HARVARD BIOSCIENCE INC - Quarter Report: 2012 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended March 31, 2012

For the transition period from            to            

Commission file number 001-33957

HARVARD BIOSCIENCE, INC.

(Exact Name of Registrant as Specified in Its Charter)

(508) 893-8999

(Registrant’s telephone number, including area code)

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.    x  YES    ¨  NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    x  YES    ¨  NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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    x  NO

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 1, 2012, there were 28,767,670 shares of Common Stock, par value $0.01 per share, outstanding.

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HARVARD BIOSCIENCE, INC.

Form 10-Q

For the Quarter Ended March 31, 2012

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PART I. FINANCIAL INFORMATION

Financial Statements.

HARVARD BIOSCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share and per share amounts)

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HARVARD BIOSCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited, in thousands, except per share amounts)

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HARVARD BIOSCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

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HARVARD BIOSCIENCE, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

Basis of Presentation

The unaudited consolidated financial statements of Harvard Bioscience, Inc. and its wholly-owned subsidiaries (collectively, “Harvard Bioscience,” the “Company,” “our” or “we”) as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“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, 2011 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, 2011, which was filed with the SEC on March 15, 2012.

In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present a fair statement of financial position as of March 31, 2012, results of operations for the three months ended March 31, 2012 and 2011 and cash flows for the three months ended March 31, 2012 and 2011, as applicable, have been made. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Summary of Significant Accounting Policies

The accounting policies underlying the accompanying unaudited consolidated financial statements are those 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, 2011, which was filed with the SEC on March 15, 2012.

Intangible assets consist of the following:

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The change in the carrying amount of goodwill for the three months ended March 31, 2012 is as follows:

Goodwill rollforward

Intangible asset amortization expense was $0.7 million and $0.6 million for the three months ended March 31, 2012 and 2011, respectively. Amortization expense of existing amortizable intangible assets is currently estimated to be $2.8 million for the year ending December 31, 2012, $2.6 million for the year ending December 31, 2013, $2.4 million for the year ending December 31, 2014, $2.1 million for the year ending December 31, 2015 and $2.0 million for the year ending December 31, 2016.

Inventories consist of the following:

2012 Restructuring Plan

During the quarter ended March 31, 2012, the management of Harvard Bioscience initiated a plan to reduce operating expenses at Panlab s.l., its Harvard Apparatus Spain subsidiary. The Company recorded restructuring charges of approximately $0.2 million representing severance payments. No charges are expected to be incurred beyond the first quarter of 2012 on this matter.

Activity and liability balances related to these charges were as follows:

2011 Restructuring Plans

During the quarter ended September 30, 2011, the management of Harvard Bioscience initiated a plan to relocate its Hoefer subsidiary’s San Francisco, California facility as part of a business improvement initiative. The Company recorded restructuring charges of approximately $0.5 million, which included $0.3 million in fixed asset write offs, $0.1 million in severance payments and $0.1 million in other expenses. The Company anticipates the remaining payments related to the 2011 Restructuring Plan will occur in the second quarter of 2012.

Activity and liability balances related to these charges were as follows:

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Aggregate restructuring charges for all the restructuring plans were as follows:

AHN Biotechnologie GmbH

On February 3, 2012, the Company acquired all issued and outstanding shares of AHN Biotechnologie GmbH (“AHN”) for approximately $2.6 million. The Company funded the acquisition from its existing cash balances.

AHN is a manufacturer of plastic laboratory consumables which include pipettes, pipette tips, PCR tubes and spin columns. AHN is located in Nordhausen, Germany. This acquisition is complementary to the Company’s molecular biology product line.

The aggregate purchase price for this acquisition was preliminarily allocated to tangible and intangible assets acquired as follows:

Direct acquisition costs related to AHN recorded in other, net in the Company’s consolidated statements of operations, were $0.2 million for the three months ended March 31, 2012.

