UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
FORM 10-Q
☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2022March 31, 2023
☐ 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 Incorporation or organization) | (I.R.S. Employer 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 |
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.
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2022,April 20, 2023, there were 41,657,68842,190,043 shares of the registrant’s common stock issued and outstanding.
FORM 10-Q
INDEX
HARVARD BIOSCIENCE, INC. |
(Unaudited, in thousands, except share and per share data) |
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 5,144 | $ | 7,821 | $ | 3,789 | $ | 4,508 | ||||||||
Accounts receivable, net | 15,023 | 21,834 | 17,737 | 16,705 | ||||||||||||
Inventories | 26,116 | 27,587 | 26,861 | 26,439 | ||||||||||||
Other current assets | 5,535 | 4,341 | 4,062 | 3,472 | ||||||||||||
Total current assets | 51,818 | 61,583 | 52,449 | 51,124 | ||||||||||||
Property, plant and equipment, net | 3,555 | 3,415 | 3,424 | 3,366 | ||||||||||||
Operating lease right-of-use assets | 6,019 | 6,897 | 5,505 | 5,816 | ||||||||||||
Goodwill | 54,851 | 57,689 | 56,618 | 56,260 | ||||||||||||
Intangible assets, net | 22,464 | 27,385 | 19,641 | 21,014 | ||||||||||||
Other long-term assets | 8,306 | 5,375 | 7,941 | 7,780 | ||||||||||||
Total assets | $ | 147,013 | $ | 162,344 | $ | 145,578 | $ | 145,360 | ||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current portion of long-term debt | $ | 2,720 | $ | 3,235 | $ | 2,970 | $ | 3,811 | ||||||||
Current portion of operating lease liabilities | 2,121 | 2,142 | 2,130 | 2,135 | ||||||||||||
Accounts payable | 5,877 | 4,911 | 5,978 | 6,447 | ||||||||||||
Deferred revenue | 3,642 | 4,266 | 4,121 | 3,370 | ||||||||||||
Other current liabilities | 7,000 | 10,762 | 8,018 | 7,486 | ||||||||||||
Total current liabilities | 21,360 | 25,316 | 23,217 | 23,249 | ||||||||||||
Long-term debt, net | 46,534 | 45,095 | 41,083 | 43,013 | ||||||||||||
Deferred tax liability | 1,181 | 1,558 | 546 | 590 | ||||||||||||
Operating lease liabilities | 5,539 | 6,488 | 4,938 | 5,282 | ||||||||||||
Other long-term liabilities | 420 | 486 | 1,454 | 1,006 | ||||||||||||
Total liabilities | 75,034 | 78,943 | 71,238 | 73,140 | ||||||||||||
Commitments and contingencies - Note 12 | ||||||||||||||||
Commitments and contingencies - Note 13 | ||||||||||||||||
Stockholders' equity: | ||||||||||||||||
Preferred stock, par value $0.01 per share, 5,000,000 shares authorized | - | - | - | - | ||||||||||||
Common stock, par value $0.01 per share, 80,000,000 shares authorized: 41,657,688 shares issued and outstanding at September 30, 2022; 41,142,876 shares issued and outstanding at December 31, 2021 | 453 | 452 | ||||||||||||||
Common stock, par value $0.01 per share, 80,000,000 shares authorized: 42,190,043 shares issued and outstanding at March 31, 2023; 42,081,707 shares issued and outstanding at December 31, 2022 | 455 | 454 | ||||||||||||||
Additional paid-in-capital | 228,229 | 225,650 | 230,108 | 229,008 | ||||||||||||
Accumulated deficit | (140,524 | ) | (132,674 | ) | (141,568 | ) | (142,190 | ) | ||||||||
Accumulated other comprehensive loss | (16,179 | ) | (10,027 | ) | (14,655 | ) | (15,052 | ) | ||||||||
Total stockholders' equity | 71,979 | 83,401 | 74,340 | 72,220 | ||||||||||||
Total liabilities and stockholders' equity | $ | 147,013 | $ | 162,344 | $ | 145,578 | $ | 145,360 | ||||||||
See accompanying notes to condensed consolidated financial statements.
HARVARD BIOSCIENCE, INC. |
(Unaudited, in thousands, except per share data) |
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Revenues | $ | 26,922 | $ | 29,663 | $ | 84,908 | $ | 85,849 | $ | 29,975 | $ | 28,778 | ||||||||||||
Cost of revenues | 14,750 | 13,355 | 39,922 | 37,757 | 11,629 | 12,601 | ||||||||||||||||||
Gross profit | 12,172 | 16,308 | 44,986 | 48,092 | 18,346 | 16,177 | ||||||||||||||||||
Sales and marketing expenses | 5,819 | 6,183 | 19,093 | 17,299 | 5,978 | 6,687 | ||||||||||||||||||
General and administrative expenses | 6,324 | 5,458 | 18,630 | 18,190 | 6,334 | 6,325 | ||||||||||||||||||
Research and development expenses | 2,763 | 2,660 | 9,480 | 7,848 | 2,897 | 3,220 | ||||||||||||||||||
Amortization of intangible assets | 1,572 | 1,459 | 4,492 | 4,388 | 1,388 | 1,466 | ||||||||||||||||||
Settlement of litigation, net - Note 13 | (544 | ) | - | (233 | ) | - | ||||||||||||||||||
Settlement of litigation, net - Note 14 | - | 5,191 | ||||||||||||||||||||||
Total operating expenses | 15,934 | 15,760 | 51,462 | 47,725 | 16,597 | 22,889 | ||||||||||||||||||
Operating (loss) income | (3,762 | ) | 548 | (6,476 | ) | 367 | ||||||||||||||||||
Operating income (loss) | 1,749 | (6,712 | ) | |||||||||||||||||||||
Other expense: | ||||||||||||||||||||||||
Interest expense | (749 | ) | (373 | ) | (1,648 | ) | (1,161 | ) | (974 | ) | (384 | ) | ||||||||||||
Other expense, net | (179 | ) | (130 | ) | (163 | ) | (477 | ) | ||||||||||||||||
Other income, net | 432 | 78 | ||||||||||||||||||||||
Total other expense | (928 | ) | (503 | ) | (1,811 | ) | (1,638 | ) | (542 | ) | (306 | ) | ||||||||||||
(Loss) income before income taxes | (4,690 | ) | 45 | (8,287 | ) | (1,271 | ) | |||||||||||||||||
Income tax (benefit) expense | (1,285 | ) | 215 | (437 | ) | (22 | ) | |||||||||||||||||
Net loss | $ | (3,405 | ) | (170 | ) | $ | (7,850 | ) | $ | (1,249 | ) | |||||||||||||
Income (loss) before income taxes | 1,207 | (7,018 | ) | |||||||||||||||||||||
Income tax expense (benefit) | 585 | (138 | ) | |||||||||||||||||||||
Net income (loss) | $ | 622 | $ | (6,880 | ) | |||||||||||||||||||
Loss per share: | ||||||||||||||||||||||||
Basic and diluted loss per common share | $ | (0.08 | ) | $ | (0.00 | ) | $ | (0.19 | ) | $ | (0.03 | ) | ||||||||||||
Income (loss) per share: | ||||||||||||||||||||||||
Basic income (loss) per share | $ | 0.01 | $ | (0.17 | ) | |||||||||||||||||||
Diluted income (loss) per share | $ | 0.01 | $ | (0.17 | ) | |||||||||||||||||||
Weighted-average common shares: | ||||||||||||||||||||||||
Basic and diluted | 41,637 | 40,754 | 41,353 | 40,202 | ||||||||||||||||||||
Basic | 42,119 | 41,219 | ||||||||||||||||||||||
Diluted | 42,783 | 41,219 | ||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
HARVARD BIOSCIENCE, INC. |
(Unaudited, in thousands) |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net loss | $ | (3,405 | ) | $ | (170 | ) | $ | (7,850 | ) | $ | (1,249 | ) | ||||
Other comprehensive loss: | ||||||||||||||||
Foreign currency translation adjustments | (2,936 | ) | (1,135 | ) | (6,152 | ) | (1,937 | ) | ||||||||
Comprehensive loss | $ | (6,341 | ) | $ | (1,305 | ) | $ | (14,002 | ) | $ | (3,186 | ) | ||||
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Net income (loss) | $ | 622 | $ | (6,880 | ) | |||
Other comprehensive income (loss): | ||||||||
Foreign currency translation adjustments | 837 | (699 | ) | |||||
Derivatives qualifying as hedges, net of tax | (440 | ) | - | |||||
Other comprehensive income (loss) | 397 | (699 | ) | |||||
Comprehensive income (loss) | $ | 1,019 | $ | (7,579 | ) | |||
See accompanying notes to condensed consolidated financial statements.
