification obligations, ii) the payment by Biostage of legal fees associated with the Biostage Settlement, and iii) other accrual adjustments. Interest expense Interest expense increased $1.0 million, or 65.5%, to $2.5 million for the year ended December 31, Income tax expense Income tax expense for the year ended December 31, 2022 was $0.3 million compared to $0.1 million for the year ended December 31, 2021. The effective tax rates for the years ended December 31, 2022 and 2021 were (3.7)% and (105.7)%, respectively. The difference between our effective tax rates compared to the U.S. statutory tax rate of 21% is primarily due to changes in reserves for uncertain tax positions in 2022, and changes in valuation allowances associated with our assessment of the
Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents, internally generated cash flow from operations and our revolving credit facility. Our expected cash outlays relate primarily to cash payments due under our Credit Agreement described below as well as capital expenditures As of December 31, 2022, we held cash and
On December 22, 2020, we entered into
this report). As of December 31, On April 28, 2022, and November 8, 2022, we entered into amendments to the Credit Agreement and Pledge and Security Agreement (respectively, the “April 2022 Amendment” and the “November 2022 Amendment”) (see Note 11 to the Consolidated Financial Statements included in “Part IV, Item 15. Exhibits, Financial Statements Schedules” of this report). The April 2022 Amendment, among other things modified the financial covenant relating to the consolidated net leverage ratio, and consented to the Biostage Settlement, including without limitation the receipt by the Company of convertible preferred stock in Biostage, and the securities issuable upon conversion thereof, as partial payment for Biostage’s indemnification obligations in connection with the Biostage Settlement. (See Note 15 to the Consolidated Financial Statements included in “Part IV, Item 15. Exhibits, Financial Statements Schedules” of this report). In consideration for the April 2022 Amendment, the Company paid fees of $0.2 million to the lenders and administrative agent. The November 2022 Amendment, among other things, modified the financial covenant relating to the consolidated net leverage ratio and the definition of Consolidated EBITDA used in the calculation of certain financial covenants, including to exclude non-cash inventory charges related to the Company’s decision to discontinue non-strategic products. In consideration for the November 2022 Amendment, the Company paid fees of $0.2 million to the lenders and administrative agent. As of December 31, 2022, we are in compliance with the financial covenants of the Credit Agreement, as amended.
Based on our current operating plans, Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary as a result of a number of factors. Condensed Consolidated Cash Flow Statements
Cash provided by operations was $1.2 million and $1.3 million for the years ended December 31, 2022 and 2021, respectively. Cash flow from operations for the year ended December 31, 2022, was lower than the comparable period in the prior year due to increased operating losses as noted and payments related to the Biostage Litigation, offset by the positive impact of improved accounts receivable collections and accounts payable management activities. During the year ended December 31, 2022, we paid approximately $4.0 million in connection with the Biostage Settlement. Cash used in investing activities was $1.6 million and $1.3 million for the years ended December 31, 2022 and 2021, respectively, and consisted primarily of capital expenditures in manufacturing and information technology infrastructure. Cash used in financing activities was $2.8 million for the year ended December 31, 2022. During this period, we made term loan payments under the Credit Agreement of $3.2 million, with net borrowings of $1.4 million under the revolving facility. We also received proceeds of $0.6 million from the exercise of stock options and employee stock purchase plan purchases and paid $1.6 million for taxes related to net share settlement of equity awards. Cash used in financing activities was $0.3 million for the year ended December 31, 2021. During this period, we made term loan installments payments under the Credit Agreement of $2.0 million, with net borrowings of $2.0 million under the revolving credit facility. We also received proceeds of $3.3 million from the exercise of stock options and employee stock purchases and paid $3.5 million for taxes related to net share settlement of equity awards. Impact of Foreign Currencies Our international operations in some instances operate in a natural hedge as we sell our products in many countries and a substantial portion of our revenues, costs and expenses are denominated in foreign currencies, primarily the euro and the British pound. During the year ended December 31, 2022, changes in foreign currency exchange rates resulted in an unfavorable effect on revenues of approximately $3.4 million and a favorable effect on expenses of approximately $3.3 million. The translation of foreign currency into U.S. dollars included as a component of comprehensive income during the year ended December 31, 2022 resulted in a loss of approximately $3.0 million, compared to a loss of $2.4 million for the year ended December 31, 2021. In addition, the currency exchange rate fluctuations included as a component of net loss resulted in currency losses of $(0.4) million and $(0.1) million during the years ended December 31, 2022 and 2021, respectively. Recent Accounting Pronouncements For information on recent accounting pronouncements impacting our business, see “Recent Accounting Pronouncements” included in Note 2 to the Consolidated Financial Statements included in “Part IV, Item 15. Exhibits, Financial Statement Schedules” of this report.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, investments, income taxes, litigation and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following are the more significant judgments and estimates used in the preparation of our consolidated financial statements.
