UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
FORM 10-Q
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For the quarterly period ended JuneSeptember 30, 2023
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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 JulyOctober 31, 2023, there were 42,688,246 shares of the registrant’s common stock issued and outstanding.
FORM 10-Q
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CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share data)
June 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 4,324 | $ | 4,508 | $ | 5,340 | $ | 4,508 | ||||||||
Accounts receivable, net | 16,903 | 16,705 | 14,983 | 16,705 | ||||||||||||
Inventories | 26,089 | 26,439 | 25,818 | 26,439 | ||||||||||||
Other current assets | 5,301 | 3,472 | 4,345 | 3,472 | ||||||||||||
Total current assets | 52,617 | 51,124 | 50,486 | 51,124 | ||||||||||||
Property, plant and equipment, net | 3,491 | 3,366 | 3,358 | 3,366 | ||||||||||||
Operating lease right-of-use assets | 5,253 | 5,816 | 5,061 | 5,816 | ||||||||||||
Goodwill | 56,771 | 56,260 | 56,222 | 56,260 | ||||||||||||
Intangible assets, net | 18,356 | 21,014 | 17,095 | 21,014 | ||||||||||||
Other long-term assets | 6,411 | 7,780 | 7,513 | 7,780 | ||||||||||||
Total assets | $ | 142,899 | $ | 145,360 | $ | 139,735 | $ | 145,360 | ||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current portion of long-term debt | $ | 3,220 | $ | 3,811 | $ | 3,470 | $ | 3,811 | ||||||||
Current portion of operating lease liabilities | 2,125 | 2,135 | 2,125 | 2,135 | ||||||||||||
Accounts payable | 4,716 | 6,447 | 6,269 | 6,447 | ||||||||||||
Deferred revenue | 3,835 | 3,370 | 4,005 | 3,370 | ||||||||||||
Other current liabilities | 9,046 | 7,486 | 8,336 | 7,486 | ||||||||||||
Total current liabilities | 22,942 | 23,249 | 24,205 | 23,249 | ||||||||||||
Long-term debt, net | 38,203 | 43,013 | 35,273 | 43,013 | ||||||||||||
Deferred tax liability | 667 | 590 | 661 | 590 | ||||||||||||
Operating lease liabilities | 4,653 | 5,282 | 4,418 | 5,282 | ||||||||||||
Other long-term liabilities | 1,046 | 1,006 | 892 | 1,006 | ||||||||||||
Total liabilities | 67,511 | 73,140 | 65,449 | 73,140 | ||||||||||||
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: 42,688,246 shares issued and outstanding at June 30, 2023; 42,081,707 shares issued and outstanding at December 31, 2022 | 457 | 454 | ||||||||||||||
Common stock, par value $0.01 per share, 80,000,000 shares authorized: 42,688,246 shares issued and outstanding at September 30, 2023; 42,081,707 shares issued and outstanding at December 31, 2022 | 457 | 454 | ||||||||||||||
Additional paid-in-capital | 231,533 | 229,008 | 232,896 | 229,008 | ||||||||||||
Accumulated deficit | (142,548 | ) | (142,190 | ) | (143,787 | ) | (142,190 | ) | ||||||||
Accumulated other comprehensive loss | (14,054 | ) | (15,052 | ) | (15,280 | ) | (15,052 | ) | ||||||||
Total stockholders' equity | 75,388 | 72,220 | 74,286 | 72,220 | ||||||||||||
Total liabilities and stockholders' equity | $ | 142,899 | $ | 145,360 | $ | 139,735 | $ | 145,360 | ||||||||
See accompanying notes to condensed consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Revenues | $ | 25,363 | $ | 26,922 | $ | 84,097 | $ | 84,908 | ||||||||
Cost of revenues | 10,636 | 14,750 | 34,351 | 39,922 | ||||||||||||
Gross profit | 14,727 | 12,172 | 49,746 | 44,986 | ||||||||||||
Sales and marketing expenses | 5,732 | 5,819 | 17,888 | 19,093 | ||||||||||||
General and administrative expenses | 5,807 | 6,324 | 17,494 | 18,630 | ||||||||||||
Research and development expenses | 2,760 | 2,763 | 8,614 | 9,480 | ||||||||||||
Amortization of intangible assets | 1,361 | 1,572 | 4,138 | 4,492 | ||||||||||||
Litigation settlement - Note 14 | - | (544 | ) | - | (233 | ) | ||||||||||
Total operating expenses | 15,660 | 15,934 | 48,134 | 51,462 | ||||||||||||
Operating (loss) income | (933 | ) | (3,762 | ) | 1,612 | (6,476 | ) | |||||||||
Other income (expense): | ||||||||||||||||
Unrealized gain (loss) on equity securities - Note 14 | 1,208 | - | (373 | ) | - | |||||||||||
Interest expense | (882 | ) | (749 | ) | (2,797 | ) | (1,648 | ) | ||||||||
Other income (expense), net | 45 | (179 | ) | 105 | (163 | ) | ||||||||||
Total other income (expense) | 371 | (928 | ) | (3,065 | ) | (1,811 | ) | |||||||||
Loss before income taxes | (562 | ) | (4,690 | ) | (1,453 | ) | (8,287 | ) | ||||||||
Income tax expense (benefit) | 677 | (1,285 | ) | 144 | (437 | ) | ||||||||||
Net loss | $ | (1,239 | ) | $ | (3,405 | ) | $ | (1,597 | ) | $ | (7,850 | ) | ||||
Loss per share: | ||||||||||||||||
Basic and diluted loss per share | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.04 | ) | $ | (0.19 | ) | ||||
Weighted-average common shares: | ||||||||||||||||
Basic and diluted | 42,688 | 41,637 | 42,345 | 41,353 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited, in thousands) |
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Revenues | $ | 28,759 | $ | 29,208 | $ | 58,734 | $ | 57,986 | ||||||||
Cost of revenues | 12,086 | 12,571 | 23,715 | 25,172 | ||||||||||||
Gross profit | 16,673 | 16,637 | 35,019 | 32,814 | ||||||||||||
Sales and marketing expenses | 6,178 | 6,587 | 12,156 | 13,274 | ||||||||||||
General and administrative expenses | 5,353 | 5,981 | 11,687 | 12,306 | ||||||||||||
Research and development expenses | 2,957 | 3,497 | 5,854 | 6,717 | ||||||||||||
Amortization of intangible assets | 1,389 | 1,454 | 2,777 | 2,920 | ||||||||||||
Litigation settlement - Note 14 | - | (4,880 | ) | - | 311 | |||||||||||
Total operating expenses | 15,877 | 12,639 | 32,474 | 35,528 | ||||||||||||
Operating income (loss) | 796 | 3,998 | 2,545 | (2,714 | ) | |||||||||||
Other expense: | ||||||||||||||||
Unrealized loss on equity securities - Note 14 | (1,581 | ) | - | (1,581 | ) | - | ||||||||||
Interest expense | (941 | ) | (515 | ) | (1,915 | ) | (899 | ) | ||||||||
Other (expense) income, net | (372 | ) | (62 | ) | 60 | 16 | ||||||||||
Total other expense | (2,894 | ) | (577 | ) | (3,436 | ) | (883 | ) | ||||||||
(Loss) income before income taxes | (2,098 | ) | 3,421 | (891 | ) | (3,597 | ) | |||||||||
Income tax (benefit) expense | (1,118 | ) | 986 | (533 | ) | 848 | ||||||||||
Net (loss) income | $ | (980 | ) | $ | 2,435 | $ | (358 | ) | $ | (4,445 | ) | |||||
(Loss) income per share: | ||||||||||||||||
Basic (loss) income per share | $ | (0.02 | ) | $ | 0.06 | $ | (0.01 | ) | $ | (0.11 | ) | |||||
Diluted (loss) income per share | $ | (0.02 | ) | $ | 0.06 | $ | (0.01 | ) | $ | (0.11 | ) | |||||
Weighted-average common shares: | ||||||||||||||||
Basic | 42,354 | 41,304 | 42,204 | 41,256 | ||||||||||||
Diluted | 42,354 | 42,560 | 42,204 | 41,256 | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Net loss | $ | (1,239 | ) | $ | (3,405 | ) | $ | (1,597 | ) | $ | (7,850 | ) | ||||
Other comprehensive (loss) income: | ||||||||||||||||
Foreign currency translation adjustments | (1,343 | ) | (2,936 | ) | (354 | ) | (6,152 | ) | ||||||||
Derivatives qualifying as hedges, net of tax | 117 | - | 126 | - | ||||||||||||
Other comprehensive loss | (1,226 | ) | (2,936 | ) | (228 | ) | (6,152 | ) | ||||||||
Comprehensive loss | $ | (2,465 | ) | $ | (6,341 | ) | $ | (1,825 | ) | $ | (14,002 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Net (loss) income | $ | (980 | ) | $ | 2,435 | $ | (358 | ) | $ | (4,445 | ) | |||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustments | 152 | (2,517 | ) | 989 | (3,216 | ) | ||||||||||
Derivatives qualifying as hedges, net of tax | 449 | - | 9 | - | ||||||||||||
Other comprehensive income (loss) | 601 | (2,517 | ) | 998 | (3,216 | ) | ||||||||||
Comprehensive (loss) income | $ | (379 | ) | $ | (82 | ) | $ | 640 | $ | (7,661 | ) | |||||
See accompanying notes to condensed consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
(Unaudited, in thousands) |
Accumulated | ||||||||||||||||||||||||
Three Months Ended | Number | Additional | Other | Total | ||||||||||||||||||||
June 30, 2023 | of Shares | Common | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||
Issued | Stock | Capital | Deficit | Loss | Equity | |||||||||||||||||||
Balance at March 31, 2023 | 42,190 | $ | 455 | $ | 230,108 | $ | (141,568 | ) | $ | (14,655 | ) | $ | 74,340 | |||||||||||
Stock option exercises | 173 | 2 | 403 | - | - | 405 | ||||||||||||||||||
Stock purchase plan | 91 | - | 215 | - | - | 215 | ||||||||||||||||||
Vesting of restricted stock units | 287 | - | - | - | - | - | ||||||||||||||||||
Shares withheld for taxes | (54 | ) | - | (295 | ) | - | - | (295 | ) | |||||||||||||||
Stock-based compensation expense | - | - | 1,102 | - | - | 1,102 | ||||||||||||||||||
Net loss | - | - | - | (980 | ) | - | (980 | ) | ||||||||||||||||