HARVARD BIOSCIENCE, INC. |
(Unaudited, in thousands) |
Accumulated | ||||||||||||||||||||||||||||
Three Months Ended | Number | Additional | Other | Total | ||||||||||||||||||||||||
September 30, 2022 | of Shares | Common | Paid-in | Accumulated | Comprehensive | Treasury | Stockholders’ | |||||||||||||||||||||
Issued | Stock | Capital | Deficit | Loss | Stock | Equity | ||||||||||||||||||||||
Balance at June 30, 2022 | 41,500 | $ | 453 | $ | 227,413 | $ | (137,119 | ) | $ | (13,243 | ) | $ | - | $ | 77,504 | |||||||||||||
Stock option exercises | 24 | - | 64 | - | - | - | 64 | |||||||||||||||||||||
Vesting of restricted stock units | 233 | - | - | - | - | - | - | |||||||||||||||||||||
Shares withheld for taxes | (100 | ) | - | (387 | ) | - | - | - | (387 | ) | ||||||||||||||||||
Stock-based compensation expense | - | - | 1,139 | - | - | - | 1,139 | |||||||||||||||||||||
Net income | - | - | - | (3,405 | ) | - | - | (3,405 | ) | |||||||||||||||||||
Other comprehensive loss | - | - | - | - | (2,936 | ) | - | (2,936 | ) | |||||||||||||||||||
Balance at September 30, 2022 | 41,657 | $ | 453 | $ | 228,229 | $ | (140,524 | ) | $ | (16,179 | ) | $ | - | $ | 71,979 | |||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Three Months Ended | Number | Additional | Other | Total | ||||||||||||||||||||||||
September 30, 2021 | of Shares | Common | Paid-in | Accumulated | Comprehensive | Treasury | Stockholders’ | |||||||||||||||||||||
Issued | Stock | Capital | Deficit | Loss | Stock | Equity | ||||||||||||||||||||||
Balance at June 30, 2021 | 40,486 | $ | 451 | $ | 225,583 | $ | (133,465 | ) | $ | (13,868 | ) | $ | - | $ | 78,701 | |||||||||||||
Stock option exercises | 38 | - | 150 | - | - | - | 150 | |||||||||||||||||||||
Vesting of restricted stock units | 493 | - | - | - | - | - | - | |||||||||||||||||||||
Shares withheld for taxes | (208 | ) | - | (1,663 | ) | - | - | - | (1,663 | ) | ||||||||||||||||||
Stock-based compensation expense | - | - | 1,004 | - | - | - | 1,004 | |||||||||||||||||||||
Net loss | - | - | - | (170 | ) | - | - | (170 | ) | |||||||||||||||||||
Other comprehensive loss | - | - | - | - | (1,135 | ) | - | (1,135 | ) | |||||||||||||||||||
Balance at September 30, 2021 | 40,809 | $ | 451 | $ | 225,074 | $ | (133,635 | ) | $ | (15,003 | ) | $ | - | $ | 76,887 | |||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Nine Months Ended | Number | Additional | Other | Total | ||||||||||||||||||||||||
September 30, 2022 | of Shares | Common | Paid-in | Accumulated | Comprehensive | Treasury | Stockholders’ | |||||||||||||||||||||
Issued | Stock | Capital | Deficit | Loss | Stock | Equity | ||||||||||||||||||||||
Balance at December 31, 2021 | 41,143 | $ | 452 | $ | 225,650 | $ | (132,674 | ) | $ | (10,027 | ) | $ | - | $ | 83,401 | |||||||||||||
Stock option exercises | 40 | 1 | 106 | - | - | - | 107 | |||||||||||||||||||||
Stock purchase plan | 78 | - | 239 | - | - | - | 239 | |||||||||||||||||||||
Vesting of restricted stock units | 628 | - | - | - | - | - | - | |||||||||||||||||||||
Shares withheld for taxes | (232 | ) | - | (1,167 | ) | - | - | - | (1,167 | ) | ||||||||||||||||||
Stock-based compensation expense | - | - | 3,401 | - | - | - | 3,401 | |||||||||||||||||||||
Net loss | - | - | - | (7,850 | ) | - | - | (7,850 | ) | |||||||||||||||||||
Other comprehensive loss | - | - | - | - | (6,152 | ) | - | (6,152 | ) | |||||||||||||||||||
Balance at September 30, 2022 | 41,657 | $ | 453 | $ | 228,229 | $ | (140,524 | ) | $ | (16,179 | ) | $ | - | $ | 71,979 | |||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended | Number | Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 | of Shares | Common | Paid-in | Accumulated | Comprehensive | Treasury | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||
Issued | Stock | Capital | Deficit | Loss | Stock | Equity | Number | Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | 47,153 | $ | 444 | $ | 232,357 | $ | (132,386 | ) | $ | (13,066 | ) | $ | (10,668 | ) | $ | 76,681 | ||||||||||||||||||||||||||||||||||||
Retirement of treasury stock | (7,746 | ) | - | (10,668 | ) | - | - | $ | 10,668 | - | ||||||||||||||||||||||||||||||||||||||||||
of Shares | Common | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||
Issued | Stock | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | 42,082 | $ | 454 | $ | 229,008 | $ | (142,190 | ) | $ | (15,052 | ) | $ | 72,220 | |||||||||||||||||||||||||||||||||||||||
Stock option exercises | 535 | 7 | 2,700 | - | - | - | 2,707 | 39 | 1 | 103 | - | - | 104 | |||||||||||||||||||||||||||||||||||||||
Stock purchase plan | 56 | - | 202 | - | - | - | 202 | |||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units | 125 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Shares withheld for taxes | (56 | ) | - | (156 | ) | - | - | (156 | ) | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | - | - | 1,153 | - | - | 1,153 | ||||||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | 622 | - | 622 | ||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 397 | 397 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2023 | 42,190 | $ | 455 | $ | 230,108 | $ | (141,568 | ) | $ | (14,655 | ) | $ | 74,340 | |||||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Number | Additional | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
of Shares | Common | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||
Issued | Stock | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | 41,143 | $ | 452 | $ | 225,650 | $ | (132,674 | ) | $ | (10,027 | ) | $ | 83,401 | |||||||||||||||||||||||||||||||||||||||
Stock option exercises | 11 | - | 31 | - | - | 31 | ||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units | 1,196 | - | - | - | - | - | - | 151 | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
Shares withheld for taxes | (385 | ) | - | (2,653 | ) | - | - | - | (2,653 | ) | (64 | ) | - | (501 | ) | - | - | (501 | ) | |||||||||||||||||||||||||||||||||
Stock-based compensation expense | - | - | 3,136 | - | - | - | 3,136 | - | - | 1,023 | - | - | 1,023 | |||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (1,249 | ) | - | - | (1,249 | ) | - | - | - | (6,880 | ) | - | (6,880 | ) | |||||||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (1,937 | ) | - | (1,937 | ) | - | - | - | - | (699 | ) | (699 | ) | |||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | 40,809 | $ | 451 | $ | 225,074 | $ | (133,635 | ) | $ | (15,003 | ) | $ | - | $ | 76,887 | |||||||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | 41,241 | $ | 452 | $ | 226,203 | $ | (139,554 | ) | $ | (10,726 | ) | $ | 76,375 | |||||||||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
HARVARD BIOSCIENCE, INC. |
(Unaudited, in thousands) |
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (7,850 | ) | $ | (1,249 | ) | ||||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
Net income (loss) | $ | 622 | $ | (6,880 | ) | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation | 1,122 | 1,311 | 333 | 382 | ||||||||||||
Amortization of intangible assets | 4,492 | 4,388 | 1,388 | 1,466 | ||||||||||||
Amortization of deferred financing costs | 210 | 210 | 70 | 70 | ||||||||||||
Stock-based compensation expense | 3,401 | 3,136 | 1,153 | 1,023 | ||||||||||||
Deferred income taxes and other | (160 | ) | (498 | ) | (55 | ) | (123 | ) | ||||||||
Investment in Convertible Preferred Stock - Note 13 | (3,900 | ) | - | |||||||||||||
Gain on sale of product line | (403 | ) | - | |||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 6,060 | (727 | ) | (923 | ) | 1,506 | ||||||||||
Inventories | (329 | ) | (4,048 | ) | (292 | ) | (1,308 | ) | ||||||||
Other assets | (811 | ) | (2,088 | ) | (308 | ) | (466 | ) | ||||||||
Accounts payable and accrued expenses | (2,379 | ) | 1,901 | (150 | ) | 2,729 | ||||||||||
Deferred revenue | (551 | ) | (142 | ) | 741 | (300 | ) | |||||||||
Other liabilities | (832 | ) | (1,049 | ) | (364 | ) | (85 | ) | ||||||||
Net cash (used in) provided by operating activities | (1,527 | ) | 1,145 | |||||||||||||
Net cash provided by (used in) operating activities | 1,812 | (1,986 | ) | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Additions to property, plant and equipment | (1,355 | ) | (837 | ) | (224 | ) | (471 | ) | ||||||||
Additions to intangible assets | - | (150 | ) | |||||||||||||
Net cash used in investing activities | (1,355 | ) | (987 | ) | ||||||||||||
Proceeds from sale of product line | 512 | - | ||||||||||||||
Net cash provided by (used in) investing activities | 288 | (471 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Borrowing on bank line of credit | 7,800 | 2,500 | 1,500 | 1,500 | ||||||||||||
Repayment on bank line of credit | (4,650 | ) | (4,000 | ) | (2,500 | ) | - | |||||||||
Repayment of term debt | (2,436 | ) | (1,500 | ) | (1,841 | ) | (936 | ) | ||||||||
Debt issuance costs | - | (102 | ) | |||||||||||||
Proceeds from exercise of stock options and employee stock purchase plan | 346 | 2,909 | 104 | 31 | ||||||||||||
Taxes paid related to net share settlement of equity awards | (1,167 | ) | (2,653 | ) | (156 | ) | (501 | ) | ||||||||
Net cash used in financing activities | (107 | ) | (2,846 | ) | ||||||||||||
Net cash (used in) provided by financing activities | (2,893 | ) | 94 | |||||||||||||
Effect of exchange rate changes on cash | 312 | (81 | ) | 74 | (25 | ) | ||||||||||
Decrease in cash and cash equivalents | (2,677 | ) | (2,769 | ) | (719 | ) | (2,388 | ) | ||||||||
Cash and cash equivalents at beginning of period | 7,821 | 8,317 | 4,508 | 7,821 | ||||||||||||
Cash and cash equivalents at end of period | $ | 5,144 | $ | 5,548 | $ | 3,789 | $ | 5,433 | ||||||||
Supplemental disclosures of cash flow information: | Supplemental disclosures of cash flow information: | Supplemental disclosures of cash flow information: | ||||||||||||||
Cash paid for interest | $ | 1,529 | $ | 836 | $ | 1,172 | $ | 383 | ||||||||
Cash paid for income taxes, net of refunds | $ | 493 | $ | 506 | $ | (134 | ) | $ | 107 | |||||||
See accompanying notes to condensed consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. | Basis of Presentation and Summary of Significant Accounting Policies, and Risks and Uncertainties |
Basis of Presentation and Summary of Significant Accounting Policies
The unaudited consolidated financial statements of Harvard Bioscience, Inc. and its wholly-owned subsidiaries (collectively, the “Company”) as of September 30, 2022March 31, 2023 and for the three and ninemonths ended September 30, 2022March 31, 2023 and 2021,2022, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2021,2022, consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022.