We
Due to Biostage’s limited operating history, their overall financial condition which includes the
Income Taxes and Valuation Allowance
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our annual tax rate is based on income, statutory tax rates, tax reserve changes and tax planning opportunities available to us in the various jurisdictions in which we operate.
Significant judgment is also required in determining the amount of deferred tax assets that will ultimately be realized and corresponding deferred tax asset valuation allowance. When estimating the necessary valuation allowance, we consider all available evidence for each jurisdiction including historical operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. If new information becomes available that would alter our estimate of the amount of deferred tax assets that will ultimately be realized, we adjust the valuation allowance through income tax expense. Changes in the deferred tax asset valuation allowance could have a material impact on our financial condition or results of operations.
Not Applicable.
None.
This Report includes the certifications of our Chief Executive Officer and Interim Chief Financial Officer required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 9A includes information concerning the controls and control evaluations referred to in those certifications.
Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
We carried out an evaluation, under the supervision and with the participation our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered in this Report. Based upon the evaluation described above, our Chief Executive Officer and Interim Chief Financial Officer have concluded that they believe that our disclosure controls and procedures were effective, as of December 31,
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed by and under the supervision of our Chief Executive Officer and Interim Chief Financial Officer and effected by our management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles, (3) provide reasonable assurance that receipts and expenditures are being made only in accordance with authorizations of management and directors, and (4) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It is a process that involves human diligence and compliance and is therefore subject to human error and misjudgment. In general, evaluations of effectiveness for future periods are subject to risk as controls may become inadequate due to changes in conditions or the degree of compliance with key processes or procedures could deteriorate.
Our management evaluated the effectiveness of our internal control over financial reporting as of December 31,
The effectiveness of our internal control over financial reporting as of December 31,
There has been no change in the Company's internal control over financial reporting as of December 31,
The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may not deteriorate. Because of their inherent limitations, systems of control may not prevent or detect all misstatements. Accordingly, even effective systems of control can provide only reasonable assurance of achieving their control objectives.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Opinion on internal control over financial reporting We have audited the internal control over financial reporting of Harvard Bioscience, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31,
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31,
Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
None.
Not applicable.
Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our
Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our
Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our
Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our
Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our
The following documents are filed as part of this Annual Report on Form 10-K or incorporated by reference as
(a)Financial Statements, Schedules, and Exhibits. We have listed our consolidated financial statements filed as part of this annual report in the index to consolidated financial statements on page F-1.
(b)Exhibits. We have listed the exhibits filed as part of this annual report in the accompanying exhibit index, which follows the signature page to this annual report.
(c) Financial Statement Schedules. We have omitted all financial statement schedules because they are not applicable or not required or becausewe have included the necessary information in our consolidated financial statements or related notes.