Other comprehensive income | - | - | - | - | 601 | 601 | ||||||||||||||||||
Balance at June 30, 2023 | 42,687 | $ | 457 | $ | 231,533 | $ | (142,548 | ) | $ | (14,054 | ) | $ | 75,388 | |||||||||||
Accumulated | ||||||||||||||||||||||||
Three Months Ended | Number | Additional | Other | Total | ||||||||||||||||||||
September 30, 2023 | of Shares | Common | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||
Issued | Stock | Capital | Deficit | Loss | Equity | |||||||||||||||||||
Balance at June 30, 2023 | 42,688 | $ | 457 | $ | 231,533 | $ | (142,548 | ) | $ | (14,054 | ) | $ | 75,388 | |||||||||||
Stock-based compensation expense | - | - | 1,363 | - | - | 1,363 | ||||||||||||||||||
Net loss | - | - | - | (1,239 | ) | - | (1,239 | ) | ||||||||||||||||
Other comprehensive loss | - | - | - | - | (1,226 | ) | (1,226 | ) | ||||||||||||||||
Balance at September 30, 2023 | 42,688 | $ | 457 | $ | 232,896 | $ | (143,787 | ) | $ | (15,280 | ) | $ | 74,286 | |||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | Number | Additional | Other | Total | Number | Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||||
June 30, 2022 | of Shares | Common | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
September 30, 2022 | of Shares | Common | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
Issued | Stock | Capital | Deficit | Loss | Equity | Issued | Stock | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | 41,241 | $ | 452 | $ | 226,203 | $ | (139,554 | ) | $ | (10,726 | ) | $ | 76,375 | |||||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | 41,500 | $ | 453 | $ | 227,413 | $ | (137,119 | ) | $ | (13,243 | ) | $ | 77,504 | |||||||||||||||||||||||||||||||||||
Stock option exercises | 5 | 1 | 11 | - | - | 12 | 24 | - | 64 | - | - | 64 | ||||||||||||||||||||||||||||||||||||
Stock purchase plan | 78 | - | 239 | - | - | 239 | ||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units | 244 | - | - | - | - | - | 233 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Shares withheld for taxes | (68 | ) | - | (279 | ) | - | - | (279 | ) | (100 | ) | - | (387 | ) | - | - | (387 | ) | ||||||||||||||||||||||||||||||
Stock-based compensation expense | - | - | 1,239 | - | - | 1,239 | - | - | 1,139 | - | - | 1,139 | ||||||||||||||||||||||||||||||||||||
Net income | - | - | - | 2,435 | - | 2,435 | ||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (3,405 | ) | - | (3,405 | ) | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (2,517 | ) | (2,517 | ) | - | - | - | - | (2,936 | ) | (2,936 | ) | ||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | 41,500 | $ | 453 | $ | 227,413 | $ | (137,119 | ) | $ | (13,243 | ) | $ | 77,504 | |||||||||||||||||||||||||||||||||||
Balance at September 30, 2022 | 41,657 | $ | 453 | $ | 228,229 | $ | (140,524 | ) | $ | (16,179 | ) | $ | 71,979 | |||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Six Months Ended | Number | Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||
June 30, 2023 | of Shares | Common | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended | Number | Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||
September 30, 2023 | of Shares | Common | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
Issued | Stock | Capital | Deficit | Loss | Equity | Issued | Stock | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | 42,082 | $ | 454 | $ | 229,008 | $ | (142,190 | ) | $ | (15,052 | ) | $ | 72,220 | 42,082 | $ | 454 | $ | 229,008 | $ | (142,190 | ) | $ | (15,052 | ) | $ | 72,220 | ||||||||||||||||||||||
Stock option exercises | 212 | 3 | 506 | - | - | 509 | 214 | 3 | 506 | - | - | 509 | ||||||||||||||||||||||||||||||||||||
Stock purchase plan | 91 | - | 215 | - | - | 215 | 91 | - | 215 | - | - | 215 | ||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units | 412 | - | - | - | - | - | 413 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Shares withheld for taxes | (110 | ) | - | (451 | ) | - | - | (451 | ) | (112 | ) | - | (451 | ) | - | - | (451 | ) | ||||||||||||||||||||||||||||||
Stock-based compensation expense | - | - | 2,255 | - | - | 2,255 | - | - | 3,618 | - | - | 3,618 | ||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (358 | ) | - | (358 | ) | - | - | - | (1,597 | ) | - | (1,597 | ) | ||||||||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 998 | 998 | ||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2023 | 42,687 | $ | 457 | $ | 231,533 | $ | (142,548 | ) | $ | (14,054 | ) | $ | 75,388 | |||||||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (228 | ) | (228 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2023 | 42,688 | $ | 457 | $ | 232,896 | $ | (143,787 | ) | $ | (15,280 | ) | $ | 74,286 | |||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Six Months Ended | Number | Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||
June 30, 2022 | of Shares | Common | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended | Number | Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||
September 30, 2022 | of Shares | Common | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
Issued | Stock | Capital | Deficit | Loss | Equity | Issued | Stock | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | 41,143 | $ | 452 | $ | 225,650 | $ | (132,674 | ) | $ | (10,027 | ) | $ | 83,401 | 41,143 | $ | 452 | $ | 225,650 | $ | (132,674 | ) | $ | (10,027 | ) | $ | 83,401 | ||||||||||||||||||||||
Stock option exercises | 16 | 1 | 42 | - | - | 43 | 40 | 1 | 106 | - | - | 107 | ||||||||||||||||||||||||||||||||||||
Stock purchase plan | 78 | - | 239 | - | - | 239 | 78 | - | 239 | - | - | 239 | ||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units | 395 | - | - | - | - | - | 628 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Shares withheld for taxes | (132 | ) | - | (780 | ) | - | - | (780 | ) | (232 | ) | - | (1,167 | ) | - | - | (1,167 | ) | ||||||||||||||||||||||||||||||
Stock-based compensation expense | - | - | 2,262 | - | - | 2,262 | - | - | 3,401 | - | - | 3,401 | ||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (4,445 | ) | - | (4,445 | ) | - | - | - | (7,850 | ) | - | (7,850 | ) | ||||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (3,216 | ) | (3,216 | ) | - | - | - | - | (6,152 | ) | (6,152 | ) | ||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | 41,500 | $ | 453 | $ | 227,413 | $ | (137,119 | ) | $ | (13,243 | ) | $ | 77,504 | |||||||||||||||||||||||||||||||||||
Balance at September 30, 2022 | 41,657 | $ | 453 | $ | 228,229 | $ | (140,524 | ) | $ | (16,179 | ) | $ | 71,979 | |||||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (1,597 | ) | $ | (7,850 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 1,083 | 1,122 | ||||||
Amortization of intangible assets | 4,138 | 4,492 | ||||||
Amortization of deferred financing costs | 210 | 210 | ||||||
Stock-based compensation expense | 3,618 | 3,401 | ||||||
Deferred income taxes and other | 92 | (160 | ) | |||||
Unrealized loss on equity securities - Note 14 | 373 | - | ||||||
Convertible Preferred Stock received in Biostage settlement - Note 14 | - | (3,900 | ) | |||||
Gain on sale of product line | (403 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 1,751 | 6,060 | ||||||
Inventories | 173 | (329 | ) | |||||
Other assets | (50 | ) | (811 | ) | ||||
Accounts payable and other current liabilities | 695 | (2,379 | ) | |||||
Deferred revenue | 635 | (551 | ) | |||||
Other liabilities | (993 | ) | (832 | ) | ||||
Net cash provided by (used in) operating activities | 9,725 | (1,527 | ) | |||||
Cash flows from investing activities: | ||||||||
Additions to property, plant and equipment | (958 | ) | (1,355 | ) | ||||
Acquisition of intangible assets | (292 | ) | - | |||||
Proceeds from sale of product line | 512 | - | ||||||
Net cash used in investing activities | (738 | ) | (1,355 | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowing from revolving line of credit | 3,500 | 7,800 | ||||||
Repayment of revolving line of credit | (8,450 | ) | (4,650 | ) | ||||
Repayment of term debt | (3,341 | ) | (2,436 | ) | ||||
Proceeds from exercise of stock options and employee stock purchase plan | 724 | 346 | ||||||
Taxes paid related to net share settlement of equity awards | (451 | ) | (1,167 | ) | ||||
Net cash used in financing activities | (8,018 | ) | (107 | ) | ||||
Effect of exchange rate changes on cash | (137 | ) | 312 | |||||
Increase (decrease) in cash and cash equivalents | 832 | (2,677 | ) | |||||
Cash and cash equivalents at beginning of period | 4,508 | 7,821 | ||||||
Cash and cash equivalents at end of period | $ | 5,340 | $ | 5,144 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 3,006 | $ | 1,529 | ||||
Cash paid for income taxes, net of refunds | $ | 168 | $ | 493 | ||||
See accompanying notes to condensed consolidated financial statements.