In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present a fair statement of financial position as of September 30, 2022,March 31, 2023, results of operations and comprehensive lossincome (loss) and cash flows for the three and ninemonths ended September 30, 2022March 31, 2023 and 2021,2022, as applicable, have been made. The results of operations for the three and ninemonths ended September 30, 2022,March 31, 2023, are not necessarily indicative of the operating results for the full fiscal year or any future periods.
The accounting policies underlying the accompanying unaudited consolidated financial statements are set forth in Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022. There have been no material changes in the Company’s significant accounting policies during the three and ninemonths ended September 30, 2022.March 31, 2023.
Risks and Uncertainties
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 continuously evolving. Many countries continue to issue COVID-19 related policies in an attempt to control the pandemic. In particular, during the beginning of 2022, China implemented area-wide shutdowns in order to control the spread of COVID-19, which have continued for different parts of China throughout 2022.
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. Accordingly, these conditions in addition to the overall impact on the global economy have negatively impacted results of operations and cash flows.
Additionally, during 2022 the global economy has recently experienced high levels of inflation,increasing economic uncertainty, including inflationary pressure, rising interest rates, and significant fluctuations in currency values, and increasingexchange rates. The COVID-19 pandemic has also caused significant economic uncertainty, particularlydisruption, including shutdowns that affected various regions in Europe. The Company’s results of operationsChina throughout 2022. These conditions 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 the Company’s debt may also have a negative impact on the Company’s results.
Ifpast business, interruptions resulting from COVID-19 or 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 flowsflow.
The Company believes that these global economic uncertainties and supply chain trends will continue through 2023. The COVID-19 pandemic continues to evolve, and the future impact of the pandemic is difficult to predict. If these factors are prolonged or are more severe than anticipated, the Company’s business, results of operations, and cash flow would likely be negativelymaterially impacted.
2. | Recently Issued Accounting Pronouncements |
Accounting Pronouncements to be Adopted
In November 2021,January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance (“ASU 2021-10”), which requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. ASU 2021-10 impacts footnote disclosures and will be effective for the Company’s annual financial statements for the year ended December 31, 2022. The Company is currently evaluating the potential impact of adopting ASU 2021-10 will have on its consolidated financial statements.
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 will be effective for the Company for fiscal years beginning after December 15, 2022. The Company is currently evaluatingadopted ASU 2016-13 effective January 1, 2023 with no impact to the potential impact that adoptingconsolidated financial statements. The Company will perform future goodwill impairment test according to ASU 2017-0404. will have 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 will be effective for the Company for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company believes that the adoption ofadopted ASU 2016-13 willeffective notJanuary 1, 2023 have a significantwhich resulted in an immaterial impact on itsto the consolidated financial statements.
3. | Goodwill and Intangible Assets |
Goodwill
The change in the carrying amount of goodwill for the ninethree months ended September 30, 2022,March 31, 2023 wereis as follows:
(in thousands) | ||||
Carrying amount at December 31, 2021 | $ | 57,689 | ||
Effect of change in currency translation | (2,838 | ) | ||
Carrying amount at September 30, 2022 | $ | 54,851 |
Intangible Assets
(in thousands) | ||||
Carrying amount at December 31, 2022 | $ | 56,260 | ||
Effect of change in currency translation | 358 | |||
Carrying amount at March 31, 2023 | $ | 56,618 |
Identifiable intangible assets at September 30, 2022March 31, 2023 and December 31, 20212022 consist of the following:
September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||
(in thousands) | Average | Accumulated | Accumulated | |||||||||||||||||||||||||
Amortizable intangible assets: | Life* | Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||||
Distribution agreements/customer relationships | 7.3 | $ | 16,716 | $ | (9,034 | ) | $ | 7,682 | $ | 17,689 | $ | (8,675 | ) | $ | 9,014 | |||||||||||||
Existing technology | 3.5 | 37,744 | (25,748 | ) | 11,996 | 38,707 | (23,962 | ) | 14,745 | |||||||||||||||||||
Trade names and patents | 3.8 | 8,162 | (5,583 | ) | 2,579 | 8,496 | (5,108 | ) | 3,388 | |||||||||||||||||||
Total amortizable intangible assets | $ | 62,622 | $ | (40,365 | ) | $ | 22,257 | $ | 64,892 | $ | (37,745 | ) | $ | 27,147 | ||||||||||||||
Indefinite-lived intangible assets: | 207 | 238 | ||||||||||||||||||||||||||
Total intangible assets | $ | 22,464 | $ | 27,385 | ||||||||||||||||||||||||
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March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||
(in thousands) | Average | Accumulated | Accumulated | |||||||||||||||||||||||||
Amortizable intangible assets: | Life* | Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||||
Distribution agreements/customer relationships | 7.0 | $ | 16,226 | $ | (9,086 | ) | $ | 7,140 | $ | 16,124 | $ | (8,727 | ) | $ | 7,397 | |||||||||||||
Existing technology | 3.0 | 37,365 | (27,196 | ) | 10,169 | 37,549 | (26,482 | ) | 11,067 | |||||||||||||||||||
Trade names and patents | 3.5 | 7,558 | (5,428 | ) | 2,130 | 7,523 | (5,197 | ) | 2,326 | |||||||||||||||||||
Total amortizable intangible assets | $ | 61,149 | $ | (41,710 | ) | $ | 19,439 | $ | 61,196 | $ | (40,406 | ) | $ | 20,790 | ||||||||||||||
Indefinite-lived intangible assets: | 202 | 224 | ||||||||||||||||||||||||||
Total intangible assets | $ | 19,641 | $ | 21,014 | ||||||||||||||||||||||||
Intangible asset amortization expense was $1.6$1.4 million and $1.5 million for the three months ended September 30, 2022March 31, 2023 and 2021, respectively, and $4.5 million and $4.4 million for the nine months ended September 30, 2022,and 2021, respectively. Estimated amortization expense of existing amortizable intangible assets for each of the five succeeding years and thereafter as of September 30, 2022,March 31, 2023, is as follows:
(in thousands) | ||||||||
2022 (remainder of year) | $ | 1,564 | ||||||
2023 | 5,486 | |||||||
2023 (remainder of the year) | $ | 4,169 | ||||||
2024 | 5,194 | 5,260 | ||||||
2025 | 4,009 | 4,023 | ||||||
2026 | 2,348 | 2,362 | ||||||
2027 | 1,265 | |||||||
2028 | 1,018 | |||||||
Thereafter | 3,656 | 1,342 | ||||||
Total | $ | 22,257 | $ | 19,439 | ||||
4. | Balance Sheet Information |
The following tables provide details of selected balance sheet items as of the periods indicated:
Inventories: | September 30, | December 31, | ||||||
(in thousands) | 2022 | 2021 | ||||||
Finished goods | $ | 5,340 | $ | 5,646 | ||||
Work in process | 3,846 | 3,410 | ||||||
Raw materials | 16,930 | 18,531 | ||||||
Total | $ | 26,116 | $ | 27,587 | ||||
Other Current Liabilities: | September 30, | December 31, | ||||||
(in thousands) | 2022 | 2021 | ||||||
Compensation | $ | 3,091 | $ | 6,048 | ||||
Professional fees | 514 | 480 | ||||||
Warranty costs | 255 | 240 | ||||||
Customer related costs | 2,184 | 2,265 | ||||||
Accrued income taxes | - | 224 | ||||||
Other | 956 | 1,505 | ||||||
Total | $ | 7,000 | $ | 10,762 | ||||
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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 restructuring-type activities from time to time to transform its business. A portion of these transformation activities are considered restructuring costs under ASC 420 – Exit or Disposal Cost Obligations and are discussed below.
During 2019, the Company initiated a restructuring program to improve operational efficiency and reduce costs which entailed consolidating and downsizing several sites and headcount reductions in Europe and North America. This program was completed in 2021. Restructuring costs under this program were $0.1 million and $1.3 million for the three and nine months ended September 30, 2021, respectively. Substantially all of these costs have been included as a component of general and administrative expenses.
Inventories: | March 31, | December 31, | ||||||
(in thousands) | 2023 | 2022 | ||||||
Finished goods | $ | 5,144 | $ | 5,223 | ||||
Work in process | 3,660 | 3,776 | ||||||
Raw materials | 18,057 | 17,440 | ||||||
Total | $ | 26,861 | $ | 26,439 | ||||
During the three months ended September 30, 2022, the Company completed a review of its product portfolio in which the Company identified certain non-strategic products for discontinuation. In the three months ended September 30, 2022, we incurred charges of $1.3 million, included in cost of revenues, in connection with excess and obsolete inventory, and $0.6 million in severance expense included in general and administrative expense, in connection with headcount reductions in Europe and North America.
The following table summarizes the activity for accrued restructuring liabilities for the nine months ended September 30, 2022:
Cost of | ||||||||||||||||
(in thousands) | Revenues | Severance | Other | Total | ||||||||||||
Balance at December 31, 2021 | $ | - | $ | - | $ | - | $ | - | ||||||||
Restructuring and other exit costs | 1,320 | 561 | 28 | 1,909 | ||||||||||||
Non-cash charges | (1,320 | ) | - | - | (1,320 | ) | ||||||||||
Cash payments | - | (82 | ) | (28 | ) | (110 | ) | |||||||||
Balance at September 30, 2022 | $ | - | $ | 479 | $ | - | $ | 479 | ||||||||
Other Current Liabilities: | March 31, | December 31, | ||||||
(in thousands) | 2023 | 2022 | ||||||
Compensation | $ | 3,154 | $ | 3,476 | ||||
Professional fees | 589 | 392 | ||||||
Warranty costs | 279 | 268 | ||||||
Customer credits | 2,204 | 2,368 | ||||||
Accrued income taxes | 700 | - | ||||||
Other | 1,092 | 982 | ||||||
Total | $ | 8,018 | $ | 7,486 | ||||
| Related Party Transactions |
In connection with the 2014 acquisitions of Multi Channel Systems MCS GmbH (“MCS”), the Company entered into a facility lease agreement with the former principal owner of MCS who became an employee of the Company at the time of the acquisition and subsequently retired in 2021. The MCS agreement expires on December 31, 2024. Pursuant to this lease agreement, the Company made rent payments of approximately $0.1$0.1 million for each of the three months ended September 30, 2022March 31, 2023 and 2021, and $0.2 million for each of the nine months ended September 30, 2022 and 2021.2022.
| Leases |
The Company has noncancelable operating leases for offices, manufacturing facilities, warehouse space, automobiles and equipment expiring at various dates through 2030.