None.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Harvard Bioscience, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31,
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31,
Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
Preferred shares received in settlement of indemnification obligation As described further in note 2 to the financial statements, the Company received 4,000 shares of Series E Convertible Preferred Stock from Biostage, Inc. (a former subsidiary of the Company) in connection with the settlement of an indemnification obligation to the Company. We identified the valuation and accounting for the receipt of these shares as a critical audit matter. The principal considerations for our determination that the valuation and accounting for the receipt of these shares is a critical audit matter are (1) applying the accounting guidance for the initial recording of the shares requires judgement (2) estimating the fair value of the shares is complex and requires specialized skills and knowledge. These considerations heightened the complexity surrounding the design and execution of audit procedures to respond to this risk. Our audit procedures related to the valuation and accounting for the receipt of these shares include the following, among others.
/s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2017.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Harvard Bioscience, Inc., a Delaware corporation (the “Company”), is a leading developer, manufacturer and seller of technologies, products and services that enable fundamental advances in life science applications, including research, pharmaceutical and therapy discovery, bio-production and preclinical testing for
Risks and Uncertainties
Additionally, during 2022 the global economy has experienced high levels of inflation, rising interest rates, significant fluctuations in currency values, and increasing economic uncertainty, particularly in Europe. The Company’s results of operations have been negatively impacted by higher costs of raw materials, labor and freight resulting from inflationary pressures. These factors and global events including the ongoing military conflict between Russia and Ukraine, a The COVID-19 pandemic has had a negative impact on the Company’s operations to date and the future impacts of the pandemic and any resulting economic impact are If business interruptions resulting from the current macroeconomic conditions described above or from COVID-19 were to be prolonged or expanded in scope, the Company’s business, financial condition, results of operations and cash
The consolidated financial statements include the accounts of Harvard Bioscience, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted accounting principles
The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include cash on hand and amounts due from banks.
The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on considering factors such as historical experience, credit quality, known troubled accounts, historical experience, factors that may affect a customer’s ability to pay and other currently available evidence.
The Company values its inventories at the lower of the actual cost to purchase (first-in, first-out method) and/or manufacture the inventories or the net realizable value of the inventories. The Company regularly reviews inventory quantities on hand and records a provision to write down excess and obsolete inventories to its estimated net realizable value if less than cost, based primarily on historical inventory usage and estimated forecast of product demand.
Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets as follows:
Leases The Company leases office space, manufacturing facilities, automobiles and equipment. The Company concludes on whether an arrangement is a lease at inception. This determination as to whether an arrangement contains a lease is based on an assessment as to whether a contract conveys the right to the Company to control the use of identified property, plant or equipment for period of time in exchange for consideration. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes these lease expenses on a straight-line basis over the lease term.
The Company has assessed its contracts and concluded that its leases consist of operating leases. Operating leases are included in operating lease right-of-use
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company determines an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate represents a significant judgment that is based on an analysis of the Company’s credit rating, country risk, treasury and corporate bond yields, as well as comparison to the Company’s borrowing rate on its most recent loan. The Company uses the implicit rate when readily determinable. The
F-
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is more than 50% likely of being realized. Changes in recognition are reflected in the period in which the judgement occurs.
The Company’s policy is to account for Global Intangible Low-Taxed income as a period cost.
The functional currency of the Company’s foreign subsidiaries is generally their local currency. All assets and liabilities of its foreign subsidiaries are translated at exchange rates in effect at period-end. Income and expenses are translated at rates which approximate those in effect on the transaction dates. The resulting translation adjustment is recorded as a separate component of stockholders’ equity in accumulated other comprehensive (loss) income (“AOCI”) in the consolidated balance sheets. Gains and losses resulting from foreign currency transactions are included in net (loss) income.
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the periods presented. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and other potentially dilutive securities using the treasury stock method unless the effect is antidilutive.
Nature of contracts and customers
The Company’s contracts are primarily of short duration and are mostly based on the receipt and fulfilment of purchase orders. The purchase orders are binding and include pricing and all other relevant terms and conditions.