|
|
Six Months Ended June 30, | ||||||||
2023 | 2022 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (358 | ) | $ | (4,445 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 665 | 758 | ||||||
Amortization of intangible assets | 2,777 | 2,920 | ||||||
Amortization of deferred financing costs | 140 | 140 | ||||||
Stock-based compensation expense | 2,255 | 2,262 | ||||||
Deferred income taxes and other | 86 | 1,040 | ||||||
Unrealized loss on equity securities - Note 14 | 1,581 | - | ||||||
Convertible Preferred Stock received in Biostage Settlement - Note 14 | - | (3,900 | ) | |||||
Gain on sale of product line | (403 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (68 | ) | 3,587 | |||||
Inventories | 398 | (2,667 | ) | |||||
Other assets | (1,268 | ) | (250 | ) | ||||
Accounts payable and accrued expenses | (270 | ) | (435 | ) | ||||
Deferred revenue | 445 | (611 | ) | |||||
Other liabilities | (616 | ) | (575 | ) | ||||
Net cash provided by (used in) operating activities | 5,364 | (2,176 | ) | |||||
Cash flows from investing activities: | ||||||||
Additions to property, plant and equipment | (741 | ) | (913 | ) | ||||
Acquisition of intangible assets | (108 | ) | - | |||||
Proceeds from sale of product line | 512 | - | ||||||
Net cash used in investing activities | (337 | ) | (913 | ) | ||||
Cash flows from financing activities: | ||||||||
| Borrowing from revolving line of credit | 2,500 | 5,300 | ||||||
| Repayment of revolving line of credit | (5,450 | ) | (3,600 | ) | ||||
Repayment of term debt | (2,591 | ) | (1,686 | ) | ||||
Proceeds from exercise of stock options and employee stock purchase plan | 724 | 282 | ||||||
Taxes paid related to net share settlement of equity awards | (451 | ) | (780 | ) | ||||
Net cash used in financing activities | (5,268 | ) | (484 | ) | ||||
Effect of exchange rate changes on cash | 57 | 11 | ||||||
Decrease in cash and cash equivalents | (184 | ) | (3,562 | ) | ||||
Cash and cash equivalents at beginning of period | 4,508 | 7,821 | ||||||
Cash and cash equivalents at end of period | $ | 4,324 | $ | 4,259 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 2,148 | $ | 845 | ||||
Cash paid for income taxes, net of refunds | $ | 115 | $ | 352 | ||||
See accompanying notes to condensed consolidated financial statements.
NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 JuneSeptember 30, 2023 and for the three and sixnine months ended JuneSeptember 30, 2023 and 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, 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, 2022.
In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present a fair statement of financial position as of JuneSeptember 30, 2023, results of operations and comprehensive income (loss) and cash flows for the three and sixnine months ended JuneSeptember 30, 2023 and 2022, as applicable, have been made. The results of operations for the three and sixnine months ended JuneSeptember 30, 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, 2022. Except as described below, there have been no material changes in the Company’s significant accounting policies during the three and sixnine months ended JuneSeptember 30, 2023.
Marketable Equity Securities
Equity securities traded in active markets are marked to market at each balance sheet date based on their prices as quoted on the relevant stock exchange. Fair value mark-to-market adjustments are recorded as non-operating gains (losses) in the consolidated statement of operations. The Company’s investments in marketable equity securities are classified in the consolidated balance sheet based on the nature of the securities and their availability for use in current operations.
Risks and Uncertainties
The global supply chain has experienced significant disruptions over the last few years due to electronic component and labor shortages and other macroeconomic factors which have emerged since the onset of COVID-19. This has led 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. These conditions have negatively impacted the Company’s past business, results of operations, and cash flow. The Company believes that these globalRecent events in Ukraine and the Middle East, as well as delays in U.S. government funding may lead to additional economic uncertainties will continue through 2023.uncertainties. If these factors are prolonged or are more severe than anticipated, the Company’s business, results of operations, and cash flow may be materially impacted.
2. | Recently |
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. The Company adopted ASU 2016-13 effective January 1, 2023 with no impact to the consolidated financial statements. The Company will perform future goodwill impairment test according to ASU 2017-04.
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. The Company adopted ASU 2016-13 effective January 1, 2023, which resulted in an immaterial impact to the consolidated financial statements.
3. | Goodwill and Intangible Assets |
The change in the carrying amount of goodwill for the sixnine months ended JuneSeptember 30, 2023 is as follows:
(in thousands) | ||||||||
Carrying amount at December 31, 2022 | $ | 56,260 | $ | 56,260 | ||||
Effect of change in currency translation | 511 | (38 | ) | |||||
Carrying amount at June 30, 2023 | $ | 56,771 | ||||||
Carrying amount at September 30, 2023 | $ | 56,222 | ||||||
Identifiable intangibleIntangible assets at JuneSeptember 30, 2023 and December 31, 2022 consist of the following:
June 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) |
| Average | Accumulated | Accumulated | Average | Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||
Amortizable intangible assets: |
| Life* | Gross | Amortization | Net | Gross | Amortization | Net | Life* | Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||||||||||||||||||||||||
Distribution agreements/customer relationships | 7 | $ | 16,185 | $ | (9,323 | ) | $ | 6,862 | $ | 16,124 | $ | (8,727 | ) | $ | 7,397 | 6 | $ | 16,017 | $ | (9,467 | ) | $ | 6,550 | $ | 16,124 | $ | (8,727 | ) | $ | 7,397 | ||||||||||||||||||||||||||
Existing technology and software development | 3 | 37,512 | (28,140 | ) | 9,372 | 37,549 | (26,482 | ) | 11,067 | |||||||||||||||||||||||||||||||||||||||||||||||
Existing technology & software development | 2 | 37,490 | (28,851 | ) | 8,639 | 37,549 | (26,482 | ) | 11,067 | |||||||||||||||||||||||||||||||||||||||||||||||
Trade names and patents | 3 | 7,539 | (5,619 | ) | 1,920 | 7,523 | (5,197 | ) | 2,326 | 3 | 7,484 | (5,774 | ) | 1,710 | 7,523 | (5,197 | ) | 2,326 | ||||||||||||||||||||||||||||||||||||||
Total amortizable intangible assets | $ | 61,236 | $ | (43,082 | ) | $ | 18,154 | $ | 61,196 | $ | (40,406 | ) | $ | 20,790 | $ | 60,991 | $ | (44,092 | ) | $ | 16,899 | $ | 61,196 | $ | (40,406 | ) | $ | 20,790 | ||||||||||||||||||||||||||||
Indefinite-lived intangible assets: | 202 | 224 | 196 | 224 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total intangible assets | $ | 18,356 | $ | 21,014 | $ | 17,095 | $ | 21,014 | ||||||||||||||||||||||||||||||||||||||||||||||||
*Weighted average life in years as of JuneSeptember 30, 2023
Intangible asset amortization expense was $1.4 million and $1.5$1.6 million for the three months ended JuneSeptember 30, 2023 and 2022, respectively, and $2.8$4.1 million and $2.9$4.5 million for the sixnine months ended JuneSeptember 30, 2023 and 2022, respectively. Estimated amortization expense of existing amortizable intangible assets for each of the five succeeding years and thereafter as of JuneSeptember 30, 2023, is as follows:
(in thousands) | ||||||||
2023 (remainder of the year) | $ | 2,777 | $ | 1,383 | ||||
2024 | 5,255 | 5,234 | ||||||
2025 | 4,024 | 4,019 | ||||||
2026 | 2,363 | 2,358 | ||||||
2027 | 1,266 | 1,261 | ||||||
2028 | 1,127 | 1,308 | ||||||
Thereafter | 1,342 | 1,336 | ||||||
Total | $ | 18,154 | $ | 16,899 | ||||
4. | Balance Sheet Information |
The following tables provide details of selected balance sheet items as of the periods indicated:
Inventories: | ||||||||||||||||
(in thousands) | June 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | ||||||||||||
Finished goods | $ | 5,748 | $ | 5,223 | $ | 6,047 | $ | 5,223 | ||||||||
Work in process | 4,607 | 3,776 | 4,642 | 3,776 | ||||||||||||
Raw materials | 15,734 | 17,440 | 15,129 | 17,440 | ||||||||||||
Total | $ | 26,089 | $ | 26,439 | $ | 25,818 | $ | 26,439 | ||||||||
Other Current Liabilities: | ||||||||||||||||
(in thousands) | June 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | ||||||||||||
Compensation | $ | 3,796 | $ | 3,476 | $ | 3,373 | $ | 3,476 | ||||||||
Customer credits | 3,111 | 2,368 | ||||||||||||||
Professional fees | 552 | 392 | 599 | 392 | ||||||||||||
Warranty costs | 301 | 268 | 308 | 268 | ||||||||||||
Customer credits | 2,664 | 2,368 | ||||||||||||||
Accrued income taxes | 398 | - | ||||||||||||||
Other | 1,335 | 982 | 945 | 982 | ||||||||||||
Total | $ | 9,046 | $ | 7,486 | $ | 8,336 | $ | 7,486 | ||||||||
5. | Restructuring and Other Exit Costs |
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 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, and recorded 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.