The components of lease expense for the three and ninemonths ended September 30, 2022March 31, 2023 and 2021,2022, are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | ||||||||||||||||||
Operating lease cost | $ | 486 | $ | 521 | $ | 1,483 | $ | 1,544 | $ | 543 | $ | 504 | ||||||||||||
Short-term lease cost | 58 | 49 | 180 | 150 | 67 | 64 | ||||||||||||||||||
Sublease income | (25 | ) | (25 | ) | (76 | ) | (76 | ) | (25 | ) | (25 | ) | ||||||||||||
Total lease cost | $ | 519 | $ | 545 | $ | 1,587 | $ | 1,618 | $ | 585 | $ | 543 | ||||||||||||
Supplemental cash flow information related to the Company's operating leases was as follows:
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
(in thousands) | 2022 | 2021 | 2023 | 2022 | ||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | $ | 1,759 | $ | 1,791 | $ | 653 | $ | 594 | ||||||||
Right-of-use assets obtained in exchange for lease obligations: | $ | 248 | $ | 351 | $ | - | $ | 39 | ||||||||
Supplemental balance sheet information related to the Company’s operating leases are as follows:
September 30, | December 31, | |||||||
(in thousands) | 2022 | 2021 | ||||||
Operating lease right-of-use assets | $ | 6,019 | $ | 6,897 | ||||
Current portion, operating lease liabilities | $ | 2,121 | $ | 2,142 | ||||
Operating lease liabilities, long-term | 5,539 | 6,488 | ||||||
Total operating lease liabilities | $ | 7,660 | $ | 8,630 | ||||
Weighted average remaining lease term (years) | 6.4 | 6.7 | ||||||
Weighted average discount rate | 9.4 | % | 9.3 | % | ||||
Future minimum lease payments for operating leases subsequent to September 30, 2022, are as follows:
Year Ending December 31, | ||||
(in thousands) | ||||
2022 (remainder of year) | $ | 531 | ||
2023 | 2,101 | |||
2024 | 1,755 | |||
2025 | 1,052 | |||
2026 | 1,016 | |||
Thereafter | 3,970 | |||
Total lease payments | 10,425 | |||
Less imputed interest | (2,765 | ) | ||
Total operating lease liabilities | $ | 7,660 |
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Stock-Based Payment Awards
Stock-based awards consist of stock options, time-based restricted stock units (“RSUs”), performance-based RSUs and shares issued under the Company’s employee stock purchase plan. Activity under the Company’s equity incentive plans for the nine months ended September 30, 2022 was as follows:
Weighted | ||||||||||||||||||||||||
Stock | Average | Time-Based | Performance- | |||||||||||||||||||||
Options | Exercise | RSUs | Grant Date | Based RSUs | Grant Date | |||||||||||||||||||
Outstanding | Price | Outstanding | Fair Value | Outstanding | Fair Value | |||||||||||||||||||
Balance at December 31, 2021 | 1,404,816 | $ | 3.10 | 1,141,164 | $ | 3.57 | 860,155 | $ | 3.13 | |||||||||||||||
Granted | - | - | 807,345 | 4.91 | 283,641 | 5.38 | ||||||||||||||||||
Exercised | (40,267 | ) | 2.64 | - | - | - | - | |||||||||||||||||
Vested (RSUs) | - | - | (232,157 | ) | 3.77 | (396,279 | ) | 2.09 | ||||||||||||||||
Cancelled/Forfeited | (76,658 | ) | 2.81 | (145,580 | ) | 4.64 | (20,284 | ) | 3.93 | |||||||||||||||
Balance at September 30, 2022 | 1,287,891 | $ | 3.13 | 1,570,772 | $ | 4.13 | 727,233 | $ | 4.55 | |||||||||||||||
Stock-based compensation expense for the three and nine months ended September 30, 2022 and 2021 was allocated as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Cost of revenues | $ | - | $ | 32 | $ | 88 | $ | 83 | ||||||||
Sales and marketing expenses | 147 | 149 | 493 | 373 | ||||||||||||
General and administrative expenses | 919 | 790 | 2,633 | 2,593 | ||||||||||||
Research and development expenses | 73 | 33 | 187 | 87 | ||||||||||||
Total stock-based compensation expenses | $ | 1,139 | $ | 1,004 | $ | 3,401 | $ | 3,136 | ||||||||
As of September 30, 2022, the total compensation costs related to unvested awards not yet recognized is $6.6 million and the weighted average period over which it is expected to be recognized is approximately 1.7 years. The Company did not capitalize any stock-based compensation.
The weighted average estimated fair value of the performance-based RSUs that were granted during the nine months ended September 30, 2022 was $5.38 per unit. The following assumptions were used to estimate the fair value of the performance-based RSUs granted during the nine months ended September 30, 2022 using a Monte-Carlo valuation simulation:
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March 31, | December 31, | |||||||
(in thousands) | 2023 | 2022 | ||||||
Operating lease right-of-use assets | $ | 5,505 | $ | 5,816 | ||||
Current portion, operating lease liabilities | $ | 2,130 | $ | 2,135 | ||||
Operating lease liabilities, long-term | 4,938 | 5,282 | ||||||
Total operating lease liabilities | $ | 7,068 | $ | 7,417 | ||||
Weighted average remaining lease term (years) | 6.1 | 6.2 | ||||||
Weighted average discount rate | 9.4 | % | 9.4 | % | ||||
Earnings (Loss) Per ShareFuture minimum lease payments for operating leases, with initial terms in excess of one year at March 31, 2023, are as follows:
Basic earnings (loss) per share (EPS) is calculated by dividing net income (loss) by the number of weighted average shares of common stock outstanding during the period. The calculation of diluted earnings per share assumes conversion of stock options, time-based RSUs, and performance-based RSUs into common stock using the treasury method. The weighted average number of shares used to compute basic and diluted EPS consists of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Net loss available to common stockholders | $ | (3,405 | ) | $ | (170 | ) | $ | (7,850 | ) | $ | (1,249 | ) | ||||
Weighted average shares outstanding - basic | 41,637 | 40,754 | 41,353 | 40,202 | ||||||||||||
Dilutive effect of equity awards | - | - | - | - | ||||||||||||
Weighted average shares outstanding - diluted | 41,637 | 40,754 | 41,353 | 40,202 | ||||||||||||
Basic and diluted loss per share | $ | (0.08 | ) | $ | (0.00 | ) | $ | (0.19 | ) | $ | (0.03 | ) | ||||
Shares excluded from diluted loss per share due to their anti-dilutive effect | 3,594 | 3,908 | 3,676 | 4,438 | ||||||||||||
Year Ending December 31, | ||||
(in thousands) | ||||
2023 (remainder of the year) | $ | 1,605 | ||
2024 | 1,803 | |||
2025 | 1,065 | |||
2026 | 1,022 | |||
2027 | 1,035 | |||
Thereafter | 2,965 | |||
Total lease payments | 9,495 | |||
Less imputed interest | (2,427 | ) | ||
Total operating lease liabilities | $ | 7,068 |
| Long-Term Debt |
As of September 30, 2022March 31, 2023 and December 31, 2021,2022, the Company’s borrowings were comprised of:as follows:
September 30, | December 31, | March 31, | December 31, | |||||||||||||
(in thousands) | 2022 | 2021 | 2023 | 2022 | ||||||||||||
Long-term debt: | ||||||||||||||||
Term loan | $ | 35,564 | $ | 38,000 | $ | 32,973 | $ | 34,814 | ||||||||
Revolving line | 14,600 | 11,450 | 11,850 | 12,850 | ||||||||||||
Less: unamortized deferred financing costs | (910 | ) | (1,120 | ) | (770 | ) | (840 | ) | ||||||||
Total debt | 49,254 | 48,330 | 44,053 | 46,824 | ||||||||||||
Less: current installments | (3,000 | ) | (3,515 | ) | ||||||||||||
Less: current portion of long-term debt | (3,250 | ) | (4,091 | ) | ||||||||||||
Current unamortized deferred financing costs | 280 | 280 | 280 | 280 | ||||||||||||
Long-term debt | $ | 46,534 | $ | 45,095 | $ | 41,083 | $ | 43,013 | ||||||||
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”). All commitments and obligations under the Credit Agreement previously held by Silicon Valley Bank have now been assumed by Silicon Valley Bridge Bank, N. A. 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 $10.0 million swingline loan sub facility) (collectively, the “Credit Facility”). The Company’s obligations under the Credit Agreement are guaranteed by certain of the Company’s direct, domestic wholly-owned subsidiaries; none of the Company’s direct or indirect foreign subsidiaries has guaranteed the Credit Facility. The Company’s obligations under the Credit Agreement are secured by substantially all of the assets of Harvard Bioscience, Inc., and each guarantor (including all or a portion of the equity interests in certain of the Company’s domestic and foreign subsidiaries). The Credit Facility matures on December 22, 2025. Issuance costs of $1.4 million are amortized over the contractual term to maturity date on a straight-line basis, which approximates the effective interest method. Available and unused borrowing capacity under the revolving line of credit was $3.0$10.5 million as of September 30, 2022March 31, 2023 based on the Credit Agreement, as amended, pursuant to the firstApril 2022 Amendment and second amendments to the Credit Agreement (the “April 2022” and “November 2022 Amendments”, respectively)Amendment (both described below.below). Total revolver borrowing capacity is limited by the consolidated net leverage ratio as defined under the amended Credit Agreement.