The results of operations for AHN have been included in the Life Science Research Tools (“LSRT”) segment in the Company’s consolidated financial statements from the date of acquisition. The financial results of this acquisition are considered immaterial for the purposes of proforma financial statement disclosures. Goodwill recorded as a result of the acquisition of AHN is not deductible for tax purposes.

Warranties are estimated and accrued at the time sales are recorded. A rollforward of product warranties is as follows:

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Certain of the Company’s United Kingdom subsidiaries, Harvard Apparatus Limited and Biochrom Limited, maintain contributory, defined benefit or defined contribution pension plans for substantially all of their employees. The components of the Company’s defined benefit pension expense were as follows:

For the three months ended March 31, 2012 and 2011, the Company contributed $0.2 million to its defined benefit plans. The Company expects to contribute approximately $0.9 million to its defined benefit plans during 2012.

The Company has noncancelable operating leases for office and warehouse space expiring at various dates through 2017.

Rent expense, which is recorded on a straight-line basis, is estimated to be $1.2 million for the year ending December 31, 2012. Future minimum lease payments for operating leases, with initial or remaining terms in excess of one year at March 31, 2012, are as follows:

Employee Stock Purchase Plan (“ESPP”)

In 2000, the Company approved the ESPP. Under the ESPP, participating employees can authorize the Company to withhold a portion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock. At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the period. Shares are issued under the plan for the six-month periods ending June 30 and December 31. Under this plan, 500,000 shares of common stock are authorized for issuance, of which 410,375 shares were issued as of March 31, 2012. During the three months ended March 31, 2012 and 2011, no shares of the Company’s common stock were issued under the ESPP.

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Stock Option Plans

We account for share-based payment awards in accordance with the provisions of FASB ASC 718 “Compensation- Stock Compensation”, which requires us to recognize compensation expense for all share-based payment awards made to employees and directors including employee stock options, Restricted Stock Units (“RSUs”) and employee stock purchases related to the ESPP.

A summary of stock option and RSU activity under the Company’s stock option and equity plans for the three months ended March 31, 2012 is as follows:

The following assumptions were used to estimate the fair value of the stock options:

There were no stock options granted during the three months ended March 31, 2011.

The weighted average fair values of the options granted under the Third Amended and Restated 2000 Stock Option and Incentive Plan (“2000 Plan”) during the three months ended March 31, 2012 was $2.14, using the Black Scholes option-pricing model.

The Company used historical volatility to estimate the expected stock price volatility assumption. Historical volatility was determined by calculating the mean reversion of the daily-adjusted closing stock price. The risk-free interest rate assumption is based upon observed U.S. Treasury bill interest rates (risk free) appropriate for the term of the Company’s employee stock options. The expected holding period of employee stock options represents the period of time options are expected to be outstanding and is based on historical experience. The vesting period is generally 4 years and the contractual life is 10 years.

Stock-based compensation expense for the three months ended March 31, 2012 and 2011 consisted of stock-based compensation expense related to employee stock options, RSUs and the ESPP.

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Stock-based compensation expense for the three months ended March 31, 2012 and 2011, respectively, was allocated as follows:

We did not capitalize any stock-based compensation.

Weighted Average Common Shares Outstanding

Basic income per share is based upon net income divided by the number of weighted average common shares outstanding during the period. The calculation of diluted net income per share assumes conversion of stock options into common stock using the treasury method. The weighted average number of shares used to compute basic and diluted earnings per share consists of the following:

Excluded from the shares used in calculating the diluted earnings per common share in the above table are options to purchase approximately 4,232,539 and 3,436,100 shares of common stock for the three months ended March 31, 2012 and 2011, respectively, as the impact of these shares would be anti-dilutive.