The Company’s customers are primarily research scientists at pharmaceutical and biotechnology companies, universities, hospitals, government laboratories, including the United States National Institutes of Health
Performance obligations
The Company’s performance obligations under its revenue contracts consist of its instruments, equipment, accessories, services, maintenance and extended warranties. Equipment also includes software that functions together with the tangible equipment to deliver its essential functionality. Contracts with customers may contain multiple promises such as delivery of hardware, software, professional services or post-contract support services. These promises are accounted for as separate performance obligations if they are distinct. For contracts with customers that contain multiple performance obligations, the transaction price is allocated to the separate performance obligations based on estimated relative standalone selling price, which does not materially differ from the stated price in the contract. In general, the Company’s list prices are indicative of standalone selling price.
F- Instruments, equipment and accessories consist of a range of products that are used in life sciences research. Revenues from the sales of these items are recognized when transfer of control of these products to the customer occurs. Transfer of control occurs when the Company has a right to payment, and the customer has legal title to the asset and the customer or their selected carrier has possession, which is typically upon shipment. Sales on these items are therefore generally recognized at a point in time.
The Company’s equipment revenue also includes the sale of wireless implantable monitors that are used for life science research purposes. The Company sells these wireless implantable monitors to pharmaceutical companies, contract research organizations and academic laboratories. In addition to sales generated from new and existing customers, these implantable devices are also sold under a program called the “exchange program.” Under this program, customers may return an implantable monitor to the Company after use, and if the returned monitor can be reprocessed and resold, they may, in exchange, purchase a replacement implantable monitor of the same model at a lower price than a new monitor. The implantable monitors that are returned by customers are reprocessed and made available for future sale. The initial sale of implantable monitors and subsequent sale of replacement implantable monitors are independent transactions. The Company has no obligation in connection with the initial sale to sell replacement implantable monitors at any future date under any fixed terms and may refuse returned implantable monitors that cannot be recovered or are obsolete. The Company has concluded that the offer to its customers that they may purchase a discounted product in the future is not a material
Service
For sales for which transfer of control occurs upon shipment, the Company accounts for shipping and handling costs as fulfilment costs. As such, the Company records the amounts billed to the customer for shipping costs as revenue and the costs within cost of revenues upon shipment. For sales, for which control transfers to customers after shipment, the Company has elected to account for shipping and handling as activities to fulfill the promise to transfer the goods to the customer. The Company therefore accrues for the costs of shipping undelivered items in the period of shipment.
Revenues expected to be recognized related to
Variable Consideration
The nature of the Company's contracts gives rise to certain types of variable consideration, including in limited cases volume and payment discounts. The Company analyzes sales that could include variable consideration and estimates the expected or most likely amount of revenue after returns, trade-ins, discounts, rebates, credits, and incentives. Product returns are estimated and accrued for, based on historical information. In making these estimates, the Company considers whether the amount of variable consideration is constrained and is included in revenue only to the extent that it is probable that a significant reversal of the revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration, and its impact on the Company’s revenue recognition, was not material in any of the periods presented.
The Company’s payment terms are generally from zero to sixty days from the time of invoicing, which generally occurs at the time of shipment or prior to services being performed. Payment terms vary by the type of
Sales taxes, value added taxes, and certain excise taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and are therefore excluded from revenues.
F- Deferred revenue
The Company records deferred revenue when cash is collected from customers prior to satisfaction of the Company’s performance obligation to the customer. Deferred revenue consists of amounts deferred related to service contracts and revenue deferred as a result of payments received in advance from customers. Deferred revenue is generally expected to be recognized within one year.
The amounts included in deferred revenue from advanced payments relate to amounts that are prepaid for wireless implantable monitors under the exchange program. The Company has made the judgment that these payments do not represent a significant financing component as the customer can exercise their discretion as to when they can obtain the products that they have made a prepayment for.
Advanced payments received from customers are recorded as a liability, and revenue is recognized when the Company’s performance obligations are completed. Performance obligations are completed when the product is shipped or delivered to the customer, or at the end of the exchange program if goods are not acquired prior to the termination of the contract period.