As part of the November 2022 Amendment, the Credit Facility’s LIBOR rate option was replaced with the Secured Overnight Financing Rate (SOFR). All references in this footnote to the LIBOR rate were changed to SOFR in connection with the November 2022 Amendment. Borrowings under the amended Credit Facility will, at the option of the Company, bear interest at either (i) a rate per annum based on SOFRthe Secured Overnight Financing Rate (“SOFR”) for an interest period of one, two, three or six months, plus an applicable interest rate margin determined as provided in the Credit Agreement, as amended (a “SOFR Loan”), or (ii) an alternative base rate plus an applicable interest rate margin, each as determined as provided in the Credit Agreement (an “ABR Loan”). SOFR interest under the Credit Agreement is subject to applicable market rates and a floor of 0.50%. The alternative base rate is based on the Citizens Bank prime rate or the federal funds effective rate of the Federal Reserve Bank of New York and is subject to a floor of 1.0%. The applicable interest rate margin varies from 2.0% per annum to 3.25% per annum for SOFR Loans, and from 1.5% per annum to 3.0% per annum for ABR Loans, in each case depending on the Company’s consolidated leverage ratio and is determined in accordance with a pricing grid set forth in the Credit Agreement. Interest on SOFR Loans is payable in arrears on the last day of each applicable interest period, and interest on ABR Loans is payable in arrears at the end of each calendar quarter. There are no prepayment penalties in the event the Company elects to prepay and terminate the Credit Facility prior to its scheduled maturity date, subject to SOFR Loan breakage and redeployment costs in certain circumstances.
The effective interest rate on the Company borrowings for the three months ended September 30, 2022March 31, 2023 and 2021,2022, was 5.8%7.9 % and 3.2%3.1%, respectively, and for the nine months ended September 30, 2022 and 2021, was 4.3% and 3.3%, respectively. As of September 30, 2022, the weighted average interest rate onas of March 31, 2023, net of the effect of the Company’s borrowingsinterest rate swaps, was 6.4%8.0%. 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.
Commencing on March 31, 2021, the outstandingThe term loans amortize in quarterly installments of $0.5$0.75 million per quarter on such date and duringfor each of the next three quarters thereafter, $0.75and $1.0 million per quarter during the next eightseven 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 term loans may be permanently reduced pursuant to certain mandatory prepayment events including an annual “excess cash flow sweep” of 50% of the consolidated excess cash flow, as defined in the agreement; provided that, in any fiscal year, any voluntary prepayments of the term loans shall be credited against the Company’s “excess cash flow” prepayment obligations on a dollar-for-dollar basis for such fiscal year. As of December 31, 2022, the current portion of long-term debt included an excess cash flow sweep of $1.1 million which was paid on March 31, 2023. Amounts outstanding under the revolving credit facility can be repaid at any time but are due in full at maturity.
The Credit Agreement, as amended, in April and November, includes customary affirmative, negative, and financial covenants binding on the Company. The negative covenants limit the ability of the Company, among other things, to incur debt, incur liens, make investments, sell assets and pay dividends on its capital stock. The financial covenants include a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage ratio. The Credit Agreement, as amended, also includes customary events of default.
On April 28, 2022, the Company entered into an amendment to the Credit Agreement and Pledge and Security Agreement (the “April 2022 Amendment”), pursuant to which the Lenders and the Administrative Agent agreed,administrative agent, among other things, (i) to modifymodified the financial covenant relating to the consolidated net leverage ratio, and (ii) to consentconsented to the settlement describedBiostage Settlement (as defined below), including without limitation the receipt by the Company of convertible preferred stock in Biostage Inc. (“Biostage”) and the securities issuable upon conversion thereof, as partial payment for Biostage’s indemnification obligations in connection with the Biostage Settlement. See Note 1314- Litigation for information regarding the Biostage Settlement. In consideration for the April 2022 Amendment, the Company paid fees of $0.2 million to the Lenders and Administrative Agent.administrative agent.
On November 8, 2022, the Company entered into a subsequent amendment to the Credit Agreement (the “November 2022 Amendment,Amendment”) pursuant to which, among other things the Lenders and the Administrative Agent have agreed, among other things, to modify (i)administrative agent modified the financial covenant relating to the consolidated net leverage ratio, and (ii) 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 Amendments,Amendment, the Company paid fees of $0.2 million to the Lenders and the Administrative Agent.administrative agent.
The Company was in compliance with the covenants of the Credit Agreement, in accordance with the November 2022 Amendment,as amended, as of September 30, 2022.March 31, 2023.
8. | Derivatives |
The Company monitors interest rate risk attributable to both its outstanding and forecasted debt obligations by the use of cash flow sensitivity analysis which estimates the expected impact of changes in interest rates on the Company’s future cash. The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging.
By using derivative financial instruments to hedge exposure to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile.
Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. The Company monitors interest rate risk attributable to both its outstanding and forecasted debt obligations by the use of cash flow sensitivity analysis which estimates the expected impact of changes in interest rates on the Company’s future cash flows.
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 its variable, SOFR based debt. The swap contract has a notional amount of $31.8 million as of March 31, 2023 and matures on December 22, 2025. This swap contract effectively 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 7 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.
The following table presents the notional amount and fair value of the Company’s derivative instruments as of March 31, 2023:
(in thousands) | March 31, 2023 | ||||||||
Derivatives instruments | Balance sheet classification | Notional Amount | Fair Value (a) | ||||||
Interest rate swaps | Other long term liabilities | $ | 31,841 | $ | (440 | ) | |||
(a) See Note 9 for the fair value measurements related to these financial instruments.
The portion of the interest rate swap that was reclassified to interest expense from accumulated other comprehensive loss for the three months ended March 31, 2023 was not significant.
9. | Fair Value Measurements |
The following tables present the fair value hierarchy for those assets or liabilities measured at fair value on a recurring basis:
Fair Value as of March 31, 2023 | ||||||||||||||||
Assets (Liabilities) (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Equity securities - common stock | $ | 206 | $ | - | $ | - | $ | 206 | ||||||||
Interest rate swap agreements | $ | - | $ | (440 | ) | $ | - | $ | (440 | ) | ||||||
The Company uses the market approach technique to value its financial liabilities. The Company’s financial assets and liabilities carried at fair value include, when applicable, investments in common stock and derivative instruments used to hedge the Company’s interest rate risks. The fair value of the Company’s investment in common stock was based on the closing price per the OTCQB Marketplace at the reporting date. The fair value of the Company’s interest rate swap agreements was based on SOFR yield curves at the reporting date.
10. | Capital Stock and Stock-Based Compensation |
Stock-Based Payment Awards
Stock-based awards consist of stock options, time-based restricted stock units (“RSUs”), performance-based RSUs (“PRSUs”) and shares issued under the Company’s employee stock purchase plan (the “ESPP”). Activity under the Company’s equity incentive plans for the three months ended March 31, 2023 was as follows:
Weighted | ||||||||||||||||||||||||
Stock | Average | |||||||||||||||||||||||
Options | Exercise | RSUs | Grant Date | PRSUs | Grant Date | |||||||||||||||||||
Outstanding | Price | Outstanding | Fair Value | Outstanding | Fair Value | |||||||||||||||||||
Balance at December 31, 2022 | 1,238,776 | $ | 3.15 | 1,093,801 | $ | 3.94 | 646,235 | $ | 4.51 | |||||||||||||||
Granted | - | - | 1,177,391 | 2.51 | 558,958 | 2.61 | ||||||||||||||||||
Exercised | (39,618 | ) | 2.63 | - | - | - | - | |||||||||||||||||
Vested (RSUs) | - | - | (125,036 | ) | 1.93 | - | - | |||||||||||||||||
Cancelled/Forfeited | (29,201 | ) | 2.99 | (3,122 | ) | 5.54 | - | - | ||||||||||||||||
Balance at March 31, 2023 | 1,169,957 | $ | 3.17 | 2,143,034 | $ | 3.27 | 1,205,193 | $ | 3.63 | |||||||||||||||
Stock-based compensation expense related to stock options, RSUs, PRSUs, and the ESPP for the three months ended March 31, 2023 and 2022 was allocated as follows:
Three Months Ended March 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Cost of revenues | $ | 69 | $ | 36 | ||||
Sales and marketing expenses | 145 | 154 | ||||||
General and administrative expenses | 869 | 791 | ||||||
Research and development expenses | 70 | 42 | ||||||
Total stock-based compensation expenses | $ | 1,153 | $ | 1,023 | ||||
As of March 31, 2023, the total compensation costs related to unvested awards not yet recognized is $8.4 million and the weighted average period over which it is expected to be recognized is approximately 2.1 years. The Company did not capitalize any stock-based compensation.