On August 7, 2009, the Company entered into an amended and restated $20.0 million revolving credit loan agreement with Bank of America, as agent, and Bank of America and Brown Brothers Harriman & Co as lenders. On September 30, 2011, the Company entered into the First Amendment to the Amended and Restated Revolving Credit Loan Agreement (the “Amendment”) with Bank of America as agent, and Bank of America and Brown Brothers Harriman & Co as lenders. The Amendment extends the maturity date of the credit facility to August 7, 2013 and reduces the interest rate to the London Interbank Offered Rate (“LIBOR”) plus 3.0%. At March 31, 2012, the interest rate for the facility was 3.24%. The amended and restated facility includes covenants relating to income, debt coverage and cash flow, as well as minimum working capital requirements. The credit facility also contains limitations on the ability to incur additional indebtedness and requires lender approval for acquisitions funded with cash, promissory notes and/or other consideration in excess of $6.0 million and for acquisitions funded solely with equity in excess of $10.0 million.

As of March 31, 2012 and December 31, 2011, the Company had $16.8 million and $16.3 million, respectively, outstanding under its credit facility. The borrowings under the credit facility were primarily related to its acquisitions, and stock repurchases. As of March 31, 2012, the Company was in compliance with all financial covenants contained in the credit facility; and was not subject to any borrowing restrictions under the financial covenants and had available borrowing capacity under its revolving credit facility of $3.2 million.

The effective income tax rate was 37.3% for the three months ended March 31, 2012. This included benefits related to foreign tax rate differential and research and development tax credits, as well as offsetting discrete expense items related to acquisition costs and stock compensation expense. As described in Note 13 in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, the Company had recorded an uncertain tax liability of $0.7 million at the end of 2010. In January 2011, the statute of limitations expired for the return that included $0.5 million of these uncertain tax positions with no change from the tax authorities. Accordingly, the uncertain tax liability of $0.5 million and the associated accrued interest was reversed in the first quarter of 2011 as a discrete item and was included as a benefit in the Income tax expense (benefit) line item in the Consolidated Statements of Operations.

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As described in Note 17 in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, the Company has two operating segments aggregated under the LSRT segment, which is the Company’s only reportable segment. These operating segments have similar products and services, customer channels, distribution methods and historical margins. The LSRT segment is engaged in the development, manufacture and marketing of specialized products, primarily apparatus and scientific instruments, used to advance life science research at pharmaceutical and biotechnology companies, universities and government laboratories worldwide.

The Company has one additional operating segment, Regenerative Medicine Device (“RMD”), which does not meet the quantitative thresholds for reportable segments and is therefore disclosed under the caption of “Other”. The RMD division is engaged in the development, manufacturing and marketing of devices used by surgeons in the field of regenerative medicine. Non operating expenses that are not allocated to operating segments are under the caption “Unallocated Expenses”. Unallocated expenses also include certain corporate related expenses that are not allocable to the operating segments.

Summarized financial information on the Company’s reportable segments for the three month periods ended March 31, 2012 and 2011 are shown in the following table. There were no inter segment revenues.

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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 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,” “expects,” “plans,” “anticipates,” “believes,” “goals,” “sees,” “estimates,” “projects,” “predicts,” “intends,” “think,”“potential,” “objectives,” “optimistic,” “strategy,” 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. Factors that may cause the Company’s actual results to differ materially from those in the forward-looking statements include the Company’s failure to identify potential acquisition candidates, successfully integrate acquired businesses or technologies, successfully negotiate favorable pricing and other terms with acquisition candidates to enable potential acquisitions to close, complete consolidations of business functions, expand our distribution channels, expand our product offerings, introduce new products or commercialize new technologies on a timely basis, including in the field of regenerative medicine, unanticipated costs relating to acquisitions, unanticipated costs arising in connection with the Company’s consolidation of business functions and any restructuring initiative, lack of demand or decreased demand for the Company’s products due to changes in our customers’ needs, success of our efforts with our distributor to promote sales of our microvolume spectrophotometer product and success of our strategies to increase the sales of other products, our ability to obtain regulatory approvals, including FDA approval, for our products including any products in the field of regenerative medicine, the current size or anticipated size of the regenerative medicine market, the existence and size of opportunities in the regenerative medicine market, our financial position, general economic outlook, or other circumstances, overall economic trends, the seasonal nature of purchasing in Europe, economic, political and other risks associated with international revenues and operations, the impact of the current economic and financial crisis, additional costs of complying with recent changes in regulatory rules applicable to public companies, our ability to manage our growth, our ability to retain key personnel, competition from our competitors, technological changes resulting in our products becoming obsolete, future changes to the operations or the activities of our subsidiaries due to manufacturing consolidations, our ability to meet the financial covenants contained in our credit facility, our ability to protect our intellectual property and operate without infringing on others’ intellectual property, potential costs of any lawsuits to protect or enforce our intellectual property, economic and political conditions generally and those affecting pharmaceutical and biotechnology industries, research funding levels from endowments at our university customers, impact of any impairment of our goodwill or intangible assets, our acquisition of Genomic Solutions failing to qualify as a tax-free reorganization for federal tax purposes, our ability to utilize deferred tax assets after the release of our valuation allowances, the amount of earn-out consideration that the Company receives in connection with the disposition of the Company’s Capital Equipment Business segment and factors that may impact the receipt of this consideration, such as the revenues of the businesses disposed of, plus factors described under the heading “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 15, 2012. Our results may also be affected by factors of which we are not currently aware. 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.