6. | 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 sixnine months ended JuneSeptember 30, 2023 and 2022, are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||
Operating lease cost | $ | 483 | $ | 493 | $ | 1,026 | $ | 997 | $ | 491 | $ | 486 | $ | 1,517 | $ | 1,483 | ||||||||||||||||
Short-term lease cost | 64 | 58 | 131 | 122 | 19 | 58 | 150 | 180 | ||||||||||||||||||||||||
Sublease income | (26 | ) | (26 | ) | (51 | ) | (51 | ) | (25 | ) | (25 | ) | (76 | ) | (76 | ) | ||||||||||||||||
Total lease cost | $ | 521 | $ | 525 | $ | 1,106 | $ | 1,068 | $ | 485 | $ | 519 | $ | 1,591 | $ | 1,587 | ||||||||||||||||
Supplemental cash flow information related to the Company's operating leases is as follows:
Six Months Ended June 30, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Cash paid for amounts included in the measurement of lease liabilities: | $ | 1,201 | $ | 1,173 | ||||
Right-of-use assets obtained in exchange for lease obligations: | $ | 95 | $ | 65 | ||||
Nine Months Ended September 30, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 1,764 | $ | 1,759 | ||||
Right-of-use assets obtained in exchange for lease obligations | 277 | 248 | ||||||
Supplemental balance sheet information related to the Company’s operating leases are as follows:
(in thousands) | June 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | ||||||||||||
Operating lease right-of-use assets | $ | 5,253 | $ | 5,816 | $ | 5,061 | $ | 5,816 | ||||||||
Current portion, operating lease liabilities | $ | 2,125 | $ | 2,135 | $ | 2,125 | $ | 2,135 | ||||||||
Operating lease liabilities, long-term | 4,653 | 5,282 | 4,418 | 5,282 | ||||||||||||
Total operating lease liabilities | $ | 6,778 | $ | 7,417 | $ | 6,543 | $ | 7,417 | ||||||||
Weighted average remaining lease term (years) | 6.0 | 6.2 | 5.8 | 6.2 | ||||||||||||
Weighted average discount rate | 9.3 | % | 9.4 | % | 9.4 | % | 9.4 | % | ||||||||
Future minimum lease payments for operating leases, with initial terms in excess of one year at JuneSeptember 30, 2023, are as follows:
Year Ending December 31, | ||||||||
(in thousands) | ||||||||
2023 (remainder of the year) | $ | 1,075 | $ | 550 | ||||
2024 | 1,831 | 1,909 | ||||||
2025 | 1,096 | 1,155 | ||||||
2026 | 1,047 | 1,052 | ||||||
2027 | 1,042 | 1,046 | ||||||
Thereafter | 2,964 | 2,963 | ||||||
Total lease payments | 9,055 | 8,675 | ||||||
Less imputed interest | (2,277 | ) | (2,132 | ) | ||||
Total operating lease liabilities | $ | 6,778 | $ | 6,543 | ||||
| Long-Term Debt |
As of JuneSeptember 30, 2023 and December 31, 2022, the Company’s borrowings are as follows:
(in thousands) | June 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | ||||||||||||
Long-term debt: | ||||||||||||||||
Term loan | $ | 32,223 | $ | 34,814 | $ | 31,473 | $ | 34,814 | ||||||||
Revolving line | 9,900 | 12,850 | 7,900 | 12,850 | ||||||||||||
Less: unamortized deferred financing costs | (700 | ) | (840 | ) | (630 | ) | (840 | ) | ||||||||
Total debt | 41,423 | 46,824 | 38,743 | 46,824 | ||||||||||||
Less: current portion of long-term debt | (3,500 | ) | (4,091 | ) | (3,750 | ) | (4,091 | ) | ||||||||
Current unamortized deferred financing costs | 280 | 280 | 280 | 280 | ||||||||||||
Long-term debt | $ | 38,203 | $ | 43,013 | $ | 35,273 | $ | 43,013 | ||||||||
In December, 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”). AllEffective March 27, 2023, all commitments and obligations under the Credit Agreement previously held by Silicon Valley Bank have now beenwere assumed by First-Citizens Bank & Trust Company. 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 $12.4$13.0 million as of JuneSeptember 30, 2023 based on the Credit Agreement, as amended. Total revolver borrowing capacity is limited by the consolidated net leverage ratio as defined under the amended Credit Agreement.
Borrowings under the amended Credit Facility will, at the option of the Company, bear interest at either (i) a rate per annum based on the 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 JuneSeptember 30, 2023 and 2022, was 8.3% and 4.0%5.8%, respectively, and for the sixnine months ended JuneSeptember 30, 2023 and 2022, was 8.1%8.2% and 3.6%4.3%, respectively. The weighted average interest rate as of JuneSeptember 30, 2023, inclusive of the effect of the Company’s interest rate swaps, was 8.1%7.7%. 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.
The term loan amortizes in quarterly installments of $0.75 million perfor the quarter for each of the nextended twoDecember 31, 2023 quarters and $1.0 million per quarter during the next seven quarters thereafter, with a balloon payment at maturity. Furthermore, within ninety days after the end of the Company’s fiscal year, the term loan 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 during the quarter ended 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, 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.
OnIn April, 28, 2022, the Company entered into an amendment to the Credit Agreement (the “April 2022 Amendment”) pursuant to which the Lenders and administrative agent,modified, among other things, modified the financial covenant relating to the consolidated net leverage ratio, and consented toalso provided consent for the Biostage 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 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.
On November, 8, 2022, the Company entered into a subsequent amendment to the Credit Agreement (the “November 2022 Amendment”) pursuant to which modified, among other things, the Lenders and administrative agent modified the financial covenant relating to the consolidated net leverage ratio, and the definition of Consolidated EBITDA used in the calculation of certain financial covenants, including to exclude non-cash inventory charges related to the Company’s decision to discontinue non-strategic products. In consideration for the November 2022 Amendment, the Company paid fees of $0.2 million to the Lenders and administrative agent.covenants. The Company was in compliance with the covenants of the Credit Agreement, as amended, as of JuneSeptember 30, 2023.
| 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 $30.3$28.8 million as of JuneSeptember 30, 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 6,7, 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) (“OCI”) in the consolidated financial statements and are reclassified as net income when the underlying hedged interest impacts earnings. A qualitative and quantitativeAn assessment over the hedge effectiveness is performed on a quarterly basis unless facts and circumstances indicate thatto evaluate the ongoing hedge may no longer be highly effective.effectiveness.
The following table presents the notional amount and fair value of the Company’s derivative instrument as of JuneSeptember 30, 2023:
(in thousands) | (in thousands) | June 30, 2023 | (in thousands) | September 30, 2023 | ||||||||||||||||
Derivatives instruments | Balance sheet classification | Notional Amount | Fair Value (a) | Balance sheet classification | Notional Amount | Fair Value (a) | ||||||||||||||
Interest rate swap | Other long term assets | $ | 30,336 | $ | 9 | Other long term assets | $ | 28,847 | $ | 126 | ||||||||||
(a) See Note 89 for the fair value measurements related to this financial instrument.
The following table summarizes the effect of derivatives designated as cash flow hedging instruments for the three and sixnine months ended JuneSeptember 30, 2023:
Three Months Ended | Six Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||
Derivatives in Hedging Relationships (in thousands) | June 30, 2023 | June 30, 2023 | ||||||||||||||
Derivatives qualifying as hedges, net of tax (in thousands) | September 30, 2023 | September 30, 2023 | ||||||||||||||
Amount of gain recognized in OCI on derivatives (effective portion) | $ | 475 | $ | 35 | $ | 163 | $ | 198 | ||||||||
Amounts reclassifed from accumulated other comprehensive loss to interest expense | (26 | ) | (26 | ) | ||||||||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense | (46 | ) | (72 | ) | ||||||||||||
Total | $ | 449 | $ | 9 | $ | 117 | $ | 126 | ||||||||
| 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 June 30, 2023 | Fair Value as of September 30, 2023 | |||||||||||||||||||||||||||||||
Assets (in thousands) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
Equity securities - common stock | $ | 2,579 | $ | - | $ | - | $ | 2,579 | $ | 3,788 | $ | - | $ | - | $ | 3,788 | ||||||||||||||||
Interest rate swap agreements | $ | - | $ | 9 | $ | - | $ | 9 | - | 126 | - | 126 | ||||||||||||||||||||
The Company uses the market approach technique to value its financial assets and 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 of Harvard Apparatus Regenerative Technologies (“HART” formerly known as Biostage, Inc.) (see Note 14 for information regarding the Biostage Settlement) was based on the closing price as quoted on the OTCQB Marketplace at the reporting date. The fair value of the Company’s interest rate swap agreements was based on SOFR yieldSOFR-yield curves at the reporting date.
| Capital Stock and Stock-Based Compensation |
Stock-Based Payment Awards
Stock-based awards consist of stock options, time-based restricted stock units, market condition restricted stock units, and shares issued under the Company’s employee stock purchase plan. Activity under the Company’s equity incentive plans for the sixnine months ended JuneSeptember 30, 2023 is as follows:
Weighted | Market | Weighted | Market | |||||||||||||||||||||||||||||||||||||||||||||
| Average | Condition | Average | Condition | ||||||||||||||||||||||||||||||||||||||||||||
Stock | Exercise | Restricted | Grant Date | Restricted | Grant Date | Stock | Exercise | Restricted | Grant Date | Restricted | Grant Date | |||||||||||||||||||||||||||||||||||||
| Options | Price | Stock Units | Fair Value | Stock Units | Fair Value | Options | Price | Stock Units | Fair Value | Stock Units | Fair Value | |||||||||||||||||||||||||||||||||||||
| Outstanding at December 31, 2022 | 1,238,776 | $ | 3.15 | 1,093,801 | $ | 3.94 | 646,235 | $ | 4.51 | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | 1,238,776 | $ | 3.15 | 1,093,801 | $ | 3.94 | 646,235 | $ | 4.51 | |||||||||||||||||||||||||||||||||||||||
Granted | - | - | 1,296,379 | 2.81 | 558,958 | 2.61 | - | - | 1,306,445 | 2.82 | 558,958 | 2.61 | ||||||||||||||||||||||||||||||||||||
Exercised | (213,644 | ) | 2.38 | - | - | - | - | (213,644 | ) | 2.38 | - | - | - | - | ||||||||||||||||||||||||||||||||||
Vested (RSUs) | - | - | (295,531 | ) | 2.97 | (115,976 | ) | 2.98 | - | - | (295,531 | ) | 2.97 | (115,976 | ) | 2.98 | ||||||||||||||||||||||||||||||||
Cancelled/Forfeited | (99,483 | ) | 2.45 | (54,396 | ) | 4.31 | (87,138 | ) | 4.64 | (101,065 | ) | 2.47 | (86,440 | ) | 3.90 | (87,138 | ) | 4.64 | ||||||||||||||||||||||||||||||
| Outstanding at June 30, 2023 | 925,649 | $ | 3.37 | 2,040,253 | $ | 3.35 | 1,002,079 | $ | 3.62 | |||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2023 | 924,067 | 3.37 | 2,018,275 | 3.36 | 1,002,079 | 3.62 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense for the three and sixnine months ended JuneSeptember 30, 2023 and 2022 is allocated as follows:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||
Cost of revenues | $ | 95 | $ | 52 | $ | 164 | $ | 88 | $ | 58 | $ | - | $ | 222 | $ | 88 | ||||||||||||||||
Sales and marketing expenses | 195 | 192 | 340 | 346 | 193 | 147 | 533 | 493 | ||||||||||||||||||||||||
General and administrative expenses | 704 | 923 | 1,573 | 1,714 | 1,012 | 919 | 2,585 | 2,633 | ||||||||||||||||||||||||
Research and development expenses | 108 | 72 | 178 | 114 | 100 | 73 | 278 | 187 | ||||||||||||||||||||||||
Total stock-based compensation expenses | $ | 1,102 | $ | 1,239 | $ | 2,255 | $ | 2,262 | $ | 1,363 | $ | 1,139 | $ | 3,618 | $ | 3,401 | ||||||||||||||||
As of JuneSeptember 30, 2023, the total compensation costs related to unvested awards not yet recognized is $7.4$6.0 million and the weighted average period over which it is expected to be recognized is approximately 1.91.7 years. The Company did not capitalize any stock-based compensation.compensation during the three and nine month periods ended September 30, 2023.