The weighted average estimated fair value of PRSUs that were granted during the three months ended March 31, 2023 was $2.61 per unit. The following assumptions were used to estimate the fair value of PRSUs granted during the three months ended March 31, 2023 using a Monte-Carlo valuation simulation:
2023 | ||||
Volatility | 56.8 | % | ||
Risk-free interest rate | 4.6 | % | ||
Correlation coefficient | 41.7 | % | ||
Dividend yield | - | % | ||
Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) is calculated by dividing net income (loss) by the number of weighted average shares of common stock outstanding during the period. The calculation of diluted earnings per share assumes conversion of stock options, RSUs, and PRSUs into common stock using the treasury method. The weighted average number of shares used to compute basic and diluted EPS consists of the following:
Three Months Ended March 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Weighted average shares outstanding - basic | 42,119 | 41,219 | ||||||
Dilutive effect of equity awards | 664 | - | ||||||
Weighted average shares outstanding - diluted | 42,783 | 41,219 | ||||||
Shares excluded from diluted loss per share due to their anti-dilutive effect | 1,167 | 3,505 | ||||||
11. | Revenues |
The following tables represent a disaggregation of revenue from contracts with customers for the three and ninemonths ended September 30, 2022March 31, 2023 and 2021:2022:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | ||||||||||||||||||
Instruments, equipment, software and accessories | $ | 25,705 | $ | 28,485 | $ | 81,008 | $ | 82,304 | $ | 28,493 | $ | 27,538 | ||||||||||||
Service, maintenance and warranty contracts | 1,217 | 1,178 | 3,900 | 3,545 | 1,482 | 1,240 | ||||||||||||||||||
Total revenues | $ | 26,922 | $ | 29,663 | $ | 84,908 | $ | 85,849 | $ | 29,975 | $ | 28,778 | ||||||||||||
The following tables represent a disaggregation of revenue by geographic destination for the three months ended March 31, 2023 and nine2022:
Three Months Ended March 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
United States | $ | 12,302 | $ | 12,239 | ||||
Europe | 7,441 | 7,823 | ||||||
Hong Kong | 3,508 | 1,706 | ||||||
Rest of Asia | 5,273 | 5,027 | ||||||
Rest of the world | 1,451 | 1,983 | ||||||
Total revenues | $ | 29,975 | $ | 28,778 | ||||
Concentrations
No customer accounted for more than 10% of revenues for the three months ended September 30,March 31, 2023 and 2022. At March 31, 2023 and December 21, 2022, and 2021:no customer accounted for more than 10% of net accounts receivable.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
United States | $ | 11,511 | $ | 12,709 | $ | 38,278 | $ | 37,300 | ||||||||
Europe | 7,344 | 8,366 | 22,361 | 25,569 | ||||||||||||
Asia | 6,730 | 7,161 | 19,080 | 18,588 | ||||||||||||
Rest of the world | 1,337 | 1,427 | 5,189 | 4,392 | ||||||||||||
Total revenues | $ | 26,922 | $ | 29,663 | $ | 84,908 | $ | 85,849 | ||||||||
Deferred Revenue
The following tables provide details of deferred revenue as of the periods indicated:
September 30, | December 31, | March 31, | December 31, | |||||||||||||
(in thousands) | 2022 | 2021 | 2023 | 2022 | ||||||||||||
Service contracts | $ | 1,642 | $ | 1,976 | $ | 2,179 | $ | 1,530 | ||||||||
Customer advances | 2,000 | 2,290 | 1,942 | 1,840 | ||||||||||||
Total deferred revenue | $ | 3,642 | $ | 4,266 | $ | 4,121 | $ | 3,370 | ||||||||
During the ninethree months ended September 30, 2022March 31, 2023 and 20212022, the Company recognized revenue of $2.1$1.0 million and $1.8$0.7 million from contract liabilitiesdeferred revenue existing at December 31, 20212022 and 2020,2021, respectively.
Allowance for Doubtful AccountsExpected Credit Losses on Receivables
AllowanceThe allowance for doubtfulexpected credit losses on receivables is used to present accounts receivable, net at an amount that represents the Company’s estimate of the related transaction price recognized as revenue. The allowance represents an estimate of expected credit losses over the lifetime of the receivables, even if the loss is basedconsidered remote, and reflects expected recoveries of amounts previously written-off. The Company estimates the allowance on the Company’s assessmentbasis of specifically identified receivables that are evaluated individually for impairment and an analysis of the collectability ofremaining receivables determined by reference to past default experience. The Company considers the need to adjust historical information to reflect the extent to which current conditions and reasonable forecasts are expected to differ from the conditions that existed for the historical period considered. Losses on receivables have not historically been significant.
Management judgments are used to determine when to charge off uncollectible trade accounts receivable. The Company bases these judgments on the age of the receivable, credit quality of the customer, current economic conditions, and other factors that may affect a customer’s ability and intent to pay. Customers are generally not required to provide collateral for purchases.
Activity in the allowance for doubtful accountsexpected losses on receivables is as follows:
Nine Months Ended September 30, | ||||||||
(in thousands) | 2022 | 2021 | ||||||
Balance, beginning of period | $ | 136 | $ | 227 | ||||
Bad debt expense (credit) | 103 | (13 | ) | |||||
Charge-offs and other | (60 | ) | (76 | ) | ||||
Balance, end of period | $ | 179 | $ | 138 | ||||
Concentrations
No customer accounted for more than 10% of revenues for the three and nine months ended September 30, 2022 and 2021. At September 30, 2022 and December 21, 2021, no customer accounted for more than 10% of net accounts receivable.
Three Months Ended March 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Balance, beginning of period | $ | 191 | $ | 136 | ||||
Bad debt (credit) | (3 | ) | (6 | ) | ||||
Charge-offs and other | (21 | ) | 6 | |||||
Balance, end of period | $ | 167 | $ | 136 | ||||
| Income Tax |
The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income in each tax jurisdiction in which the Company operates and the development of tax planning strategies during the year. In addition, as a global commercial enterprise, the Company’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.
Income tax expense (benefit) expense was $(1.3)$0.6 million and $0.2$(0.1) million for the three months ended September 30, 2022March 31, 2023 and 2021, respectively, and was $(0.4) million and less than $(0.1) million for the nine months ended September 30, 2022,and 2021, respectively. The effective tax rates for the three months ended September 30, 2022March 31, 2023 and 2021,2022 were 27.4%48.5% and 477.8%2.0%, respectively. The effective tax rates for the nine months ended September 30, 2022 and 2021, were 5.3% and 1.7%, respectively.
The difference between the Company’s effective tax rates in 20222023 and 20212022 compared to the U.S. statutory tax rate of 21% is primarily due to a Global Intangible Low-Taxed Income (“GILTI”) inclusion to taxable income and changes in valuation allowances associated with the Company’s assessment of the likelihood of the recoverability of deferred tax assets. The Company currently has valuation allowances against substantially all of its net operating loss carryforwards and tax credit carryforwards.
| Commitments and Contingent Liabilities |
On April 27, 2022, the Company and Biostage Inc. (f/k/a Harvard Apparatus Regenerative Technology, Inc.) (“Biostage”) executed a settlement with the plaintiffs in the Biostage Litigation (as defined below) which resolvesresolved all claims relating to the litigation as described in Note 1314 – Litigation Settlement.
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 flows. Although unfavorable outcomes in the proceedings are possible, the Company has not accrued for loss contingencies relating to any such matters as they are not considered to be probable and reasonably estimable. If one or more of these matters are resolved in a manner adverse to the Company, the impact on the Company’s business, financial condition, results of operations and cash flows could be material.
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 March 31, 2023.
The Company is also subject to unclaimed property laws in the ordinary course of its business. State escheat laws generally require entities to report and remit abandoned and unclaimed property to the state. Failure to timely report and remit the property can result in assessments that could include interest and penalties, in addition to the payment of the escheat liability itself. The Company is currently undergoing unclaimed property audits conducted by three states. Based on the current stage of the audits, the Company has not accrued any loss contingencies related to these audits as of March 31, 2023.
| Litigation Settlement |
On April 14, 2017, representatives for the estate of an individual plaintiff filed a wrongful death complaint with the Suffolk Superior Court, in the County of Suffolk, Massachusetts, 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 allegesalleged 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 “Settlement”“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 litigationBiostage Litigation and the Biostage Settlement.
During the nine months ended September 30, 2022, the Company recorded Settlement related charges (credits) as follows:
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During the three months ended March 31, 2022, the Company accrued $5.2 million of costs related to legal fees and the Biostage Settlement. 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. |
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During the three months ended June 30, 2022 and September 30, 2022, the Company recorded credits 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 Biostage Settlement, and iii) other accrual adjustments. The Series E Preferred Stock was initially recorded at an estimated fair value of $4.0$3.9 million including dividends, and is included in the September 30, 2022 Consolidated Balance Sheet asusing a component of Other Long-Term Assets. 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 and
During the limited trading volume and liquiditythree months ended March 31, 2023, the Company converted 200 shares of Biostage’s common stock, the value of theits Series E Preferred Stock could fluctuate considerably from time to time.into 31,933 shares of Biostage common stock. The market value of this Biostage common stock was $0.2 million at March 31, 2023.
The book value of the shares of Series E Preferred Stock, inclusive of accrued dividends, as of March 31, 2023 is $4.0 million and is included in the consolidated balance sheet as a component of Other long-term assets. The Company has elected the provisions within ASC 321 Investment 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 September 30, 2022,March 31, 2023, 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.
| Product Line Disposition |
On February 17, 2023, the Company completed the disposition of its Hoefer product line for cash consideration of $0.5 million. The carrying value of assets sold was $0.1 million resulting in a gain on disposition of $0.4 million which is recorded in Other income, net in the consolidated statement of operations for the three months ended March 31, 2023. Revenue and gross profit of this disposed product line included in the condensed consolidated statement of operations for the three months ended March 31, 2023 and 2022 are not significant.
16. | Subsequent Event - Conversion of Biostage Series E Preferred Stock to Common Stock |
Credit Agreement AmendmentOn April 6, 2023, Biostage disclosed that it had completed a private placement with certain investors to purchase shares of Biostage common stock for the aggregate purchase price of approximately $6.0 million at a purchase price of $6.00 per share. As the proceeds of the private placement are in excess of $4.0 million, the transaction triggered a mandatory conversion of the Series E Preferred Stock, plus all accrued dividends, into Biostage common stock as discussed in Note 14 above.
On November 8, 2022,April 6, 2023, all of the Company’s remaining Series E Preferred Stock, plus all accrued dividends, were converted into approximately 675,000 shares of Biostage common stock at the applicable qualified offering price of $6.00 per share. Immediately after the conversion, the Company entered intoowned approximately 5% of Biostage’s total common shares outstanding. Due to Biostage’s limited operating history, their overall financial condition and the November 2022 Amendment tolimited trading volumes and liquidity of their common stock, the Credit Agreement as describedvalue of the Company’s investment in detail in Note 9 – Long-Term Debt.
Biostage’s common stock could fluctuate considerably or become worthless.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q 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”). The forward-looking statements are principally, but not exclusively, contained in “Item 2: 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, 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,” “potential,” “objectives,” “optimistic,” “strategy,” “goals,” “sees,” “new,” “guidance,” “future,” “continue,” “drive,” “growth,” “long-term,” “projects,” “develop,” “possible,” “emerging,” “opportunity,” “pursue” 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 in our Annual Report on Form 10-K for the year ended December 31, 20212022 and our other filings with the Securities and Exchange Commission.SEC. 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.”