General

Harvard Bioscience consists of a Life Science Research Tools (“LSRT”) business and a Regenerative Medicine Device (“RMD”) business.

Our LSRT strategy is to have a broad range of highly specialized but relatively inexpensive products that have strong positions in niche markets in life science research. We believe that:

We seek to grow this range of products through a combination of organic growth driven by internal development of new products, direct marketing, distribution channel expansion and the acquisition of closely related products. We use acquisitions to expand our product offerings because we believe we can use our well-established brands and distribution channels to accelerate the growth of these acquired products. We also believe that our expertise in operational management frequently allows us to improve profitability at acquired companies.

In addition to driving growth in our core research markets, we have been investing to create new products to address what we believe is a long term growth opportunity in the emerging field of regenerative medicine. Regenerative medicine is using stem cells to

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repair damaged organs and to grow organs outside the body for transplant. The U.S. Department of Health and Human Services has projected that the U.S. market for regenerative medicine may be $100 billion in the coming years. The government’s estimate appears to include the value of all regenerative medicine protocols and therapies, including potential cost savings versus current methodologies. Our strategy is not to become a therapeutics company, but instead, to provide tools to researchers and clinicians in the field of regenerative medicine. These new tools currently fall into two main categories: bioreactors for growing tissue and organs outside the body; and injectors for stem cell therapy. These new tools we are creating are being built on our existing technologies—such as our market leading Harvard Apparatus precision syringe pumps and market leading Hugo-Sachs isolated organ systems.

Our strategy in our RMD business is to (i) create devices in collaboration with leading surgeons, (ii) build these devices using our existing technologies and brands in an effort to reduce the investment needed to get the devices to market, and (iii) develop devices with significant disposable components to improve clinical safety and allow us to participate on a per-procedure basis following the sale of an instrument.

Our first regenerative medicine tool, the “InBreath” hollow organ bioreactor, was used to perform the world’s first human transplant of a regenerated bronchus. Dr. Paolo Macchiarini of the Karolinska University Hospital and Karolinska Institutet, et al reported this success in The Lancet, a leading general medicine journal, in November 2008. We have licensed the “InBreath” hollow organ bioreactor from Dr. Macchiarini’s team, and worked to make it a commercial device. We believe that it is the world’s first commercially available bioreactor that has been used to perform a human transplant of a regenerated organ. We believe it marks an important milestone in the development of the regenerative medicine field as the tools evolve from concepts to commercial quality products.

During the first half of 2010, one of our collaborators, Dr. Harald Ott at Massachusetts General Hospital (“MGH”) succeeded in regenerating a lung and subsequently transplanting it into a rat. In collaboration with Dr. Ott and MGH, we designed and developed a novel bioreactor, LB-2 Solid organ bioreactor, that was used to grow the lung. The work was published online in Nature Medicine in July 2010. The bioreactor used by Dr. Ott was a modified version of one of our market leading Hugo-Sachs isolated organ systems.