The weighted average estimated fair value of the market condition restricted stock awards that were granted during the sixnine months ended JuneSeptember 30, 2023 was $2.61 per unit. The estimate of the fair value was determined using a Monte-Carlo valuation simulation, which included the following assumptions:
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 and restricted stock units into common stock using the treasury method. The weighted average number of shares used to compute basic and diluted EPS consisted of the following:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| (in thousands, except per share data) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||
Net (loss) income available to common stockholders | $ | (980 | ) | $ | 2,435 | $ | (358 | ) | $ | (4,445 | ) | |||||||||||||||||||||
Net loss available to common stockholders | $ | (1,239 | ) | $ | (3,405 | ) | $ | (1,597 | ) | $ | (7,850 | ) | ||||||||||||||||||||
Weighted average shares outstanding - basic | 42,354 | 41,304 | 42,204 | 41,256 | 42,688 | 41,637 | 42,345 | 41,353 | ||||||||||||||||||||||||
Dilutive effect of equity awards | - | 1,256 | - | - | - | - | - | - | ||||||||||||||||||||||||
Weighted average shares outstanding - diluted | 42,354 | 42,560 | 42,204 | 41,256 | 42,688 | 41,637 | 42,345 | 41,353 | ||||||||||||||||||||||||
| Basic (loss) earnings per share | $ | (0.02 | ) | $ | 0.06 | $ | (0.01 | ) | $ | (0.11 | ) | |||||||||||||||||||||
| Diluted (loss) earnings per share | $ | (0.02 | ) | $ | 0.06 | $ | (0.01 | ) | $ | (0.11 | ) | |||||||||||||||||||||
Shares excluded from diluted (loss) income per share due to their anti-dilutive effect | 4,286 | 910 | 3,795 | 3,717 | ||||||||||||||||||||||||||||
Basic loss per share | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.04 | ) | $ | (0.19 | ) | ||||||||||||||||||||
Diluted loss per share | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.04 | ) | $ | (0.19 | ) | ||||||||||||||||||||
Shares excluded from diluted loss per share due to their anti-dilutive effect | 3,952 | 3,594 | 3,847 | 3,676 | ||||||||||||||||||||||||||||
| Revenues |
The following tables represent a disaggregation of revenue from contracts with customers for the three and sixnine months ended JuneSeptember 30, 2023 and 2022:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||
Instruments, equipment, software and accessories | $ | 27,268 | $ | 27,765 | $ | 55,761 | $ | 55,303 | $ | 23,500 | $ | 25,705 | $ | 79,261 | $ | 81,008 | ||||||||||||||||
Service, maintenance and warranty contracts | 1,491 | 1,443 | 2,973 | 2,683 | 1,863 | 1,217 | 4,836 | 3,900 | ||||||||||||||||||||||||
Total revenues | $ | 28,759 | $ | 29,208 | $ | 58,734 | $ | 57,986 | $ | 25,363 | $ | 26,922 | $ | 84,097 | $ | 84,908 | ||||||||||||||||
The following tables represent a disaggregation of revenue by geographic destination for the three and sixnine months ended JuneSeptember 30, 2023 and 2022:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||
United States | $ | 12,336 | $ | 14,075 | $ | 24,638 | $ | 26,314 | $ | 12,017 | $ | 11,511 | $ | 36,655 | $ | 38,278 | ||||||||||||||||
Europe | 9,332 | 7,194 | 16,773 | 15,017 | 7,063 | 7,344 | 23,836 | 22,361 | ||||||||||||||||||||||||
Greater China | 4,136 | 3,396 | 10,335 | 7,127 | 3,489 | 4,497 | 13,824 | 11,624 | ||||||||||||||||||||||||
Rest of the world | 2,955 | 4,543 | 6,988 | 9,528 | 2,794 | 3,570 | 9,782 | 12,645 | ||||||||||||||||||||||||
Total revenues | $ | 28,759 | $ | 29,208 | $ | 58,734 | $ | 57,986 | $ | 25,363 | $ | 26,922 | $ | 84,097 | $ | 84,908 | ||||||||||||||||
Concentrations
No customer accounts for more than 10% of revenues for the three and sixnine months ended JuneSeptember 30, 2023 and 2022. At JuneSeptember 30, 2023 and December 21, 2022, no customer accounts for more than 10% of net accounts receivable.
Deferred RevenueContract Liabilities
The following tables provide details of deferred revenuecontract liabilities as of the periods indicated:
(in thousands) | June 30, 2023 | December 31, 2022 | September 30, 2023 | December 31, 2022 | Change | % Change | ||||||||||||||||||
Service contracts | $ | 2,327 | $ | 1,530 | $ | 2,234 | $ | 1,530 | $ | 704 | 46 | % | ||||||||||||
Customer advances | 1,508 | 1,840 | 1,771 | 1,840 | (69 | ) | -4 | % | ||||||||||||||||
Total deferred revenue | $ | 3,835 | $ | 3,370 | $ | 4,005 | $ | 3,370 | $ | 635 | 19 | % | ||||||||||||
The overall increase in contract liabilities was primarily due to receipt of payments under service and warranty contracts. During each of the three months ended JuneSeptember 30, 2023 and 2022, the Company recognized revenue of $0.6$1.0 million and $0.8 million from deferred revenue existing at December 31, 2022 and 2021, respectively. During the sixnine months ended JuneSeptember 30, 2023 and 2022, the Company recognized revenue of $1.6$2.3 million and $1.3$2.1 million from deferred revenue existing at December 31, 2022 and 2021, respectively.
Allowance for Expected Credit Losses on Receivables
The allowance for expected 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 considered remote, and reflects expected recoveries of amounts previously written-off. The Company estimates the allowance on the basis of specifically identified receivables that are evaluated individually for impairment and an analysis of the remaining 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 expected losses on receivables is as follows:
Six Months Ended June 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Balance, beginning of period | $ | 191 | $ | 136 | $ | 191 | $ | 136 | ||||||||
| Provision for bad debts | 18 | 107 | 9 | 103 | ||||||||||||
Charge-offs and other | (55 | ) | (48 | ) | (56 | ) | (60 | ) | ||||||||
Balance, end of period | $ | 154 | $ | 195 | $ | 144 | $ | 179 | ||||||||
| Income Tax |
Income tax expense (benefit) was $0.7 million and $(1.3) million for the three months ended September 30, 2023 and 2022, respectively, and was $0.1 million and $(0.4) million for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rates for the three months ended September 30, 2023 and 2022, were (120.2)% and 27.4%, respectively. The effective tax rates for the nine months ended September 30, 2023 and 2022, were (9.9)% and 5.3%, respectively.
The difference between the Company’s effective tax rates in 2023 compared to the U.S. statutory tax rate of 21% was primarily due to the mix of forecasted income or losses in the U.S. and foreign tax jurisdictions and a Global Intangible Low-Taxed Income (“GILTI”) inclusion to taxable income. The effective tax rates in both the three and nine months ended September 30, 2023 and 2022, were also impacted by changes in valuation allowances associated with the Company’s assessment of the likelihood of the recoverability of deferred tax assets. The Company has valuation allowances against substantially all of its net operating loss carryforwards and tax credit carryforwards.
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 (benefit) expense is $(1.1) million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively, and is $(0.5) million and $0.8 million for the six months ended June 30, 2023 and 2022, respectively. The effective tax rates for the three months ended June 30, 2023 and 2022, are 53.3% and 28.8%, respectively. The effective tax rates for the six months ended June 30, 2023 and 2022, are 59.8% and (23.6)%, respectively.
The difference between the Company’s effective tax rates in 2023 and 2022 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 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. (“Biostage”) executed a settlement with the plaintiffs in the Biostage Litigation (as defined below) which resolved 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 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 JuneSeptember 30, 2023.
The Company is 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 in various states. Based on the current stage of the audits, the Company has not accrued any loss contingenciessignificant losses related to these audits as of JuneSeptember 30, 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 alleged that the plaintiff sustained terminal injuries allegedly caused by products, including one synthetic trachea scaffold and two bioreactors, provided by certain of the named defendants and utilized in connection with surgeries performed by third parties in Europe in 2012 and 2013.
On April 27, 2022, the Company and Biostage executed a settlement with the plaintiffs of the Biostage Litigation and Biostage’s products liability insurance carriers (the “Biostage Settlement”), which resolved all claims by and between the parties and Biostage’s product liability insurance carriers and resulted in the dismissal with prejudice of the wrongful death claim and all claims between the Company, Biostage and the insurance carriers. The Biostage Settlement was entered into solely by way of compromise and settlement and iswas not in any way an admission of liability or fault by the Company or Biostage. Biostage has indemnified the Company for all losses and expenses, including legal expenses that the Company incurred in connection with the Biostage Litigation and the Biostage Settlement.