Disaggregation of revenue
Refer to Note
The When the Company determines that the carrying value of the assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company measures the potential impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in its current business model. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and exceeds its fair value. Different assumptions and judgments could materially affect the calculation of the fair value of
Goodwill
For the purpose of its goodwill analysis, the Company has one reporting unit. The Company conducts its annual impairment analysis in the fourth quarter of the fiscal year and more frequently if there is an indicator of impairment. The Company assesses qualitative factors of the reporting unit to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the qualitative assessment indicates a potential impairment, a quantitative analysis is performed. The Company compares the fair value of the reporting unit with its carrying amount. The Company typically estimates fair value using
F-
The Company assesses recoverability of its long-lived assets that are held for use, such as property, plant and equipment and amortizable intangible assets in accordance with ASC 360, “Property, Plant and Equipment” when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets or an asset group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or the asset group. Cash flow projections are based on trends of historical performance and management’s estimate of future performance. If the carrying amount of the asset or asset group exceeds the estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset or asset group exceeds its estimated fair value. For the year ended December 31,
The Company
Valuation of Investment in Preferred Stock On June 10, 2022, Biostage, Inc., issued 4,000 shares of its Series E Convertible Preferred Stock (the “Series E Preferred Stock”) to
The Company
Fair Value of Financial Instruments Financial reporting standards define a fair value hierarchy that consists of three levels:
The carrying values of the Company’s cash and cash equivalents, trade accounts receivable and trade accounts payable and short-term debt approximate their fair values because of the short maturities of those instruments. The fair value of the Company’s long-term debt approximates its carrying value and is based on the amount of future cash flows associated with the debt discounted using current borrowing rates for similar debt instruments of comparable
F-
The Company accounts for stock-based payment awards in accordance with the provisions of ASC 718, “Compensation—Stock Compensation”, which requires it to recognize compensation expense for all stock-based payment awards made to employees and directors including stock options, restricted stock units, and restricted stock units with a market condition
Stock-based compensation expense recognized is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. The Company values stock-based payment awards, except restricted stock units at grant date using the Black-Scholes option-pricing model. The Company values restricted stock units with a market condition using a Monte-Carlo valuation simulation. The determination of fair value of stock-based payment awards on the date of grant using an option-pricing model or Monte-Carlo valuation simulation is affected by the Company’s stock price as well as assumptions regarding certain variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected stock option exercise behaviors.
The fair value of restricted stock units is based on the market price of the Company’s stock on the date of grant and are recorded as compensation expense on a straight-line basis over the applicable service period, which ranges from one to four years.
Accounting Pronouncements to be Adopted In January 2017, the FASB issued ASU 2017-04,Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which eliminates the performance of Step 2 from the goodwill impairment test. In performing its annual or interim impairment testing, an entity will instead compare the fair value of the reporting unit with its carrying amount and recognize any impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. ASU 2017-04 is effective for the Company for fiscal years beginning after December 15, 2022. The Company has determined that the adoption of ASU 2017-04 will not have a significant impact on its consolidated financial statements.
In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The FASB issued several ASUs after ASU 2016-13 to clarify implementation guidance and to provide transition relief for certain entities. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company
F-
Changes in the components of accumulated other comprehensive loss, net of tax, for the years ended December 31,
The change in the carrying amount of goodwill
Identifiable intangible assets at December 31, 2022 and 2021 consist of the following:
* Weighted average life in years as of December 31,
During the year ended December 31,
F- Intangible asset amortization expense was
The following tables provide details of selected balance sheet items as of the periods indicated:
equipment from its fixed asset records.
F- 17
On an ongoing basis, the Company reviews the global economy, the healthcare industry, and the markets in which it competes to identify operational efficiencies, enhance commercial capabilities and align its cost base and infrastructure with customer needs and its strategic plans. In order to realize these opportunities, the Company undertakes
During the year ended December 31,
Substantially all of the severance and other costs detailed above have been included as a component of
In connection with the 2014 acquisitions of Multi Channel Systems MCS GmbH (“MCS”)
Employee Retirement Savings Plans The Company sponsors
Employee Pension Plans The Company’s subsidiary in the United Kingdom, Biochrom Limited maintains contributory, defined benefit
F- 18 The components of the Company’s net period benefit (credit) expense were as follows:
The
Changes in the actuarial
The amounts recognized in the consolidated balance sheets consist of:
F- 19 The weighted average assumptions used in determining the net pension cost for these plans follows:
The discount rate assumptions used for pension accounting reflect the prevailing rates available on high-quality, fixed-income debt instruments with terms that match the average expected duration of the Company’s defined benefit pension plan obligations.