In June 2011, the “InBreath” bioreactor was used for the world’s first successful transplantation of a synthetic tissue engineered windpipe. For the first time in history, a patient was given a new trachea made from a synthetic scaffold seeded with his own stem cells in a bioreactor. The cells were grown on the scaffold inside the bioreactor for two days before transplantation into the patient. Because the cells used to regenerate the trachea were the patient’s own, there has been no rejection of the transplant, and the patient is not taking immunosuppressive drugs. The patient had been suffering from late stage tracheal cancer, which before this surgery would have been inoperable, and is now alive and well eleven months after the surgery. The operation was performed at the Karolinska University Hospital in Huddinge, Stockholm, by Dr. Paolo Macchiarini and colleagues. Dr. Macchiarini led an international team including medical professionals and individuals who designed and built the nanocomposite tracheal scaffold, and we produced a specifically designed bioreactor used to seed the scaffold with the patient’s own stem cells. The success of this transplant surgery was noted in The Lancet on November 24, 2011.

In November 2011, a second patient was given a new trachea made from a synthetic scaffold seeded with his own stem cells in a bioreactor. The patient had been suffering from late stage tracheal cancer. The patient was discharged from the hospital in January 2012. On March 5, 2012, this patient died. The official cause of death recorded on the death certificate was pneumonia secondary to tracheal cancer. We know of no evidence that either the scaffold or the bioreactor played any part in the patients death.

In addition to the bioreactors described above, we have also made progress on our clinical version of one of our market leading Harvard Apparatus research syringe pumps. The research version of this pump is called the “PHD Ultra Nanomite” stem cell therapy injection system. We anticipate that this pump will be used to inject cells into damaged tissue in cell therapy. We expect to submit this pump to the regulatory agencies in 2012 for approval. Based on our progress to date, we expect to get our first clinical revenue this year.

We are also actively evaluating strategic alternatives to fund the RMD business going forward.

While we expect the initiatives discussed above to positively impact our business, the success of these initiatives is subject to a number of factors, including fluctuations in foreign exchange rates, the current economic and financial condition and their impact on our customers and our ability to obtain credit on terms favorable to us, the competitiveness of our new products, the strength of our intellectual property underlying these products, the success of our marketing efforts and those of our distributors and the other factors described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 15, 2012.

Financing

On August 7, 2009, we entered into an amended and restated $20.0 million revolving credit loan agreement with Bank of America, as agent, and Bank of America and Brown Brothers Harriman & Co as lenders. On September 30, 2011, we entered into the First Amendment to the Amended and Restated Revolving Credit Loan Agreement (the “Amendment”) with Bank of America as agent, and Bank of America and Brown Brothers Harriman & Co as lenders. The Amendment extends the maturity date of our credit facility to August 7, 2013 and reduces our interest rate to the London Interbank Offered Rate (“LIBOR”) plus 3.0%. At March 31, 2012, the interest rate for the facility was 3.24%. The amended and restated facility includes covenants relating to income, debt coverage and cash flow, as well as minimum working capital requirements. The credit facility also contains limitations on our ability to incur additional indebtedness and requires lender approval for acquisitions funded with cash, promissory notes and/or other consideration in excess of $6.0 million and for acquisitions funded solely with equity in excess of $10.0 million.

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At March 31, 2012, we had borrowings of $16.8 million outstanding under our credit facility with Bank of America and Brown Brothers Harriman & Co.

Historically, we have funded acquisitions with debt, capital raised by issuing equity and cash flow from operations. In order to continue the acquisition portion of our growth strategy beyond what our current cash balances and cash flow from operations can support, we will need to raise more capital, either by incurring additional debt, issuing equity or a combination thereof.