Recent Developments
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 are largely unknown and continuously evolving. Many countries world-wide continue to issue COVID-19 related policies in an attempt to control the pandemic. In particular, during the beginning of 2022, China implemented area-wide shutdowns in order to control the spread of COVID-19, which have continued for different parts of China throughout 2022.
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. Additionally, the global economy has recently experienced increasing economic uncertainty, including inflationary pressure, rising interest rates, and significant fluctuations in exchange rates. The COVID-19 pandemic has also caused significant economic disruption, including shutdowns that affected various regions in China throughout 2022. These conditions have negatively impacted our past business, results of operations, and cash flow.
We believe that these global economic uncertainties and supply chain trends will continue through 2023. The COVID-19 pandemic continues to evolve, and the restfuture impact of 2022. These conditions, in additionthe pandemic is difficult to the overall impact on the global economy, have negatively impactedpredict. If these factors are prolonged or are more severe than anticipated, our business, results of operations, and cash flows.flow may be materially impacted.
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 may also have a negative impact on our results.
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. We will continue to actively monitor this situation and will implement actions necessary to maintain business continuity.
Selected Results of Operations
Three months ended September 30, 2022March 31, 2023 compared to three months ended September 30, 2021.March 31, 2022.
Three Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||||||||||
(dollars in thousands) | 2022 | % of revenue | 2021 | % of revenue | 2023 | % of revenue | 2022 | % of revenue | ||||||||||||||||||||||||
Revenues | $ | 26,922 | $ | 29,663 | $ | 29,975 | $ | 28,778 | ||||||||||||||||||||||||
Gross profit | 12,172 | 45.2 | % | 16,308 | 55.0 | % | 18,346 | 61.2 | % | 16,177 | 56.2 | % | ||||||||||||||||||||
Sales and marketing expenses | 5,819 | 21.6 | % | 6,183 | 20.8 | % | 5,978 | 19.9 | % | 6,687 | 23.2 | % | ||||||||||||||||||||
General and administrative expenses | 6,324 | 23.5 | % | 5,458 | 18.4 | % | 6,334 | 21.1 | % | 6,325 | 22.0 | % | ||||||||||||||||||||
Research and development expenses | 2,763 | 10.3 | % | 2,660 | 9.0 | % | 2,897 | 9.7 | % | 3,220 | 11.2 | % | ||||||||||||||||||||
Amortization of intangible assets | 1,572 | 5.8 | % | 1,459 | 4.9 | % | 1,388 | 4.6 | % | 1,466 | 5.1 | % | ||||||||||||||||||||
Settlement of litigation, net | (544 | ) | -2.0 | % | - | - | - | - | 5,191 | 18.0 | % | |||||||||||||||||||||
Interest expense | 749 | 2.8 | % | 373 | 1.3 | % | 974 | 3.2 | % | 384 | 1.3 | % | ||||||||||||||||||||
Income tax (benefit) expense | (1,285 | ) | -4.8 | % | 215 | 0.7 | % | |||||||||||||||||||||||||
Income tax expense (benefit) | 585 | 2.0 | % | (138 | ) | -0.5 | % | |||||||||||||||||||||||||
Revenue
Revenues decreased $2.7increased $1.2 million, or 9.2%4.2%, to $26.9$30.0 million for the three months ended September 30, 2022,March 31, 2023, compared to $29.7$28.8 million for the three months ended September 30, 2021.March 31, 2022. The decreaseincrease in revenuesrevenue was primarily due primarily to a decreasegrowth in salespreclinical products, which was partially offset by reduced revenue from the discontinuation of our pre-clinicalnon-strategic cellular and molecular products as well asand unfavorable currency impact.impacts.
Gross profit
Gross profit decreased $4.1increased $2.2 million, or 25.4%13.4%, to $12.2$18.3 million for the three months ended September 30, 2022,March 31, 2023 compared with $16.3$16.2 million for the three months ended September 30, 2021.March 31, 2022. Gross margin decreasedincreased to 45.2%61.2% for the three months ended September 30, 2022,March 31, 2023, compared with 55.0%56.2% for the three months ended September 30, 2021.March 31, 2022. The reductionincrease in gross margin was due primarily to the declineincrease in revenue, noted,a higher mix of preclinical products which carries a higher gross margin than our other product lines, and resulting reduction in labor and overhead absorption, as well as higher costs of labor and materials. Costs of goods sold for the current period also included inventory reserved related to the discontinuation in the second half of certain2022 of lower margin non-strategic products.
The global supply chain has experienced significant disruptions due to electronic components and labor shortages and other macroeconomic factors, leading to increased costs. We believeexpect that these supply chain trends will continue through the rest of 2022.2023.
Sales and marketing expenses
Sales and marketing expenses decreased $0.4$0.7 million, or 5.9%10.6%, to $5.8$6.0 million for the three months ended September 30, 2022,March 31, 2023, compared to $6.2$6.7 million during the same period in 2021.2022. The decrease was primarily due to lower outside service costsreduced salaries and travel expenses partially offset by increases in variable compensation as compared to the prior period.compensation.
General and administrative expenses
General and administrative expenses increased $0.9 million, or 15.9%, towere $6.3 million for each of the three months ended September 30, 2022, compared to $5.5 million during the same periodMarch 31, 2023 and 2022. This includes decreases in 2021. The increase was primarily due to higher severanceconsulting costs related to our product portfolio review and otherassociated with enterprise-level operational improvement initiatives partially offset by lowerincreases in variable compensation.
Research and development expenses
Research and development expenses increased $0.1decreased $0.3 million, or 3.9%10.0%, to $2.8$2.9 million for the three months ended September 30, 2022,March 31, 2023, compared with $2.7$3.2 million for the three months ended September 30, 2021.March 31, 2022. The increasedecrease was primarily due to higherreduced salaries and consulting costs associated with new product developmentpartially offset by increases in our preclinical product lines.variable compensation.
Amortization of intangible assets
Amortization of intangible asset expenses were $1.6$1.4 million for the three months ended September 30, 2022,March 31, 2023, compared with $1.5 million for the three months ended September 30, 2021.March 31, 2022. Amortization expense was higher due to a change indecreased as we completed the estimated remaining economic lifeamortization of certain intangible assets.
assets discontinued during 2022.
Settlement of litigation
During the three months ended September 30,March 31, 2022, we recorded a creditaccrued $5.2 million of $0.5 million as an adjustmentcosts related to legal fees in connection with the Biostage Litigation and the Biostage Settlement. Due to the reserve against thefinancial condition of Biostage, we 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 to reflect the final payment by Biostage of the legal fees associated with the Settlement.
Interest expense
Interest expense increased $0.3 million, or 100.8%, to $0.7 million for the three months ended September 30, 2022, compared with $0.4 million for the three months ended September 30, 2021. The increase was the result of higher interest rates under our Credit Agreement as well as higher average borrowing balances.
Income tax
Income tax (benefit) expense for the three months ended September 30, 2022 was $(1.3) million and was $0.2 million for the three months ended September 30, 2021. The effective tax rates for the three months ended September 30, 2022 and 2021 were 27.4% and 477.8%, respectively. The difference between our effective tax rates in 2022 and 2021 compared to the U.S. statutory tax rate of 21% is primarily due to changes in valuation allowances associated with our assessment of the likelihood of the recoverability of our deferred tax assets. We currently have valuation allowances against substantially all of our net operating loss carryforwards and tax credit carryforwards.
Nine months ended September 30, 2022 compared to nine months ended September 30, 2021.
Nine Months Ended September 30, | ||||||||||||||||
(dollars in thousands) | 2022 | % of revenue | 2021 | % of revenue | ||||||||||||
Revenues | $ | 84,908 | $ | 85,849 | ||||||||||||
Gross profit | 44,986 | 53.0 | % | 48,092 | 56.0 | % | ||||||||||
Sales and marketing expenses | 19,093 | 22.5 | % | 17,299 | 20.2 | % | ||||||||||
General and administrative expenses | 18,630 | 21.9 | % | 18,190 | 21.2 | % | ||||||||||
Research and development expenses | 9,480 | 11.2 | % | 7,848 | 9.1 | % | ||||||||||
Amortization of intangible assets | 4,492 | 5.3 | % | 4,388 | 5.1 | % | ||||||||||
Settlement of litigation, net | (233 | ) | -0.3 | % | - | - | ||||||||||
Interest expense | 1,648 | 1.9 | % | 1,161 | 1.4 | % | ||||||||||
Income tax (benefit) expense | (437 | ) | -0.5 | % | (22 | ) | 0.0 | % | ||||||||
Revenue
Revenues decreased $0.9 million, or 1.1%, to $84.9 million for the nine months ended September 30, 2022, compared to revenues of $85.8 million for the nine months ended September 30, 2021. The decrease in revenues was due primarily to a decrease in sales of our pre-clinical products, lower revenue in Europe and unfavorable currency impacts.
Gross profit
Gross profit decreased $3.1 million, or 6.5%, to $45.0 million for the nine months ended September 30, 2022, compared with $48.1 million for the nine months ended September 30, 2021 due primarily to the decrease in revenue and increases in the cost of goods noted above. Gross margin was 53% for the nine months ended September 30, 2022 and was 56% for the nine months ended September 30, 2021. The reduction in gross margin was due primarily to higher costs of labor and materials and inventory reserves related to the discontinuation of certain non-strategic products, as well as the impact of lower revenue on overhead absorption. Pricing increases positively impacted gross margin during 2022.
The global supply chain has experienced significant disruptions due to electronic components and labor shortages and other macroeconomic factors, leading to increased costs. We believe these supply chain trends will continue through the rest of 2022.
Sales and marketing expenses
Sales and marketing expenses increased $1.8 million, or 10.4%, to $19.1 million for the nine months ended September 30, 2022, compared to $17.3 million during the same period in 2021. The increase was primarily due to new marketing and sales support personnel and increases in travel and attendance at in-person trade shows offset by lower variable compensation. Travel and tradeshow costs were lower in the prior year due to COVID-19 related restrictions and efforts to mitigate the spread of COVID-19.