The Company’s mix of pension plan investments among asset classes also affects the long-term expected rate of return on plan assets. As of December 31,
The fair value and asset allocations of the Company’s pension benefits as of December 31,
Financial reporting standards define a fair value hierarchy that consists of three levels. The fair values of the plan assets by fair value hierarchy level as of December 31,
Level 1 assets consist of cash and cash equivalents held in the pension
The Company expects to contribute
F- 20
The Company has noncancelable operating leases for office space, manufacturing facilities, warehouse space, automobiles and equipment expiring at various dates through 2030.
The components of lease expense for the
Supplemental cash flow information related to the Company’s operating leases was as follows:
Supplemental balance sheet information related to the Company’s operating leases was as follows:
Future minimum lease payments for operating leases, with initial
F- 21
Retirement of Treasury Stock In May 2021, the Company retired the 7.8 million shares of common stock held by the Company as treasury shares and returned these shares to the status of authorized and unissued shares of common stock.
Preferred Stock
The Company’s Board of Directors has the authority to issue up to 5.0 million shares of preferred stock and to determine the price privileges and other terms of the shares. The Board of Directors may exercise this authority without any further approval of stockholders. As of December 31,
Employee Stock Purchase Plan (“ESPP”)
Under the ESPP, participating employees can authorize the Company to withhold a portion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock. At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the period. Shares are issued under the ESPP for the six-month periods ending June 30 and December 31.
Performance Restricted Stock Units
The
Stock-Based Payment Awards
The Company accounts for stock-based payment awards in accordance with the provisions of FASB ASC 718, which requires it to recognize compensation expense for all stock-based payment awards made to employees and directors including stock options, restricted stock units, Market Condition RSUs and employee stock purchases related to the ESPP. The Company has elected as an accounting policy to account for forfeitures for service-based awards as they occur, with no adjustment for estimated forfeitures.
F- 22 Stock option and restricted stock unit activity under the Company’s Incentive
Earnings per share
Basic earnings per share is based upon net income divided by the number of weighted average common shares outstanding during the period. The calculation of diluted earnings per share assumes conversion of stock options, restricted stock units and Market Condition RSUs into common stock using the treasury method. The weighted average number of shares used to compute basic and diluted earnings per share consists of the following:
The following table summarizes outstanding and exercisable options as of December 31,
F- 23 The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of
As of December 31,
Valuation and Expense Information under Stock-Based-Payment Accounting
Stock-based compensation
The weighted average estimated fair value per share of the Market Condition RSUs granted during the
The Company used historical volatility to calculate the expected volatility. Historical volatility was determined by calculating the mean reversion of the daily adjusted closing stock price. The risk-free interest rate assumption is based upon observed U.S. Treasury bill interest rates (risk-free) appropriate for the term of the Company’s stock options. The expected holding period of stock options represents the period of time options are expected to be outstanding and were based on historical experience. The vesting period ranges from one to four years and the contractual life is ten years.