Components of Operating Income

Revenues. We generate revenues by selling apparatus, instruments, devices and consumables through our catalogs, our distributors, our direct sales force and our website. For products primarily priced under $10,000, we typically distribute a new, comprehensive catalog every one to three years, initially in a series of bulk mailings, first to our existing customers, followed by mailings to targeted markets of potential customers. Over the life of the catalog, distribution will also be made periodically to potential and existing customers through direct mail and trade shows and in response to e-mail and telephone inquiries. From time to time, we also distribute catalog supplements that promote selected areas of our catalog or new products to targeted subsets of our customer base. Future editions of our comprehensive catalog and our catalog supplements will be timed at least in part with the incidence of new product introductions. Our end user customers are research scientists at pharmaceutical and biotechnology companies, universities and government laboratories. Revenue from catalog sales in any period is influenced by the amount of time elapsed since the last mailing of the catalog, the number of catalogs mailed and the number of new items included in the catalog. We launched our latest comprehensive catalog in March 2010, with approximately 850 pages, 11,000 products and approximately 65,000 copies printed. Revenues from direct sales to end users represented approximately 57% and 58%, respectively, of our revenues for the three months ended March 31, 2012 and for the year ended December 31, 2011.

Products sold under brand names of distributors, including GE Healthcare, are typically priced in the range of $5,000-$15,000. They are mainly scientific instruments like spectrophotometers and plate readers that analyze light to detect and quantify a very wide range of molecular and cellular processes or apparatus like gel electrophoresis units. We also use distributors for both our catalog products and our higher priced products, for sales in locations where we do not have subsidiaries or where we have distributors in place for acquired businesses. For the three months ended March 31, 2012 and for the year ended December 31, 2011, approximately 43% and 42%, respectively, of our revenues were derived from sales to distributors.

For the three months ended March 31, 2012, approximately 64% of our revenues were derived from products we manufacture; approximately 23% were derived from distributed products sold under our brand names and approximately 13% were derived from complementary products we distribute in order to provide the researcher with a single source for all equipment needed to conduct a particular experiment. For the year ended December 31, 2011, approximately 62% of our revenues were derived from products we manufacture; approximately 13% were derived from complementary products we distribute in order to provide the researcher with a single source for all equipment needed to conduct a particular experiment and 25% were derived from distributed products sold under our brand names.

For the three months ended March 31, 2012 and for the year ended December 31, 2011, approximately 41% of our revenues were derived from sales made by our non-U.S. operations. A large portion of our international sales during these periods consisted of sales to GE Healthcare, the distributor for our spectrophotometers and plate readers. GE Healthcare distributes these products to customers around the world, including to many customers in the United States, from its distribution center in Upsalla, Sweden. As a result, we believe our international sales would have been a lower percentage of our revenues if we had shipped our products directly to our end-users. Changes in the relative proportion of our revenue sources between catalog sales, direct sales and distribution sales are primarily the result of a different sales proportion of acquired companies.

Cost of product revenues. Cost of product revenues includes material, labor and manufacturing overhead costs, obsolescence charges, packaging costs, warranty costs, shipping costs and royalties. Our cost of product revenues may vary over time based on the mix of products sold. We sell products that we manufacture and products that we purchase from third parties. The products that we purchase from third parties have a higher cost of product revenues as a percent of revenue because the profit is effectively shared with the original manufacturer. We anticipate that our manufactured products will continue to have a lower cost of product revenues as a percentage of revenues as compared with the cost of non-manufactured products for the foreseeable future. Additionally, our cost of product revenues as a percent of product revenues will vary based on mix of direct to end user sales and distributor sales, mix by product line and mix by geography.

Sales and marketing expenses. Sales and marketing expense consists primarily of salaries and related expenses for personnel in sales, marketing and customer support functions. We also incur costs for travel, trade shows, demonstration equipment, public relations and marketing materials, consisting primarily of the printing and distribution of our catalogs, supplements and the maintenance of our websites. We may from time to time expand our marketing efforts by employing additional technical marketing specialists in an effort to increase sales of selected categories of products in our catalog. We may also from time to time expand our direct sales organizations in an effort to concentrate on key accounts or promote certain product lines.

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General and administrative expenses. General and administrative expense consists primarily of salaries and other related costs for personnel in executive, finance, accounting, information technology and human relations functions. Other costs include professional fees for legal and accounting services, facility costs, investor relations, insurance and provision for doubtful accounts.