During the threenine 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.
During the three months ended JuneSeptember 30, 2022, the Company recorded creditsa net credit of $0.2 million related to the Biostage Settlement consisting of charges (credits) as follows:
| ● | During the three months ended March 31, 2022, the Company accrued $5.2 million of costs related to legal fees and the Biostage Settlement. Additionally, during the year ended December 31, 2021, the Company had incurred $0.3 million in legal fees in connection with the Biostage Litigation. Due to the financial condition of Biostage, the Company determined that it was uncertain as to whether Biostage would be able to meet its indemnification obligation and had fully reserved any receivable from Biostage. | |
● | During the three months ended June 30, 2022, the Company recorded credit adjustments of $4.9 million 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 a portion of the legal fees associated with the Biostage Settlement, and iii) other accrual adjustments. |
● | During the three months ended September 30, 2022, the Company recorded a credit adjustment of $0.5 million to the reserve against the indemnification receivable from Biostage due to the final payment by Biostage of the legal fees associated with the Biostage Settlement. |
As of December 31, 2022, the book value of the shares of Series E Preferred Stock, inclusive of accrued dividends, was $4.0 million and was included in the consolidated balance sheet as a component of Other long-term assets. The Company 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 December 31, 2022, there were no observable price changes or indicators of impairment and therefore, there was no measurement adjustments to the carrying value of the Series E Preferred Stock.
On January 18, 2023, the Company voluntarily converted 200 shares of its Series E Preferred Stock into 31,933 shares of Biostage common stock.
On April 6, 2023, Biostage disclosed that it had completed a private placement of its common stock for an aggregate offering amount of approximately $6.0 million at a purchase price of $6.00 per share. As the proceeds of the private placements were in excess of $4.0 million, theThis transaction triggered a mandatory conversion of the Company’s remaining Series E Preferred Stock into shares of Biostage common stock at the offering price of $6.00 per share.
On July 20, 2023, Biostage, Inc. changed its corporate name to Harvard Apparatus Regenerative Technology, Inc. (“HART”) and began to trade under the OTCQB Marketplace symbol HRGN.
As of JuneSeptember 30, 2023, the Company held 707,626706,626 shares of BiostageHART common stock with an estimated fair value of $2.6$3.8 million, which hashave been included in the consolidated balance sheet as a component of Other long-term assets dueassets. During the three and nine months ended September 30, 2023, the Company recorded an unrealized gain (loss) related to these shares of $1.2 million and $(0.4) million, respectively, which were recorded in the limited trading volumesOther income (expense) section in the consolidated statements of Biostage’s common stock on the OTCQB Marketplace.operations.
The Company determines the fair value of its shares of BiostageHART common stock at each reporting period using pricesbased on the closing price as quoted on the OTCQB Marketplace.Marketplace at the reporting date. Due to Biostage’sHART’s limited operating history, its overall financial condition and the limited trading volumes and liquidity of its common stock, the value of the Company’s investment in Biostage’sthis common stock could fluctuate considerably or become worthless. During the three months ended June 30, 2023, the Company recorded unrealized losses related to its investment in Biostage common stock of $1.6 million, which was recorded in the Other expense section in the consolidated statements of operations.
| 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 sixnine months ended JuneSeptember 30, 2023. Revenue and gross profit of this disposed product line included in the condensed consolidated statement of operations for the sixnine months ended JuneSeptember 30, 2023, and for the three and sixnine months ended JuneSeptember 30, 2022, were not significant.
16. | Financial Statement Reclassifications |
During the three months ended September 30, 2023, the Company identified immaterial misclassification errors in the financial statement footnote describing the components of accumulated other comprehensive loss as of December 31, 2022 and 2021. These misclassifications overstated the amount attributed to the defined benefit pension plans, net of tax, by $5.4 million and $5.1 million and understated the amount attributed to foreign currency translation adjustments by $(5.4) million and $(5.1) million as of December 31, 2022 and 2021, respectively. This had no impact on total other comprehensive income (loss) for the years ended December 31, 2022 and 2021, included in the Consolidated Statements of Comprehensive Income (Loss), or the total accumulated other comprehensive loss included in the Consolidated Balance Sheets as of December 31, 2022, and 2021. This also had no impact on any of the Company’s previously reported Consolidated Statements of Operations, Stockholders’ Equity, or Cash Flows. These offsetting misclassifications had no impact on any of the periods presented in the interim financial statements and disclosures in this Quarterly Report on Form 10-Q as of September 30, 2023, and applicable corrections will be included in the annual financial statements and disclosures in the Company’s Annual Report on Form 10-K as of December 31, 2023 and for the year then ended.
Item 2. |
|
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, 2022 and our other filings with the 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
Global Supply Chain and Economic Environment
The global supply chain has experienced significant disruptions over the last few years due to electronic component and labor shortages and other macroeconomic factors which have emerged since the onset of COVID-19. This has led 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. These conditions have negatively impacted our past business, results of operations, and cash flow.
We believe that these global Recent events in Ukraine and the Middle East, as well as delays in U.S. government funding may lead to additional economic uncertainties will continue through 2023.uncertainties. If these factors are prolonged or are more severe than anticipated, our business, results of operations, and cash flow may be materially impacted.
Selected Results of Operations
Three months ended JuneSeptember 30, 2023 compared to three months ended JuneSeptember 30, 2022.
Three Months Ended June 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||
(dollars in thousands) | 2023 | % of revenue | 2022 | % of revenue | 2023 | % of revenue | 2022 | % of revenue | ||||||||||||||||||||||||
Revenues | $ | 28,759 | $ | 29,208 | $ | 25,363 | $ | 26,922 | ||||||||||||||||||||||||
Gross profit | 16,673 | 58.0 | % | 16,637 | 57.0 | % | 14,727 | 58.1 | % | 12,172 | 45.2 | % | ||||||||||||||||||||
Sales and marketing expenses | 6,178 | 21.5 | % | 6,587 | 22.6 | % | 5,732 | 22.6 | % | 5,819 | 21.6 | % | ||||||||||||||||||||
General and administrative expenses | 5,353 | 18.6 | % | 5,981 | 20.5 | % | 5,807 | 22.9 | % | 6,324 | 23.5 | % | ||||||||||||||||||||
Research and development expenses | 2,957 | 10.3 | % | 3,497 | 12.0 | % | 2,760 | 10.9 | % | 2,763 | 10.3 | % | ||||||||||||||||||||
Amortization of intangible assets | 1,389 | 4.8 | % | 1,454 | 5.0 | % | 1,361 | 5.4 | % | 1,572 | 5.8 | % | ||||||||||||||||||||
Litigation settlement | - | - | (4,880 | ) | -16.7 | % | - | - | (544 | ) | -2.0 | % | ||||||||||||||||||||
Unrealized loss on equity securities | 1,581 | 5.5 | % | - | - | |||||||||||||||||||||||||||
Unrealized gain on equity securities | (1,208 | ) | -4.8 | % | - | - | ||||||||||||||||||||||||||
Interest expense | 941 | 3.3 | % | 515 | 1.8 | % | 882 | 3.5 | % | 749 | 2.8 | % | ||||||||||||||||||||
Income tax (benefit) expense | (1,118 | ) | -3.9 | % | 986 | 3.4 | % | |||||||||||||||||||||||||
Income tax expense (benefit) | 677 | 2.7 | % | (1,285 | ) | -4.8 | % | |||||||||||||||||||||||||
Revenue
Revenue decreased $0.4 million, or 1.5%, to $28.8was $25.4 million for the three months ended JuneSeptember 30, 2023, compared to $29.2$26.9 million for the three months ended JuneSeptember 30, 2022.2022, a decrease of $1.5 million, or 5.8%. This decline included a net decrease of $1.6$1.3 million in revenue from the discontinuation of non-strategic cellular and molecular products discontinued in the second half of 2022 and decreases in cellular and molecular product revenue, which were largely offset by growth in preclinical products and services. Revenue declines in Asia were partially offset by revenue growth in preclinical products.North America.
Gross profit
Gross profit was $16.7 million for three months ended June 30, 2023, compared with $16.6$14.7 million for the three months ended JuneSeptember 30, 2023, compared with $12.2 million for the three months ended September 30, 2022. Gross margin increased to 58.0%58.1% for the three months ended JuneSeptember 30, 2023, compared with 57.0%45.2% for the three months ended JuneSeptember 30, 2022. The increase in gross margin was due primarily to a higher mix of preclinical products, service and software, which generally have higher gross marginmargins than our other product lines, andas well as reduced revenue from lower margin products discontinued during the second half of 2022. Additionally, duringCosts of goods sold for the three months ended JuneSeptember 30, 2023, we aligned our global2022, also included a $1.3 million inventory costing process, which had an unfavorable impactreserve related to gross margin.the discontinuation of certain non-strategic products.
Sales and marketing expenses
Sales and marketing expenses decreased $0.4$0.1 million, or 6.2%1.5%, to $6.2$5.7 million for the three months ended JuneSeptember 30, 2023, compared to $6.6$5.8 million for the three months ended JuneSeptember 30, 2022. The decrease was primarilyA reduction in salaries due to reduced salarieslower headcount was mostly offset by increases in variable compensation and travel expenses.
General and administrative expenses
General and administrative expenses decreased $0.6$0.5 million, or 10.5%8.2%, to $5.4$5.8 million for the three months ended JuneSeptember 30, 2023, compared with $6.0$6.3 million for the three months ended JuneSeptember 30, 2022. This decrease was primarily due to reduced consultingWe undertook a restructuring during the three months ended September 30, 2022, which resulted in higher severance costs partially offset by increases in salaries and variable compensation.the prior period.
Research and development expenses
Research and development expenses decreased $0.5were $2.8 million or 15.4%, to $3.0 million for both the three months ended JuneSeptember 30, 2023, compared with $3.5 million for the three months ended June 30,and 2022. The decrease was primarilyA reduction in salaries due to reduced salarieslower headcount and a reduction in consulting costs partiallywere mostly offset by increases in variable compensation.