F- 24
As of December 31,
The aggregate amounts of debt maturing during the next five years are as follows:
On December 22, 2020, the Company entered into a Credit Agreement (the “Credit Agreement”) with Citizens Bank, N.A., Wells Fargo Bank, National Association, and Silicon Valley Bank, (together, the “Lenders”). The Credit Agreement provides for a term loan of $40.0 million and a $25.0 million senior revolving credit facility (including a $10.0 million sub-facility for the issuance of letters of credit and a
November 2022 Amendment. Borrowings under the
The effective interest rate on the Company’s borrowings for the years ended December 31, 2022 and 2021, was 5.0% and 3.3%, respectively, and the weighted average interest rate as of December 31, 2022 was 7.6%. The carrying value of the debt approximates fair value because the interest rate under the obligation approximates market rates of interest available to the Company for similar instruments. F- 25 Commencing on March 31, 2021, the outstanding term loans amortizes in equal quarterly installments equal to $0.5 million per quarter on such date and during each of the next three quarters thereafter, $0.75 million per quarter during the next eight quarters thereafter and $1.0 million per quarter thereafter, with a balloon payment at maturity. Furthermore, within ninety days after the end of the Company’s fiscal year,
The Credit Agreement,
The Company
The Company
F-
The following table represents a disaggregation of revenue from contracts with customers for the years ended December 31,
Deferred revenue
During the years ended December 31,
Allowance for Doubtful Accounts
Allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. A rollforward of allowance for doubtful accounts is as follows:
Concentrations
No customer accounted for more than 10% of the revenues for the years ended December 31,
Warranties
Warranties are estimated and accrued at the time revenues are recorded. A rollforward of the Company’s product warranty accrual is as follows:
F-
Income tax expense
The effective tax rate for the year ended December 31,
Income tax
F- Income tax expense is based on the following pre-tax income (loss) from operations:
The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at December 31,
Deferred income tax assets and liabilities by classification on the consolidated balance sheets were as follows:
As of December 31,
F- 29 At December 31,
As of December 31,
At December 31,
The Company
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities in foreign jurisdictions for years before
On
F-
On April
The Company is involved in various other claims and legal proceedings arising in the ordinary course of business. After consultation with legal counsel, the Company has determined that the ultimate disposition of such proceedings is not likely to have a material adverse effect on its business, financial condition, results of operations or cash
In addition, the Company has entered into indemnification agreements with its directors. It is not possible to determine the maximum potential liability amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. The company has not recorded any liability for costs related to contingent indemnification obligations as of December 31, 2022.
On April 14, 2017, representatives for the estate of an individual plaintiff filed a wrongful death complaint with the Court against the Company and other defendants, including Biostage, a former subsidiary of the Company that was spun off in 2013, as well as another third party (the “Biostage Litigation”). The complaint sought payment for an unspecified amount of damages and alleges that the plaintiff sustained terminal injuries allegedly caused by products, including one synthetic trachea scaffold and two bioreactors, provided by certain of the named defendants and utilized in connection with surgeries performed by third parties in Europe in 2012 and 2013.
On April 27, 2022, the Company and Biostage executed a settlement with the plaintiffs of the Biostage Litigation and Biostage’s products liability insurance carriers (the “Biostage Settlement”), which resolved all claims by and between the parties and Biostage’s product liability insurance carriers and resulted in the dismissal with prejudice of the wrongful death claim and all claims between the Company, Biostage and the insurance carriers. The Biostage Settlement was entered into solely by way of compromise and settlement and is not in any way an admission of liability or fault by the Company or Biostage. Biostage has indemnified the Company for all losses and expenses, including legal expenses that the Company incurred in connection with the litigation and the Settlement.
During the three months ended March 31, 2022, the Company accrued $5.2 million of costs related to legal fees and the Biostage Settlement. Additionally, during the year ended December 31, 2021, the Company had incurred $0.3 million in legal fees in connection with the litigation. Due to the financial condition of Biostage, the Company determined that it was uncertain as to whether Biostage would be able to meet its indemnification obligation and had fully reserved any receivable from Biostage.
During the three months ended June 30, 2022 and September 30, 2022, the Company recorded adjustments of $4.9 million and $0.5 million, respectively, to the reserve against the indemnification receivable from Biostage. These adjustments reflected: i) the issuance by Biostage of 4,000 shares of its Series E Convertible Preferred Stock (the “Series E Preferred Stock”) to the Company on June 10, 2022, in satisfaction of $4.0 million of Biostage’s total indemnification obligation, ii) the payment by Biostage of the legal fees associated with the Settlement, and iii) other accrual adjustments. The Series E Preferred Stock was initially recorded at an estimated fair value of $3.9 million using a Monte Carlo valuation simulation incorporating information from selected guideline companies.