Research and development expenses. Research and development expense consists primarily of salaries and related expenses for personnel and spending to develop and enhance our products. Other research and development expense includes fees for consultants and outside service providers, and material costs for prototype and test units. We expense research and development costs as incurred. We believe that investment in product development is a competitive necessity and plan to continue to make these investments in order to realize the potential of new technologies that we develop, license or acquire for existing markets. Additionally, we are working to develop new products aimed at long term opportunities in the emerging field of regenerative medicine.

Stock-based compensation expenses. Stock-based compensation expense for the three months ended March 31, 2012 and 2011 was $0.7 million and $0.6 million, respectively. This stock-based compensation expense was related to employee stock options, RSUs and the employee stock purchase plan and was recorded as a component of cost of product revenues, sales and marketing expenses, general and administrative expenses and research and development expenses.

Income Taxes

The effective income tax rate was 37.3% for the three months ended March 31, 2012. This included benefits related to foreign tax rate differential and research and development tax credits, as well as offsetting discrete expense items related to acquisition costs and stock compensation expense. As described in Note 13 in our Company’s Annal Report on Form 10-K for the year ended December 31, 2011, we had recorded an uncertain tax liability of $0.7 million at the end of 2010. In January 2011, the statute of limitations expired for the return that included $0.5 million of these uncertain tax positions with no change from the tax authorities. Accordingly, the uncertain tax liability of $0.5 million and the associated accrued interest was reversed in the first quarter of 2011 as a discrete item and is included as a benefit in the Income tax expense (benefit) line item in the Consolidated Statements of Operations.

Selected Results of Operations

Three months ended March 31, 2012 compared to three months ended March 31, 2011:

Revenues.

Revenues increased $2.0 million, or 7.6%, to $28.3 million for the three months ended March 31, 2012 compared to $26.3 million for the same period in 2011. Our acquisitions of CMA and AHN contributed approximately $1.2 million to first quarter 2012 revenues. The effect of a stronger U.S. dollar decreased our first quarter revenues by $0.3 million, or 1.0%, compared with the same period in 2011. Adjusting for the effect of foreign currency fluctuation and acquisitions, revenues were up $1.1 million, or 4.2%, year-to-year and reflected organic growth across our Harvard Apparatus, Denville and Hoefer businesses.

Cost of product revenues.

Cost of product revenues increased $1.0 million, or 7.0%, to $14.9 million for the three months ended March 31, 2012 compared with $13.9 million for the three months ended March 31, 2011. The increase in cost of product revenues included $0.7 million, or 5.0%, attributable to our acquisitions of CMA and AHN. A stronger U.S. dollar caused a $0.1 million, or 1.0%, favorable currency effect on the cost of product revenues for the three months ended March 31, 2012. Gross profit as a percentage of revenues increased to 47.3% for the three months ended March 31, 2012 compared with 47.0% for the same period in 2011. The increase in gross profit as a percentage of revenues was primarily due to a more favorable sales mix in the first quarter of 2012 compared with the first quarter of 2011.

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Sales and marketing expense.

Sales and marketing expenses increased $0.6 million, or 14.2%, to $4.8 million for the three months ended March 31, 2012 compared with $4.2 million for the three months ended March 31, 2011. In LSRT, sales and marketing expenses increased $0.5 million, or 13.4%, to $4.6 million, compared to $4.1 million for the three months ended March 31, 2011 primarily due to $0.1 million, or 2.8%, of expenses related to our AHN and CMA acquisitions, and $0.4 million, or 10.7%, due to an increase in the number of sales representatives at our Denville business. In RMD, sales and marketing expenses increased $0.1 million primarily due to an increase in business development efforts.

General and administrative expense.

General and administrative expenses increased $0.5 million, or 11.6%, to $4.9 million for the three months ended March 31, 2012 compared with $4.4 million for the three months ended March 31, 2011. In LSRT, general and administrative expenses increased $0.2 million, or 5.8%, to $4.5 million, compared to $4.3 million for the three months ended March 31, 2011 primarily due to our acquisitions of CMA and AHN. In RMD, general and administrative expenses increased $0.3 million due to increased activity in our regenerative medicine device initiative.