Amortization of intangible assets
Amortization of intangible asset expenses were $1.4 million for the three months ended JuneSeptember 30, 2023, compared with $1.5$1.6 million for the three months ended JuneSeptember 30, 2022. Amortization expense decreased as we completeddue to the amortizationcompletion of amortizing certain intangible assets during 2022.
Litigation settlement (2022)
During the three months ended March 31, 2022, we accrued $5.2 million of costs related to legal fees in connection with the Biostage Litigation and the Biostage Settlement. Due to the financial 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.
During the three months ended JuneSeptember 30, 2022, we recordedreleased a creditreserve of $4.9$0.5 million consisting of adjustments toagainst the reserve against an indemnification receivable from Biostage to reflect: i)reflect the issuancefinal payment by Biostage of Series E 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.Settlement.
Unrealized lossgain on equity securities
On April 6, 2023, Biostage disclosed that it had completed a private placement of its common stock for an aggregate offering amount of approximately $6.0 million at a purchase price of $6.00 per share. As the proceeds of the private placements were in excess of $4.0 million, the transaction triggered a mandatory conversion of our Series E Preferred Stock into shares of Biostage common stock at the offering price of $6.00 per share. On July 20, 2023, Biostage, Inc. changed its corporate name to Harvard Apparatus Regenerative Technology (“HART”) and began to trade under the OTCQB Marketplace symbol HRGN. As of JuneSeptember 30, 2023, we held 707,626706,626 shares of BiostageHART common stock with an estimated fair value of $2.6$3.8 million. During the three months ended September 30, 2023, we recorded an unrealized gain of $1.2 million related to these shares.
We determine the fair value of our shares of BiostageHART common stock at each reporting period using pricesbased on the closing price as quoted on the OTCQB Marketplace. DuringMarketplace at the three months ended June 30, 2023, we recorded unrealized losses related to our investment in Biostage common stock of $1.6 million.reporting date. Due to Biostage’sHART’s limited operating history, its overall financial condition and the limited trading volumes and liquidity of its common stock, the value of our investment in this common stock could fluctuate considerably or become worthless.
Interest expense
Interest expense was $0.9 million and $0.7 million for the three months ended September 30, 2023 and 2022, respectively. The increase was the result of higher interest costs in a rising rate environment, which was partially offset by lower average borrowings during the period.
Income tax
Income tax expense (benefit) for the three months ended September 30, 2023 was $0.7 million and for the three months ended September 30, 2022 was $(1.3) million. The effective tax rates for the three months ended September 30, 2023 and 2022 were (120.2)% and 27.4%, respectively. The difference between our effective tax rates for the three months ended September 30, 2023, compared to the U.S. statutory tax rate of 21% is primarily due to the mix of forecasted income or losses in our U.S. and foreign tax jurisdictions and a Global Intangible Low-Taxed Income (“GILTI”) inclusion to taxable income. The effective tax rates in both the three months ended September 30, 2023 and 2022, were also impacted by changes in valuation allowances associated with our assessment of the likelihood of the recoverability of our deferred tax assets. We have valuation allowances against substantially all of our net operating loss carryforwards and tax credit carryforwards.
Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.
Nine Months Ended September 30, | ||||||||||||||||
(dollars in thousands) | 2023 | % of revenue | 2022 | % of revenue | ||||||||||||
Revenues | $ | 84,097 | $ | 84,908 | ||||||||||||
Gross profit | 49,746 | 59.2 | % | 44,986 | 53.0 | % | ||||||||||
Sales and marketing expenses | 17,888 | 21.3 | % | 19,093 | 22.5 | % | ||||||||||
General and administrative expenses | 17,494 | 20.8 | % | 18,630 | 21.9 | % | ||||||||||
Research and development expenses | 8,614 | 10.2 | % | 9,480 | 11.2 | % | ||||||||||
Amortization of intangible assets | 4,138 | 4.9 | % | 4,492 | 5.3 | % | ||||||||||
Litigation settlement | - | - | (233 | ) | -0.3 | % | ||||||||||
Unrealized loss on equity securities | 373 | 0.4 | % | - | - | |||||||||||
Interest expense | 2,797 | 3.3 | % | 1,648 | 1.9 | % | ||||||||||
Income tax expense (benefit) | 144 | 0.2 | % | (437 | ) | -0.5 | % | |||||||||
Revenue
Revenue was $84.1 million for the nine months ended September 30, 2023, compared to $84.9 million for the nine months ended September 30, 2022, a decrease of $0.8 million, or 1.0%. Revenue included a net decrease of $4.1 million from the discontinuation of non-strategic products which was largely offset by growth in preclinical product and service revenue.
Gross profit
Gross profit was $49.7 million for nine months ended September 30, 2023, compared with $45.0 million for the nine months ended September 30, 2022. Gross margin increased to 59.2% for the nine months ended September 30, 2023, compared with 53.0% for the nine months ended September 30, 2022. The increase in gross margin was due primarily to a higher mix of preclinical products, services and software, which generally have higher gross margins than our other product lines, as well as reduced revenue from lower margin products discontinued during the second half of 2022. Costs of goods sold for the three months ended September 30, 2022, also included a $1.3 million inventory reserve related to the discontinuation of certain non-strategic products.
Sales and marketing expenses
Sales and marketing expenses decreased $1.2 million, or 6.3%, to $17.9 million for the nine months ended September 30, 2023, compared to $19.1 million for the nine months ended September 30, 2022. A reduction in salaries due to lower headcount was partially offset by increases in variable compensation.
General and administrative expenses
General and administrative expenses decreased $1.1 million, or 6.1%, to $17.5 million for the nine months ended September 30, 2023, compared with $18.6 million for the nine months ended September 30, 2022. The decrease was primarily due to reduced consulting costs and severance costs incurred with restructuring activities in the prior period, partially offset by increases in salaries and variable compensation in the current period.
Research and development expenses
Research and development expenses decreased $0.9 million, or 9.1%, to $8.6 million for the nine months ended September 30, 2023, compared with $9.5 million for the nine months ended September 30, 2022. The decrease was primarily due to reduced salaries and consulting costs, partially offset by increases in variable compensation.
Amortization of intangible assets
Amortization of intangible asset expenses were $4.1 million for the nine months ended September 30, 2023, compared with $4.5 million for the nine months ended September 30, 2022. Amortization expense decreased as we completed the amortization of certain intangible assets during 2022.
Litigation settlement (2022)
During the nine months ended September 30, 2022, we recorded a net credit of $0.2 million related to the Biostage Settlement consisting of $5.2 million in settlement and legal expenses accrued during the three months ended March 31, 2022, offset by credits of $4.9 million and $0.5 million recorded during the three months ended June 30, 2022 and September 30, 2022, respectively. The credits consisted of adjustments to the reserve against the 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.
Unrealized loss on equity securities
As discussed above, we held 706,626 shares of HART common stock with an estimated fair value of $3.8 million as of September 30, 2023. During the nine months ended September 30, 2023, we recorded an unrealized loss of $0.4 million related to these shares.
We determine the fair value of our HART common stock based on the closing price as quoted on the OTCQB Marketplace at the reporting date. Due to HART’s limited operating history, its overall financial condition and the limited trading volumes and liquidity of its common stock, the value of our investment in this common stock could fluctuate considerably or become worthless.
Interest expense
Interest expense increased $0.4$1.2 million, or 82.7%69.7%, to $0.9$2.8 million for the threenine months ended JuneSeptember 30, 2023, compared with $0.5$1.6 million for the threenine months ended JuneSeptember 30, 2022. The increase was the result of higher interest costs in a rising rate environment, which was partially offset by lower average borrowings during the period.
Income tax
Income tax expense (benefit) expense for the threenine months ended JuneSeptember 30, 2023 was $(1.1)$0.1 million and for the threenine months ended JuneSeptember 30, 2022 was $1.0$(0.4) million. The effective tax rates for the threenine months ended JuneSeptember 30, 2023 and 2022 were 53.3%(9.9)% and 28.8%5.3%, respectively. The difference between our effective tax rates for the threenine months ended JuneSeptember 30, 2023, and 2022, compared to the U.S. statutory tax rate of 21% iswas primarily due to the mix of forecasted income or losses in our U.S. and foreign tax jurisdictions and a Global Intangible Low-Taxed Income (“GILTI”)GILTI inclusion to taxable incomeincome. The effective tax rates in both the nine months ended September 30, 2023 and 2022, were also impacted by changes in valuation allowances associated with our assessment of the likelihood of the recoverability of our deferred tax assets. We have valuation allowances against substantially all of our net operating loss carryforwards and tax credit carryforwards.
Six months ended June 30, 2023 compared to six months ended June 30, 2022.
Six Months Ended June 30, | ||||||||||||||||
(dollars in thousands) | 2023 | % of revenue | 2022 | % of revenue | ||||||||||||
Revenues | $ | 58,734 | $ | 57,986 | ||||||||||||
Gross profit | 35,019 | 59.6 | % | 32,814 | 56.6 | % | ||||||||||
Sales and marketing expenses | 12,156 | 20.7 | % | 13,274 | 22.9 | % | ||||||||||
General and administrative expenses | 11,687 | 19.9 | % | 12,306 | 21.2 | % | ||||||||||
Research and development expenses | 5,854 | 10.0 | % | 6,717 | 11.6 | % | ||||||||||
Amortization of intangible assets | 2,777 | 4.7 | % | 2,920 | 5.0 | % | ||||||||||
Litigation settlement | - | - | 311 | 0.5 | % | |||||||||||
Unrealized loss on equity securities | 1,581 | 2.7 | % | - | - | |||||||||||
Interest expense | 1,915 | 3.3 | % | 899 | 1.6 | % | ||||||||||
Income tax (benefit) expense | (533 | ) | -0.9 | % | 848 | 1.5 | % | |||||||||
Revenue
Revenue increased $0.7 million, or 1.3%, to $58.7 million for the six months ended June 30, 2023, compared to $58.0 million for the six months ended June 30, 2022. The increase in revenue was primarily due to revenue growth in preclinical products, which was partially offset by decreases from the discontinuation of non-strategic cellular and molecular products of $2.8M.