The Series E Preferred Stock ranks senior to all classes of common stock of Biostage and all classes of preferred stock of Biostage (unless the Company consents to Biostage’s issuance of other preferred stock that is senior to or pari passu with the Series E Preferred Stock) and accrues dividends at a rate of 8% per annum that are payable in additional shares of Series E Preferred Stock. Each share of Series E Preferred Stock is convertible at any time at the option of the Company into such number of shares of Biostage common stock determined by dividing (a) the $1,000 face value of the Series E Preferred Stock plus all accrued and unpaid dividends thereon by (b) the average of the volume weighted average trading prices of Biostage’s common stock, which is currently quoted on the OTCQB Marketplace, for the 60 consecutive trading days prior to the conversion. In the event Biostage has a subsequent qualified offering of its common stock, (which is defined as an offering of Biostage common stock that coincides with its uplisting onto Nasdaq, the first subsequent public offering by Biostage, or the first subsequent private placement by Biostage resulting in gross proceeds to Biostage of at least $4,000,000), the Series E Preferred Stock is mandatorily converted into Biostage common stock at the applicable qualified offering price. Due to Biostage’s limited operating history, their overall financial condition which includes the requirement to raise additional capital in order to continue as a going concern and the limited trading volume and liquidity of Biostage’s common stock, the value of the Series E Preferred Stock could fluctuate considerably or become worthless.
F- The book value of the Series E Preferred Stock, inclusive of accrued dividends, is $4.1 million and is included in the December 31, 2022 Consolidated Balance Sheet as a component of Other Long-Term Assets. The Company has elected the provisions within ASC 321Investment Securities to subsequently measure the Series E Preferred Stock at its original cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of Biostage. As of December 31, 2022, there have been no observable price changes or indicators of impairment and therefore there have been no measurement adjustments to the carrying value of the Series E Preferred Stock.
Operating segments are determined by products and services provided by each segment, internal organization structure, the manner in which operations are managed, criteria used by the Chief Operating Decision Maker, or CODM, to assess the segment performance, as well as resource allocation and the availability of discrete financial information. The Company has one operating segment and therefore segment results and consolidated results are the same.
The following tables summarize additional selected financial information of the Company’s operations by geographic location.
Long-lived assets by geographic area
Net assets by geographic area
F-
For the year ended December 31, 2022, the Company received $0.7 million under government assistance programs. The majority of the assistance was a result of the Company’s German subsidiaries participating in programs established to offset the negative impact of COVID-19 on profitability, to support employment during the COVID-19 pandemic, and to offset the costs of qualifying research and development activities. Government assistance that is related to profitability is recorded as other income, and government assistance that supplements salaries or research activities are recorded as a reduction of the related operating expense.
On February 28, 2023, the Company entered into an interest rate swap contract to improve the predictability of cash flows from interest payments related to our variable, SOFR based debt. The swap contract has initial notional amount of $33.4 million and matures on December 22, 2025. This swap contract converts the SOFR-based variable portion of the interest payable under the Credit Agreement into fixed-rate debt at an annual rate of 4.75%. The swap contract does not impact the additional interest related to the applicable interest rate margin as discussed above in Note 11 Long-Term Debt. The interest rate swap is considered an effective cash flow hedge, and as a result, the net gains or losses on such instrument are reported as a component of other comprehensive income (loss) in the consolidated financial statements and are reclassified as net income when the underlying hedged interest impacts earnings. A qualitative and quantitative assessment over the hedge effectiveness is performed on a quarterly basis unless facts and circumstances indicate that the hedge may no longer be highly effective.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
The following exhibits are filed as part of this Annual Report on Form 10-K. Where such filing is made by incorporation by reference to a previously filed document, such document is identified.
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