General and administrative expenses
General and administrative expenses increased $0.4 million, or 2.4%, to $18.6 million for the nine months ended September 30, 2022, compared to $18.2 million during the same period in 2021. The increase was primarily due to operational improvement initiative costs partially offset by lower variable compensation.
Research and development expenses
Research and development expenses increased $1.6 million, or 20.8%, to $9.4 million for the nine months ended September 30, 2022, compared with $7.8 million for the nine months ended September 30, 2021. The increase was primarily due to higher costs associated with new product development in our preclinical product lines.
Amortization of intangible assets
Amortization of intangible asset expenses were $4.5 million for the nine months ended September 30, 2022, compared to $4.4 million for the nine months ended September 30, 2021. Amortization expense was higher due to a change in the estimated remaining economic life of certain intangible assets.
Settlement of litigationBiostage.
During the nine months ended September 30, 2022, we recorded a net credit of $0.2 million related to the 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. Thewe recorded credits consistedof $4.9 million and $0.5 million, respectively consisting of adjustments to the reserve against thean 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. 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.
Interest expense
Interest expense increased $0.5$0.6 million, or 41.9%153.6%, to $1.7$1.0 million for the ninethree months ended September 30, 2022,March 31, 2023, compared to $1.2with $0.4 million for the ninethree months ended September 30, 2021.March 31, 2022. The increase was the result of both higher interest rates under our Credit Agreement as well as higher average borrowing balances.costs in a rising rate environment.
Income tax
Income tax expense (benefit) for the ninethree months ended September 30, 2022March 31, 2023 was $(0.4)$0.6 million and was less than $(0.1) million for the ninethree months ended September 30, 2021.March 31, 2022. The effective tax rates for the ninethree months ended September 30,March 31, 2023 and 2022 were 48.5% and 2021 were 5.3% and 1.7%2.0%, respectively. The difference between our effective tax rates in 20222023 and 20212022 compared to the U.S. statutory tax rate of 21% is primarily due to a Global Intangible Low-Taxed Income (“GILTI”) inclusion to taxable income and changes in valuation allowances associated with our assessment of the likelihood of the recoverability of our deferred tax assets. We currently have valuation allowances against substantially all of our net operating loss carryforwards and tax credit carryforwards.
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 and payments associated with ongoing business improvement initiatives.
As of September 30, 2022,March 31, 2023, we held cash and cash equivalents of $5.1$3.8 million, compared with $7.8$4.5 million at December 31, 2021.2022. Borrowings outstanding were $50.2$44.8 million and $49.5$47.7 million as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
On December 22, 2020, we entered into a Credit Agreement which provides for a term loan of $40.0 million and a $25.0 million senior revolving credit facility both maturing on December 22, 2025 (See Note 9 to our Condensed Consolidated Financial Statements included in “Part I, Item 1. Financial Statement” of this report).2025. As of September 30, 2022,March 31, 2023, the weighted average interest rate on our borrowings, net of the effect of the interest rate swaps, was 6.4%8.0%, and the available and unused borrowing capacity under the Credit Agreement, as amended, was $3.0$10.5 million. Total revolver borrowing capacity is limited by our consolidated net leverage ratio as defined under the Credit Agreement, as amended.
On April 28, 2022, and November 8, 2022, we entered into amendments to the Credit Agreement and Pledge and Security Agreement (see Notes 9 and 14 to our Condensed Consolidated Financial Statements included in “Part I, Item 1. Financial Statements” As of this report). The amendment we entered into on November 8, 2022 (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. As a result of the November 2022 Amendment,March 31, 2023, we are in compliance with these financialthe covenants of the Credit Agreement, as amended.
Based on our current operating plans, we expect that our available cash, cash generated from current operations and debt capacity will be sufficient to finance current operations, any costs associated with restructuring activitiesbusiness improvement initiatives and capital expenditures for at least the next 12 months. This assessment includes consideration of our best estimates of the impact of macroeconomic conditions and the COVID-19 pandemic and other macroeconomic conditions on our financial results described above. 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
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
(in thousands) | 2022 | 2021 | 2023 | 2022 | ||||||||||||
Cash (used in) provided by operating activities | $ | (1,527 | ) | $ | 1,145 | |||||||||||
Cash used in investing activities | (1,355 | ) | (987 | ) | ||||||||||||
Cash used in financing activities | (107 | ) | (2,846 | ) | ||||||||||||
Cash provided by (used in) operating activities | $ | 1,812 | $ | (1,986 | ) | |||||||||||
Cash provided by (used in) investing activities | 288 | (471 | ) | |||||||||||||
Cash (used in) provided by financing activities | (2,893 | ) | 94 | |||||||||||||
Effect of exchange rate changes on cash | 312 | (81 | ) | 74 | (25 | ) | ||||||||||
Decrease in cash and cash equivalents | $ | (2,677 | ) | $ | (2,769 | ) | $ | (719 | ) | $ | (2,388 | ) | ||||
Cash provided by (used in) provided by operating activities was $(1.5)$1.8 million and $1.1$(2.0) million for the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, respectively. Cash flow from operations for the ninethree months ended September 30, 2022March 31, 2023 was lowergreater than the comparable period in the prior year due to increasedprimarily as a result of improved operating losses as noted, payments related toprofits.
Cash provided by investing activities was $0.3 million for the Biostage Litigation,three months ended March 31, 2023, and primarily consisted of $0.5 million from proceeds of the sale our Hoefer product line partially offset by the positive impact$0.2 million of improved accounts receivable collections. During the nine months ended September 30, 2022, we paid approximately $4.0 millioncapital expenditures in connection with the Settlement.
manufacturing and information technology infrastructure. Cash used in investing activities was $1.4 million and $1.0$(0.5) million for the ninethree months ended September 30,March 31, 2022, and 2021, respectively, and primarily consisted of capital expenditures in manufacturing and information technology infrastructure.
Cash used in(used in) provided by financing activities was $0.1$(2.9) million and $2.8$0.1 million for the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, respectively. During the ninethree months ended September 30, 2022,March 31, 2023, debt outstanding under our credit facility increaseddecreased by $0.7$2.8 million, consisting of net drawingspayments against our revolver of $3.1$1.0 million, offset byand payments of $2.4$1.8 million against the term loan. During the three months ended March 31, 2022, we increased total debt outstanding under our credit facility by $0.6 million. This increase included $0.9 million paid under the term loan and an increase in revolver borrowings of $1.5 million. We also paid $1.2$0.5 million for taxes related to net share settlement of equity awards. During the nine months ended September 30, 2021, we reduced total debt outstanding under our credit facility by $3.0 million. This reduction included $1.5 million paid under term loan installments and a net reduction in revolver borrowings of $1.5 million. We also received proceeds of $2.9 million from the exercise of stock options and we paid $2.7 million for taxes related to net share settlements 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 British pound.
During the three months ended September 30, 2022,March 31, 2023, changes in foreign currency exchange rates resulted in an unfavorable translation effect on our consolidated revenues of approximately $1.1$0.5 million and a favorable effect on expense of approximately $1.0$0.5 million. During the nine months ended September 30, 2022, changes in foreign currency exchange rates resulted in an unfavorable translation effect on our consolidated revenues of approximately $2.4 million and a favorable effect on expenses of approximately $2.3 million.
The lossgain associated with the translation of foreign equity into U.S. dollars included as a component of comprehensive lossincome during the three months ended September 30, 2022March 31, 2023 was $2.9$0.8 million, compared to a loss of approximately $1.1$0.7 million for the three months ended September 30, 2021. The loss associated with the translation of foreign equity into U.S. dollars included as a component of comprehensive loss during the nine months ended September 30, 2022 was $6.2 million, compared to a loss of $1.9 million for the nine months ended September 30, 2021.
In addition, currencyMarch 31, 2022. Currency exchange rate fluctuations included as a component of net loss resulted in a loss of $0.3 millionincome (loss) during the three months ended September 30,March 31, 2023, and March 31, 2022 and losses of $0.6 million and $0.1 million during the nine months ended September 30, 2022 and 2021, respectively. Currency gains for the three months ended September 30, 2021 were not significant.
Critical Accounting Policies
The critical accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Part II, Item 7 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022.
Recently IssuedRecent Accounting Pronouncements
For information on recent accounting pronouncements impacting our business, see “Recently Issued Accounting Pronouncements” included in Note 2 to our Condensed Consolidated Financial Statements included in “Part I, Item 1. Financial Statements” of this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of September 30, 2022,March 31, 2023, the end of the period covered by this report, our management, including our Chief Executive Officer and our Interim Chief Financial Officer, reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). Based upon management's review and evaluation, our Chief Executive Officer and Interim Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and is accumulated and communicated to management, including the Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the thirdfirst quarter of fiscal 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We continue to monitor the impact of the COVID-19 pandemic and, despite many of our employees working remotely, have not experienced any changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our controls and procedures, 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 is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud within the Company have been detected.
The information included in Note 1213 and Note 1314 to the Condensed Consolidated Financial Statements (Unaudited) included in Part“Part I, Item 1 Financial Statements” of this quarterly report is incorporated herein by reference.
You should carefully consider the risk factors set forth below together with the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, which could materially affect our business, financial position, or future results of operations. The risks described below and in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial position, or future results of operations.
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 September 30, 2022, we had outstanding borrowings of $50.2 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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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 with the November 2022 Amendment. 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities during the period covered by this report.
Item 3. Defaults Upon Senior Securities.
See the discussion regarding the Credit Agreement, as amended by the November 2022 Amendment, in Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”None.
Item 4. Mine Safety Disclosures.
Not applicable.
None.
| 10.1 | |
101.INS | Inline XBRL Instance Document |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
* | This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by undersigned thereunto duly authorized.
HARVARD BIOSCIENCE, INC. | |||
Date: | |||
By: | /s/ JAMES GREEN | ||
James Green | |||
Chief Executive Officer | |||
By: | /s/ | ||
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Interim Chief Financial Officer | |||