Research and development expense.

Research and development expenses increased $0.4 million, or 35.3%, to $1.7 million for the three months ended March 31, 2012 compared with $1.3 million for the same period in 2011. In LSRT, research and development expenses remained flat at $1.0 million for the three months ended March 31, 2012 and 2011. In RMD, research and development expenses increased $0.4 million primarily due to increased activity in our stem cell therapy injector and bioreactor development initiatives.

Amortization of intangible assets.

Amortization of intangible asset expenses increased $0.1 million, or 9.2%, to $0.7 million for the three months ended March 31, 2012 compared with $0.6 million for the same period in 2011. The year-to-year increase in the amortization expense was primarily due to the acquisitions of CMA and AHN.

Other(expense) income, net.

Other expense and income, net, was $0.4 million expense and $0.3 million expense for the three months ended March 31, 2012 and 2011, respectively. Net interest expense was $0.1 million for the three months ended March 31, 2012 compared to net interest expense of $0.2 million for the three months ended March 31, 2011. The decrease in net interest expense was primarily due to a lower average interest rate and debt balance in the first quarter of 2012 compared to the first quarter of 2011. Other expense and income, net, for the three months ended March 31, 2012 and 2011, also included $0.2 million and $0.1 million, respectively, of primarily acquisition related expenses.

Income Taxes.

Income tax expense (benefit) was $0.3 million expense and $1,000 benefit for the three months ended March 31, 2012 and 2011, respectively. The effective income tax rate was 37.3% expense for the three months ended March 31, 2012, compared with a benefit of less than 1.0% for the same period in 2011. The effective tax rate for the first quarter of 2012 included benefits related to foreign tax rate differential and research and development tax credits, as well as offsetting discrete expense items related to acquisition costs and stock compensation expense. The effective tax rate for the first quarter of 2011 included benefits related to foreign tax rate differential and research and development tax credits, and a $0.5 million benefit related to the reversal of an uncertain tax liability and the related accrued interest due to the expiration of the statute of limitation for that item.

Restructuring.

During the quarter ended March 31, 2012, we initiated a plan to reduce operating expenses at Panlab s.l., our Harvard Apparatus Spain subsidiary. We recorded restructuring charges of approximately $0.2 million representing severance payments. No charges are expected to be incurred beyond the first quarter of 2012 on this matter. There were no restructuring charges recorded during the quarter ended March 31, 2011.

Liquidity and Capital Resources

Historically, we have financed our business through cash provided by operating activities, the issuance of common stock and preferred stock and bank borrowings. Our liquidity requirements have arisen primarily from investing activities, including funding of acquisitions, and capital expenditures.

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We ended the first quarter of 2012 with cash and cash equivalents of $17.2 million compared to $17.9 million at December 31, 2011. As of March 31, 2012 and December 31, 2011, we had $16.8 million and $16.3 million, respectively, of borrowings outstanding under our credit facility. Total cash and cash equivalents, net of debt was $0.4 million and $1.6 million at March 31, 2012 and December 31, 2011, respectively.

As of March 31, 2012 and December 31, 2011, cash and cash equivalents held by our foreign subsidiaries was $14.5 million and $15.9 million, respectively. These funds are not available for domestic operations unless the funds are repatriated. If we planned to or did repatriate these funds then U.S. federal and state income taxes would have to be recorded on such amounts. We currently have no plans and do not intend to repatriate any of our undistributed foreign earnings. These balances are considered permanently reinvested and will be used for foreign items including foreign acquisitions, capital investments and operations. It is impracticable to estimate the total tax liability, if any, which would be created by the future distribution of these earnings. In February 2012, we acquired all issued and outstanding shares of AHN, a German manufacturer, and utilized approximately $2.6 million of our foreign cash on hand. During 2012, we plan to use approximately $2.0 million additional foreign cash on hand for capital improvements at this new subsidiary.

Condensed Cash Flow Statements

(in thousands, unaudited)