Gross profit
Gross profit was $35.0 million for six months ended June 30, 2023 compared with $32.8 million for the six months ended June 30, 2022. Gross margin increased to 59.6% for the six months ended June 30, 2023, compared with 56.6% for the six months ended June 30, 2022. The increase in gross margin was due primarily to the increase in revenue, a higher mix of preclinical products which generally have higher gross margin than our other product lines, and reduced revenue from lower margin products discontinued during the second half of 2022.
Sales and marketing expenses
Sales and marketing expenses decreased $1.1 million, or 8.4%, to $12.2 million for the six months ended June 30, 2023, compared to $13.3 million for the six months ended June 30, 2022. The decrease was primarily due to reduced salaries and travel expenses partially offset by increases in variable compensation.
General and administrative expenses
General and administrative expenses decreased $0.6 million, or 5.0%, to $11.7 million for the six months ended June 30, 2023, compared with $12.3 million for the six months ended June 30, 2022. The decrease was primarily due to reduced consulting costs partially offset by increases in salaries and variable compensation.
Research and development expenses
Research and development expenses decreased $0.9 million, or 12.8%, to $5.9 million for the six months ended June 30, 2023, compared with $6.7 million for the six months ended June 30, 2022. The decrease was primarily due to reduced salaries and consulting costs partially offset by increases in variable compensation.
Amortization of intangible assets
Amortization of intangible asset expenses were $2.8 million for the six months ended June 30, 2023, compared with $2.9 million for the six months ended June 30, 2022. Amortization expense decreased as we completed the amortization of certain intangible assets during 2022.
Litigation settlement (2022)
During the six months ended June 30, 2022, we incurred a net expense of $0.3 million related to the Biostage Settlement consisting of $5.2 million in settlement and legal expenses accrued during the three months ended March 31, 2022 offset by a credit of $4.9 million recorded during the three months ended June 30, 2022 as discussed above, related to adjustments to the reserves against the indemnification receivable from Biostage.
Unrealized loss on equity securities
On April 6, 2023, Biostage disclosed that it had completed a private placement of its common stock for an aggregate offering amount of approximately $6.0 million at a purchase price of $6.00 per share. As the proceeds of the private placements were in excess of $4.0 million, the transaction triggered a mandatory conversion of our Series E Preferred Stock into shares of Biostage common stock at the offering price of $6.00 per share. As of June 30, 2023, we held 707,626 shares of Biostage common stock with an estimated fair value of $2.6 million.
We determine the fair value of our shares of Biostage common stock at each reporting period using prices as quoted on the OTCQB Marketplace. During the six months ended June 30, 2023, we recorded unrealized losses related to our investment in Biostage common stock of $1.6 million. Due to Biostage’s limited operating history, its overall financial condition and the limited trading volumes and liquidity of its common stock, the value of our investment in Biostage’s common stock could fluctuate considerably or become worthless.
Interest expense
Interest expense increased $1.0 million, or 113.0 %, to $1.9 million for the six months ended June 30, 2023, compared with $0.9 million for the six months ended June 30, 2022. The increase was the result of higher interest costs in a rising rate environment which was partially offset by lower average borrowings during the period.
Income tax
Income tax (benefit) expense for the six months ended June 30, 2023 was $(0.5) million and for the six months ended June 30, 2022 was $0.8 million. The effective tax rates for the six months ended June 30, 2023 and 2022 were 59.8% and (23.6)%, respectively. The difference between our effective tax rates for the six months ended June 30, 2023 and 2022, compared to the U.S. statutory tax rate of 21% is primarily due to a 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 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, salaries as well as capital expenditures.
As of JuneSeptember 30, 2023, we held cash and cash equivalents of $4.3$5.3 million, compared with $4.5 million at December 31, 2022. Borrowings outstanding were $42.1$39.4 million and $47.7 million as of JuneSeptember 30, 2023 and December 31, 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. As of JuneSeptember 30, 2023, the weighted average interest rate on our borrowings, inclusive of the effect of theour interest rate swaps, was 8.1%7.7%, and the available and unused borrowing capacity was $12.4$13.0 million. Total revolver borrowing capacity is limited by our consolidated net leverage ratio as defined under the Credit Agreement, as amended. As of JuneSeptember 30, 2023, we were in compliance with the 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, 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 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
| Six Months Ended June 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Cash provided by (used in) operating activities | $ | 5,364 | $ | (2,176 | ) | $ | 9,725 | $ | (1,527 | ) | ||||||
Cash used in investing activities | (337 | ) | (913 | ) | (738 | ) | (1,355 | ) | ||||||||
Cash used in financing activities | (5,268 | ) | (484 | ) | (8,018 | ) | (107 | ) | ||||||||
Effect of exchange rate changes on cash | 57 | 11 | (137 | ) | 312 | |||||||||||
Decrease in cash and cash equivalents | $ | (184 | ) | $ | (3,562 | ) | ||||||||||
Increase (decrease) in cash and cash equivalents | $ | 832 | $ | (2,677 | ) | |||||||||||
Cash provided by (used in) operating activities was $5.4 million and $(2.2)$9.7 million for the sixnine months ended JuneSeptember 30, 2023, and 2022, respectively. Cash flow from operationscompared with cash used in operating activities of $1.5 million for the sixnine months ended JuneSeptember 30, 2022. Cash provided by operating activities for the nine months ended September 30, 2023 was greater thanimproved due to reductions in our net loss adjusted for non-cash items and increases in deferred revenue for service contracts. During the comparable period in the prior year reflecting improved operating results. Also, during the sixnine months ended JuneSeptember 30, 2022, we paidcash used in operating activities was negatively impacted by the payment of approximately $4.0 million in connection with the Biostage Settlement.
Cash used in investing activities was $0.3$0.7 million for the sixnine months ended JuneSeptember 30, 2023, and primarily consisted of $0.8$1.2 million of capital expenditures in manufacturing, information technology infrastructure, and intangible asset acquisitions, offset by $0.5 million from proceeds of the sale our Hoefer product line. Cash used in investing activities was $0.9$1.4 million for the sixnine months ended JuneSeptember 30, 2022, and primarily consisted of capital expenditures in manufacturing and information technology infrastructure.
Cash used in financing activities was $5.3$8.0 million and $0.5$0.1 million for the sixnine months ended JuneSeptember 30, 2023 and 2022, respectively. During the sixnine months ended JuneSeptember 30, 2023, debt outstanding under our credit facility decreased by $5.5$8.3 million, consisting of net payments against our revolving line of credit of $2.9$5.0 million, and payments of $2.6$3.3 million against the term loan. We also received proceeds of $0.7 million from the exercise of stock options and employee stock purchases and paid $0.5 million for taxes related to net share settlement of equity awards. During the sixnine months ended JuneSeptember 30, 2022, we made paymentsdebt outstanding under our credit facility increased by $0.7 million, consisting of $1.7 million against our term loan, which were offset by net drawings against our revolving credit facilityrevolver of $1.7 million.$3.1 million, offset by payments of $2.4 million against the term loan. We also paid $0.8$1.2 million for taxes related to net share settlement of equity awards.
Impact of Foreign Currencies
Our international operations in some instances operate in a natural hedge, as we sell our products in many countries and a substantial portion of our revenues, costs and expenses are denominated in foreign currencies, primarily the euro and British pound.
During the three months ended June 30, 2023, the impact of foreign currency exchange rates on our consolidated revenues and expense was not significant. During the six months ended JuneSeptember 30, 2023, changes in foreign currency exchange rates resulted in an unfavorablea favorable translation effect on our consolidated revenues of approximately $0.4$0.7 million and a favorablean unfavorable effect on expense of approximately $0.4$0.5 million. During the nine months ended September 30, 2023, changes in foreign currency exchange rates resulted in a favorable translation effect on our consolidated revenues of approximately $0.3 million and a unfavorable effect on expense of approximately $0.1 million.
The gain (loss)loss associated with the translation of foreign equity into U.S. dollars included as a component of comprehensive incomeloss was $0.2$1.3 million and $(2.5)$2.9 million for the three months ended JuneSeptember 30, 2023 and June 30, 2022, respectively, and was $1.0$0.4 million and $(3.2)$6.2 million for the sixnine months ended JuneSeptember 30, 2023 and June 30, 2022, respectively.
In addition, currency exchange rate fluctuations included as a component of net income (loss)loss resulted in currency lossesgains (losses) of approximately $0.1$0.2 million and $0.2$(0.3) million for each of the three months ended JuneSeptember 30, 2023 and 2022, respectively, and $0.1 million and $0.2$(0.6) million for each of the sixnine months ended JuneSeptember 30, 2023 and 2022, respectively.
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, 2022.
Recent 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. |
|
Not Applicable.
Item 4. |
Evaluation of Disclosure Controls and Procedures
As of JuneSeptember 30, 2023, the end of the period covered by this report, our management, including our Chief Executive Officer and our 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 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 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 secondthird quarter of fiscal 2023 that have 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.
Item 1. |
The information included in Note 13 and Note 14 to the Condensed Consolidated Financial Statements (Unaudited) included in “Part I, Item 1 Financial Statements” of this quarterly report is incorporated herein by reference.
Item 1A. |
You should carefully consider 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, 2022, which could materially affect our business, financial position, or future results of operations. The risks described 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.
Item 2. |
|
There were no unregistered sales of equity securities during the period covered by this report.
Item 3. |
None.
Item 4. |
Not applicable.
Item 5. |
None.
Item 6. |
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/ JENNIFER COTE | ||
Jennifer Cote | |||
Chief Financial Officer | |||
28